New Efforts to Make Commercial REO Healthy

The retail real estate industry in today’s downcycle is facing the difficult reality of property defaults, foreclosures and bankruptcy proceedings. As a result, many lenders, financial institutions and bankruptcy trustees are taking back assets that often are in need of rapid financial and operational analysis, and immediate stabilization.

This year, Levin Management Corp. in North Plainfield, N.J. has re-established its service to address the needs of REO clients in the current environment. The company manages a portfolio of 80 commercial properties totaling 12.5 million square feet.

“Very few firms have the specific expertise and the practical experience with distressed properties to immediately be able to analyze a shopping center and keep it from losing tenants or otherwise going downhill,” says Matthew Harding, president and chief operating officer.

Perhaps the loss of a major tenant devastated a property’s rent roll or a buyer borrowed more than a center’s current return can support. He says the short-term financing came due in a market where underwriting criteria have changed or an owner simply hit challenging times. “Almost always, the fallout impacts the center — financially, physically or in the form of tenant relations — before it comes back into the lender’s hands.” This can range from incomplete documentation and uncollected rent, to deferred maintenance, to unhappy tenants and a negative image in the community. Putting things in order can be a complex task.

“Many lenders possess a deep understanding of retail real estate, but lack the time and staff to address the many details involved in retail property management and leasing efficiently and in-house,” he said.

Levin’s initial priorities include assessing a retail center’s physical, financial and marketing conditions, in order to develop short- and long-range plans. The firm’s full range of services employed in this process include accounting and financial reporting, leasing and lease administration, property management and maintenance, marketing and market analysis, dispositions and construction management — providing a one-stop source for REO clients.

For each new REO assignment, the company gathers all available information and verifies the property’s financial status. Careful abstracting of the shopping center’s leases serves to determine if all payments due are being billed and collected, and to fully understand the scope of the client’s responsibilities. The property management team quickly communicates directly with the property’s tenants as well, to ensure them that the property is being adequately managed and that any former problems can now be restated and will be addressed.

“These are the first steps to improving comfort levels and fostering healthy tenant relations,” Mr. Harding noted. “At the same time, frequent site visits allow our property managers the opportunity to assess the visible health of the stores at a center. They note stock levels, cleanliness, the number of employees and customers, merchandising, and other details.”

These managers also establish contact with the center’s existing contractors. They examine agreements from a pricing and performance standpoint and determine the potential to make changes, if warranted. “In markets where we manage other properties, we often can work with our existing suppliers to achieve ‘bulk-type’ pricing,” he said.

From closely monitoring utility usage, to planting perennial flowers instead of annuals, the company works to lower costs. Levin examines the center’s vacancies and disposes of old tenant signage and cleans the empty stores, prepping them to be toured by prospective tenants.

If the entire property needs freshening, updated landscaping and painting can go a long way toward adding color and interest at minimum cost, Mr. Harding says.