Stephen Nalley is the Founder & CEO of Black Briar Advisors.
A distressed real estate asset can be a significant source of concern for its owner. Often, it’s a sign that the property isn’t generating the anticipated revenue or that it has lost value in the market.
However, with a strategic approach, distressed assets can be turned around to not only mitigate losses but also to create potential for growth.
I’m the founder and CEO of a full-service real estate investment company that specializes in the acquisition, repositioning and turnaround of distressed real estate assets, and over the past 20 years, I’ve asset managed over $2 billion in distressed real estate assets. Here’s my guide on how to create a turnaround plan for a distressed real estate asset.
1. Assess the situation.
Before making any decisions, you must understand the underlying issues. Is the distress due to market conditions, mismanagement, deferred maintenance or something else? Conduct a comprehensive audit of the property, both physically and financially.
• Physical assessment: Inspect the property to identify any repair or maintenance issues. Look for structural damages, outdated fixtures and landscaping problems.
• Financial assessment: Examine the asset’s financial health. Check for outstanding debts, declining revenue and increasing expenses.
2. Engage with stakeholders.
Collaborate with everyone involved with the property—this could be lenders, investors, tenants or even local government officials. Understand their perspectives, apprehensions and expectations.
I’ve found that lenders might be open to restructuring the debt if they believe in your turnaround strategy. Tenants might provide insights into what improvements they’d like to see.
3. Prioritize immediate concerns.
Address any urgent problems that might exacerbate the asset’s distress. For instance, if there are severe maintenance issues causing tenants to vacate, these should be dealt with promptly. In my experience, prioritizing these immediate concerns not only stops the asset’s value from plummeting further but also instills confidence among stakeholders.
4. Revisit the financials.
• Debt restructuring: If the distress has been caused due to overwhelming debt, consider renegotiating terms with your lender. This could involve longer repayment terms, reduced interest rates or even a temporary pause on repayments.
• Expense optimization: Review all expenses to determine areas of wastage. Perhaps you’re overpaying for property management services, or there might be inefficiencies in utilities.
5. Revitalize the property.
Look for ways to make strategic enhancements to the property. These can be cosmetic upgrades, such as a fresh coat of paint or landscaping improvements, or more substantial renovations like overhauling outdated units or amenities. The aim should be to increase the property’s attractiveness to potential tenants or buyers.
6. Re-strategize the property’s position.
If the market dynamics have shifted since the property’s initial acquisition, it might be time to re-evaluate its position.
• Rebranding: Sometimes, a new name or a fresh branding campaign can shift perceptions about a property.
• Rezoning: If permissible, consider rezoning the property for a different use that’s in higher demand in the area.
• Re-pricing: Adjust the pricing strategy, be it rents or sales prices, based on current market conditions and the property’s new value proposition.
7. Increase tenant engagement.
For income-generating properties, tenant satisfaction is pivotal. Happy tenants are more likely to renew their leases and can become ambassadors for the property, attracting more tenants.
• Feedback mechanisms: Regularly solicit feedback from tenants to understand their needs and grievances.
• Community building: Organize events or provide shared amenities that foster a sense of community. For example, in several different communities over the years, we have established skill-sharing workshops. These workshops included everything from buying and financing a car to improving your credit score.
The workshops are hosted by residents or outside professionals and would be held on a monthly basis. Each workshop would begin with an information session provided by management that informed the tenants on what’s happening in the community along with a question-and-answer segment. It is a great way to get the tenants together and keep them informed, as well as provide value to their personal and professional lives.
8. Turn your focus to marketing and public relations.
Once you’ve made improvements, communicate these changes to the market.
• Public relations: Consider reaching out to local media to cover any significant upgrades or changes in management.
• Marketing campaigns: I recommend utilizing both digital platforms and traditional mediums to promote the revitalized property. Highlight the improvements and any new positioning strategies.
9. Monitor and adjust.
Turnaround strategies aren’t set in stone. Regularly review the plan’s effectiveness by tracking key metrics like occupancy rates, revenue growth and tenant satisfaction. Be prepared to make adjustments based on feedback and changing market conditions.
Turning around a distressed real estate asset requires a blend of strategic planning, stakeholder engagement and adaptability. By taking these steps, owners can navigate the challenges and potentially unlock significant value in the asset.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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