Commercial Investment Real Estate March/April 2013 - Page 30

BROKERS PROVIDE BOOTS ON THE GROUND FOR REO SELLERS Some real estate professionals are turning their CCIM analysis training to good use by helping lenders evaluate and dispose of real estate owned, or REO. In the San Diego offi ce of Newmark Grubb Knight Frank, Bob Teglia, CCIM, associate director, and his partner Brent Bohlken, a senior managing director, have completed 25 REO sales for 20 different lenders over the past year-and-a-half. Teglia says lenders are often out of state and rely on his local market knowledge and fi rsthand assessment of the physical condition of the property to maximize sale proceeds. As a lender’s representative, Teglia has done everything from securing a property and coordinating cleanup to walking the roof and checking for structural damage, all of which helps him better assess acquisition offers. “We really incorporate those property management type services into our brokerage relationship,” he says. “A lot of the lenders are really struggling through a massive volume of deals, and they need boots on the ground.” Teglia has found that selling to business owners who plan to occupy the space often maximizes value for his lender clients. “When business owners can acquire their own real estate, they capture both the investment value and the value in use for their business.” Frank Szelest, CCIM, is general manager and commercial manager of the Re/Max Realty Group in Fort Myers, Fla., and estimates that he has sold more than $500 million in REO over his lifetime. He says lenders and their real estate representatives have several advantages in selling REO today, including historically low interest rates that enable investors to pay higher prices. In the 1990s, he recalls, interest rates were 20 percent or more and limited sellers’ ability to command higher prices. Based on his experience in previous cycles, Szelest believes Florida will take another six to 12 months to work through the majority of its commercial REO before pricing increases to a point that will make development cost-effective again. “In the second half of this year, I’m looking forward to getting closer to that equilibrium so that commercial builders can start new construction again,” he says. “There will be pent-up demand for commercial real estate, too, because no one has built anything for a few years.” 28 March | April | 2013 market. Yet savvy investment managers are also discovering opportuni- ties in smaller communities. Neyer Properties is a development company in Cincinnati, Ohio, that is buying up properties for redevelopment. T e company avoids larger markets where it would be competing with institutional inves- tors for acquisitions, says Chris Dobrozsi, CCIM, who is vice presi- dent of real estate development at the f rm. Neyer prefers to work in smaller markets, where competitive bidding hasn’t driven up prices and reduced available returns, he says. Neyer made one of its most recent acquisitions, the 250,000-sf Centennial I and II of ce buildings in Cincinnati, through Auction. com, an online venue that requires top bidders to close within 30 days. As a developer with a reputation for closing acquisitions quickly, Neyer hears regularly from brokers listing banks’ real estate-owned properties for sale, Dobrozsi says. In choosing which assets to pursue, the company looks for semi- vacant properties with enough in-place leasing to cover debt and operating costs. T at means that any additional leasing or rate increases the company can put into place will boost cash f ow. “T at’s the value-add for us,” Dobrozsi says. In November, Jeremy Malensky, CCIM, president of Dutchman Realty in O’Fallon, Mo., helped his client FS Investments complete a 30-day due diligence and closing to purchase the 36,500-sf 4 Seasons Center in that market for approximately $1.3 million. To help the buyer meet its objectives for the shopping center before the onset of winter weather, the seller, Reliance Bank, allowed painting and exterior renovations to begin while the asset was still under contract. T e speedy turnaround paid of ; within 60 days of the purchase date, Malensky’s team had negotiated 14,000 sf in additional leases to bring occupancy up to 75 percent, doubling the property’s cash f ow and meeting the buyer’s 12-month leasing goal. “I like to get in there very quickly,” says Malensky, who has repo- sitioned several distressed properties in the region. “I always go in and give them unique curb appeal, and I also want to be the most competitive lease rate in that market area,” he says. “If you’re the best price and you look the best, it’s hard to lose a tenant.” Distress Strategies T e appeal of distressed assets typically revolves around the opportunity to reset the basis, or owner’s cost position. A basis reset enables brokers like Ronnie L. Miranda, CCIM, SIOR, to help clients acquire and improve properties that the previous own- ers were unable to cost-ef ectively maintain or repair, due to the distressed owners’ greater cost in the asset. “It’s not always about f xing something physical,” says Miranda, who is a senior vice president for asset management at T ompson National Properties in Houston. “It’s also about lease rates — Can I sell a gallon of milk for $1 instead of $3.” Miranda recently helped a publicly registered, non-traded real estate investment trust to acquire Constitution Trail, a 198,000-sf, grocery-anchored shopping center in Normal, Ill., that originally opened at the beginning of the recession. When rents in the area declined, the property’s cash f ow couldn’t support its debt. Commercial Investment Real Estate