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Managing assets key to successful portfolio

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Whether a client's goal is actively building a portfolio or merely maintaining a stable income stream, the asset management function provides information to enable the owner to make appropriate decisions regarding individual properties and/or the portfolio as a whole.

The property management function, by contrast, focuses more on the property, its maintenance, lease-up, tenant retention, maximizing income and minimizing expenses. Real estate management professionals provide both of these services from time to time, but some clients require a clearly defined separation of these functions, usually at a greater cost.

Institutional investors, foreign investors and individuals with large portfolios are those who frequently desire both functions, performed by separate parties.

These investors are apt to need a third level of management assistance, in addition to real estate property management and asset management, and that is legal/tax/cash management, sometimes provided by a tax attorney who is well versed in tax treaties between the United States and other countries, or an attorney who is also a CPA, or an attorney and a separate CPA firm.

Coming from a management as well as a sales perspective -- my company leases, sells and manages retail, office, industrial and R&D buildings -- I maintain long-term relationships with my clients, something all real estate professionals should strive to do.

By contacting them once a month to report on the performance of their assets in the form of a financial report on each property, I have the opportunity to inform clients of market trends, financing products and advice on action to take in acquiring or disposing of assets.

This is the asset management function, as opposed to the property management function. The asset manager steps into the shoes of the owner and acts in the overview, making recommendations on major decisions.

The property management function, by contrast, focuses on the property, its maintenance and leasing, on increasing income and minimizing expenses.

How often should clients be advised to evaluate their portfolios? Through the medium of monthly financial reports, telephone conferences and personal meetings, I am available for personal consultation on an ongoing basis.

Usually, I know if the client's intent is to 1) build a larger portfolio via refinancing and acquisitions or exchanging up; 2) establish a stable income stream; or 3) build equity to leave to children, etc.

If the client's goals are to actively grow the portfolio, then frequent consultations are a must -- including examining new properties as they become available for possible acquisition.

I have ready in my clients' files a current, audited financial statement, two years' income tax returns and updated credit report, which are the minimum necessary information to include with a loan application for the acquisition.

Properties in Southern California are snapped up -- some even before they hit the market -- so being poised for quick action is a must. This client-related action (rather than property-related action) is part of the asset management function.

How is it determined when a client should sell certain properties? The No. 1 criterion in deciding when to sell is market conditions. Because I know my clients well, I usually know what their criteria are for acquisitions. In the Southern California investment arena these days, because of steep annual appreciation, everyone is a seller, if a replacement property can be found.

Length of ownership of the old property is not necessarily an important criterion, nor is the price at which the old property was acquired. If current market conditions are such that a substantial profit can be derived, and if another property is available for acquisition in an exchange scenario, I recommend a sale. If the profit is great enough to sustain the tax hit, then an outright sale can be advantageous.

A case in point is a client who purchased a 40,000-square-foot shopping center in an outlying area in September of last year for $3.8 million ($95 per square foot). He exchanged three residential income properties for the one retail property, and hired my firm to manage the new asset. There was moderate vacancy in the property and some deferred maintenance, both of which are slowly being addressed by management.

Because of the ascending spiral in Southern California real estate prices, the continued availability of below-5 percent mortgage financing, and the lack of inventory, the owner decided not to wait for 95 percent to 100 percent occupancy, or for repairs to be completed, but to test the market by offering the property for sale for $7 million ($175 per square foot).

He accepted an offer of $6.7 million ($167.50 per square foot), with no appreciable change in the NOI from when he bought it. He is now in escrow with a buyer who liked the location, was already in the neighborhood with other properties, and who could see the property's future potential.

This is why market conditions are the most important factor in advising a sale. Under "ordinary" market conditions, it would not have been possible for this owner to make a profit of $2.9 million in a matter of months.

How and when are exit strategies determined for clients' properties? The client should have an exit strategy in mind at the point of acquisition. She should know when to buy, and who the target market is when she decides to sell. What market conditions should be present enabling her to obtain the highest return for her asset? And, what is the projected hold period?

A case in point is a 75,000-square-foot research office building, occupied by a Department of Defense (DOD) computer contractor, which was sold for $12.75 million to a foreign pension fund specializing in laboratory buildings, in the eighth year of a 10-year lease.

The purchaser wanted a laboratory building, but none were available for acquisition. This office building was in an area of scientific research, and we thought it might lend itself to a change of use.

During the due diligence period, physical inspections showed the interstitial space was sufficient to allow enough of a drop ceiling for the installation of additional electrical, gas and water capacity, such that it would appeal to a laboratory user.

The purchase was made with the exit strategy in mind: Change the use to laboratory, install a laboratory tenant and sell or exchange at a profit, with two years' marketing time to find a tenant.

The trouble was, about the time the DOD tenant vacated and the new tenant was in lease negotiations, sources of financing for the laboratory improvements could not be found. There was a tightening of the real estate market and the financing that goes with it. As property managers and asset managers, the task of implementing the original plan, or devising a Plan B, rested squarely on our shoulders.

We went to the various trade unions and made the following proposition: You lend us the construction money (a total of $15 million) and we'll use your union labor in the construction of 75,000 square feet of research laboratory space, plus a 5,000-square-foot pilot plant (small manufacturing facility under the auspices of the FDA). It worked! The trade unions funded the construction.

Eighteen months of construction jobs were obtained for the community, and the result was a fine R&D building occupied on a long-term lease by a regional credit tenant.

We as property managers made four separate mortgage payments per month for the next couple of years, and when the building achieved a stabilized income stream, it was sold for $27 million.

Which new assets should clients purchase, and how do they fit into the clients' overall portfolios? I usually advise clients to stick with the type of properties they already own, if those have worked well for them in the past.

When there is an exceptional opportunity to acquire a property of a different product type, which will spread the risk in the portfolio and will provide a different point of interest for a client, I will recommend such an acquisition.

Some clients are mainly interested in steady income, regardless of the type of property. If I feel I can properly manage such a property in the client's best interest, I recommend the acquisition.

Some clients want their properties to show more pride of ownership and insist on trophy-type properties, and they are willing to pay more to acquire them.

The recommendation to purchase new assets hinges on how well the real estate professional knows the client and how intimate and long-term the business relationship has been.

The real estate professional has to make the recommendation to purchase based on projections of the asset's anticipated performance and then, as the manager of the asset, has to make the projections come true.

It's almost like a marriage, where the interests of the client are always put first, and the consequences are borne by both the manager and the client.

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