When it comes to managing your assets in times of market crisis, remaining vigilant is the key differentiator between property owners who emerge stronger and those who fail. A proactive, innovative approach will help principal owners weather the storms of potential market devaluation, instability, value uncertainty and even potential lender shut down.
Depending on the circumstances that cause the crisis, it is almost a certainty that volatility will remain in the marketplace over a 6 to 12-month period, if not longer. During this time, it is critical that we stabilize our assets by acting professionally. Remaining flexible and optimistic, maintaining our cool, and trying to project a sense of calm with our tenants will be essential factors in avoiding a revolt.
Understand that during these times it is important to make sure that you are making decisions that could have a lasting effect on your operating statements and balance sheets.
Here are five essential factors to keep in mind when managing your Commercial Real Estate assets during a market crisis.
1. Documentation, Documentation, Documentation
Proactive management during a market crisis begins with keeping open lines of communication with your tenants. This means following up with them and responding to all written requests. It also means attention to details, such as sending proper notices within proper time frames, and to proper addresses in the notice provisions.
All verbal, electronic or physical conversations that you have with or relative to a tenant must be fully and accurately documented. This includes abatement of rent, deferral of rent, reduction of rent, forgiveness of rent, forbearance of rent (where rent is not paid now but those payments are added to the backside of the length of the contract agreement), or any other economic modification to a rent or lease structure.
To emerge stronger in the long term, it is critical to communicate with your tenants frequently and always respond in writing. Keep track of paperwork and properly document your files to ensure that agreements are in place for the future.
2. Know Your Potential Legal Liabilities
Regarding modifications to rent, it is critical that you are aware of and manage notice provisions within your lease agreements. Be certain that you do not overstep the authority granted to you within any underlying loan agreements that you have.
Many landlords in a crisis situation unwittingly agree to changes in terms of lease agreements that were utilized in the underwriting of existing loans. In the fine print language of your lender agreements, any modifications to any loan used in the assessment value prior to making a loan could likely open a window to potential loan default in the event that the lender does not agree with the modification.
Changing the rents or the terms of a lease agreement, and thereby changing the cash flow amount of the asset, can create insecurity relative to the asset value. This concern for overstepping your authority relative to lease agreements not only applies to senior lenders, but also pay attention to your authority within any relevant investor or partnership operating agreements.
3. Your Attitude Counts
Generally speaking, when working with tenants, it is always best to have a can-do attitude. Approach all communications with the understanding that you are here to work with your tenants. Assure them that whenever possible, you will allow long-term benefits and relationships to guide short term decisions.
However, it is important to ensure that every time you give the tenant something, you also attempt to get some form of concession benefit or compensation in return. While this article is not intended to provide a roadmap for negotiating strategies, it is important to realize that challenging times are optimal to negotiate for additional term rental concessions, increased rents, or some other benefit, which may or may not even be directly related to the current problem.
With a positive attitude, you can help your tenants overcome short term challenges while also seeing opportunities for increasing long-term partnership success.
4. Avoid Entitlement Thinking: Self-Reliance
Typical guidance and recommendations from governmental institutions in times of crisis often encourage landlords to be flexible with their tenants. This is an understandable approach, and avoiding immediate default is a vital part of post-crisis economic redevelopment.
However, the same cannot be said for how commercial lenders usually interact with landlords. In fact, from a commercial lending perspective, landlords and other property borrowers are among those often left out of broad plans to stabilize various sectors of our economy and various industries across the country.
In addition to that, each state gives different levels of guidance, so we are not dealing with a uniform platform in operating procedures at different levels.
The point here is critical: property borrowers and landlords are often overlooked by government economic stimulus packages. Although this may indeed be an injustice, owners who expect the government to pay for solutions to their tenant problems often squander precious time and opportunities for improving their long-term success.
Act decisively and work with your tenants to create win-win scenarios.
5. Vigilance and Cost Management
In challenging economic times, it is more important than ever to truly watch the pennies and manage your expenditures. Each expense can be incredibly meaningful in maintaining profitable operations.
Some tips for expense management include:
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- Challenge insurance companies to compete for your business
- Institute energy saving measures with respect to lighting, water usage, high-efficiency heating and cooling, and monitoring thermostats
- Reduce services, such as less frequent parking lot sweeping and landscaping, etc.
- Reevaluate any ongoing service and maintenance agreements. These can often be renegotiated or in some cases eliminated during times of crisis.
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And on the flip side of expense management, stay on top of market trends to make sure that you are appropriately pricing your properties for lease. Don’t assume your rates are competitive! In some cases, demand may be growing while in other cases, market lease rates may decline.
Do not miss out on quality opportunities to increase rates or stay competitive simply because you are dealing with outdated market data or making incorrect assumptions.
At the Commercial Academy, we support people with knowledge, strategies and resources to locate, acquire, fund and improve assets and their operational profitability. We also help people with leasing and insights into the decision-making process of the day-to-day management of assets across all Commercial Real Estate platforms. This includes retail, office, apartments, land development, mobile home parks, storage facilities, industrial, warehouse, distribution, manufacturing, governmental, restaurants, entertainment, and recreational facilities.
Questions about property management? Learn about all aspects of Commercial Real Estate in our online courses at CommercialAcademy.com or contact us to set up a consultation.