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| DISTRESSED REAL ESTATE UPDATE | |||
| September 2009 | |||
SIX KEY PRINCIPLES FOR THE NEW REAL ESTATE PARADIGM  |
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Editor’s Note: This is the first in a series of monthly newsletters on topics we hope will be of interest to our partners, clients and colleagues. The general theme of FrontView’s approach to distressed real estate will be articulated through the series, which we intend to begin with foundational topics and proceed to more sophisticated issues over time. This first newsletter briefly describes six key principles that we have found helpful in our evaluation of challenged real estate assets. THE FIRST PRINCIPLE: BE PROACTIVE Where there is real distress, you have to confront the problems proactively, with sufficient and competent resources to solve them. The issues must be hit hard, in a logical sequence and using a qualified team. The hard truth about distressed real estate is that many more hours and many more dollars must usually be applied to the task of fixing a troubled loan or project than would be required in order to manage a performing one. The good news is that there is usually a solution. THE SECOND PRINCIPLE: GET ALL THE FACTS The first order of business when dealing with distressed real estate is to establish the source of the distress. This is accomplished by conducting an efficient, thorough, practical and realistic assessment of the asset’s fundamental issues. This effectively means re-underwriting the asset and re-evaluating the performance of all the parties involved in the transaction. The project must be given a thorough top-to-bottom analysis to identify all of its issues and challenges. The source of distress may be found in the ownership, management, capital structure, original business deal (including original pro forma assumptions), or prevailing economic conditions. Because the source of the problem is often in the territory of a player whose vested interest is self-preservation, it may put such a party into subconscious denial or lead it to actively cover up issues. For this reason, real tenacity and a nose for dishonesty or perverse motivation are key traits in a workout professional. For example, once its expected promote is underwater an operating partner’s only motivation to remain in a troubled deal may be to collect recurring fees, not to maximize asset value; and yet this important fact may remain hidden from the untrained eye. THE THIRD PRINCIPLE: STRATEGIC FLEXIBILITY IS ESSENTIAL Strategies that work in an up-cycle may be doomed in a down-cycle. A rising market can cover up many mistakes, but where the tide has turned, a player must be willing to abandon its original strategy if doing so will preserve its investment and maximize the potential for upside. Reality may dictate that some or all parties grant concessions and adopt investment structures that would be unthinkable earlier on in the cycle. THE FOURTH PRINCIPLE: STRESS-TEST BEFORE EXECUTING Once several alternative structures have been proposed, the next step toward a successful workout is to test each proposed structure in the realistic context of the current market. It is imperative that the players arrive at realistic cash flow projections and understand the economic result that each potential strategy is most likely to achieve. Until the various plans have been ranked in accordance with their relative likelihood to maximize economic returns and properly re-align the various interests, the players cannot really begin to evaluate how to restructure the business deal. THE FIFTH PRINCIPLE: FAIRNESS MAXIMIZES RESULTS Any effort to address serious real estate distress should attempt to determine how to maximize the ultimate value of the asset as a whole, and not just how to optimize the applicable party’s current position. Burning one’s partners for an easy buck today may seem appealing, but will often hurt the long-term value of the asset and may ruin long-term relationships with those partners. THE SIXTH PRINCIPLE: A POINT OF COMMAND The complexity of distressed real estate transactions often requires designating one experienced, objective professional or organization to be the central “point of command” for the workout process. Multiple strategic options will usually present themselves as potential means to address any given type of real estate distress, and a variety of disciplines (including financial, legal, asset management, tax, appraisal, accounting and others) will need to be coordinated and supervised in order to ascertain the cause of the distress through due diligence and underwriting, and then to articulate and evaluate objective strategies to resolve underlying problems. About FrontView Advisors FrontView Advisors is a real estate investment advisory firm offering our clients and capital partners relevant and "current day" experience to source, underwrite, negotiate, execute and manage existing and new real estate investments and loan portfolios in today's challenging economic climate. FrontView's principals have handled in excess of $2 billion in the workout and restructuring of complex debt and equity positions throughout the capital stack since 2007. |
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For further information please visit our website at www.fvallc.com or contact any of the following individuals:
David J. Steinberg |
Bret R. Salzer |
Christopher M. Bellapianta |
Copyright © 2009. FrontView Advisors LLC. All rights reserved. FrontView Advisors LLC is not a law firm and Distressed Real Estate Update should in no way be relied upon or construed as legal, financial or other advice and should not be relied upon to address specific factual situations without the advice of legal counsel and/or other professional advisors. |