Top Ten Things Investors Should Know When Purchasing Distressed Retail Property
It is a great time to buy distressed retail properties. That is, if you can find them, get them at the right price and effectively manage and lease them.
With slow job growth, waning consumer confidence and the banking industry still staggering from the worst recession since the depression, retail properties have certainly taken it on the chin.
At the same time, the lack of new construction could help retail properties bounce off the ropes stronger than we might imagine. If you’re betting on a comeback, you want the best advice in your corner. While there are many issues to consider when buying distressed retail, these top ten tips will place the odds in your favor.
Property sources: Get to know the attorneys in the distressed market and the lenders with existing loans. Establish relationships with brokers who specialize in retail investment properties who track defaulting loans, loan maturities and have relationships with lenders. Offer to protect their reasonable fee for acquisition opportunities they source for you.
Notes: Consider buying notes, but be sure to understand the risks of stepping in the lender’s shoes. Consider the collateral, the collateral title, the borrowers’ intentions and jurisdiction issues related to the foreclosure process and recent bankruptcy/cram down court decisions. Also consider the time, risks and costs to get from lender to property owner.
Joint venture: Consider joint venture recapitalization acquisitions with existing sponsors. There are experienced owners with good reputations who were just caught with bad timing and/or too much leverage. You may be able to provide capital to renegotiate loans and keep good management and leasing in place. Ask to be paid first with reasonable controls on sponsor management and costs. Engage experienced counsel to help negotiate the joint venture partnership agreement. Be sure to consider all contingencies and possible exit plans.
Offer format: Get the seller’s attention. Make offers in full purchase and sale contract format with multiple copies signed in blue ink. If possible hand deliver them or send via Fed-Ex. Servicers and lenders in most cases have a heavy case load; you want your offer to stand out.
Patience: If a lender or seller in a short sale does not respond to your offer in a timely fashion, be patient. Consider making the offer again closer to the end of the quarter or end of the year. Motivations change; if a seller or broker says the time is right, make your offer again.
Ability to close: Provide your best proof of ability to close in writing with offers. Liquid cash in the bank sufficient to close all cash is best. If not, as close to that as possible. Consider large earnest money deposits of course with a solid contract and a safe escrow agent. Lenders in short sale, receivership or OREO situations may not respond to offers without proof of ability to close.
Quick & clean: When practical, make written offers with short fuses for closing and contingencies. Occasionally quick and clean wins. When making offers to lenders write offers with little to no seller reps and warranties as possible. Contingencies should be as short as possible but be sure you have time for title, environmental and other proper due diligence.
Due diligence and underwriting: To increase occupancy in most cases you should underwrite your lease rates and incentives to be very competitive. Make sure you understand the credit of the tenants, the current market rates for the specific property, the expected lease up time frame and all the costs to bring the property to stabilization. Sometimes it pays to do your due diligence prior to making an offer, especially when buying notes or when in a competitive bid situation.
Good management: Prepare for a longer recovery and turnaround time frame than seen in past cycles. Your asset and property management team should be top notch. Your turnaround plan should be realistic and properly implemented.
Talented leasing: Your leasing team should be properly motivated and for lease marketing extremely thorough. You want a well thought out multi-disciplined marketing plan to win in this cycle, and you certainly want talented support in your corner.
With some properties available at well below replacement costs, this could be the time to get in the ring. If you take on the battle of buying distressed retail properties, be in good fiscal shape and be sure you have the stamina to hang in there until you can turn the property around.
Michael Bull, CCIM is host of the Commercial Real Estate Show, a national talk radio show, and founder of Bull Realty, a regional commercial brokerage firm with three offices, headquartered in Atlanta.