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Randy Podolsky

By Randy Podolsky

It is virtually impossible to pick up a newspaper or real estate trade publication and not be bombarded with stories about “distressed” real estate and the endless stream of firms racing to position themselves as distressed real estate experts.

This frenzy can be counterproductive without a working definition of distress, and guidelines for how firms should be evaluated before awarding them assignments involving these real estate assets.

Though there are many definitions and variations on the same theme, a distressed real estate property can generally be defined as having more than one of the following characteristics:
-Underperforming revenue streams-the property is not operating at full occupancy and/or the leases that are in place are at levels below market rents or that don’t match expectations/pro forma.
-Overrun operating expenses-the costs to operate and maintain the property have increased beyond budget or exceed norms to a point where they are excessive.
-Unserviceable debt-when market conditions adversely shift or projected rents are no longer achievable, or both, the property owner is unable to meet debt service obligations.

This financial distress may also impact the ability to complete new deals or lease renewals because of a lack of tenant improvement dollars, commissions and capital needed for routine operations or other ordinary or capital improvements.

Navigating the world of distressed real estate requires insights, perspectives and focus that only come with experience. When looking to assign or entrust a firm with a distressed asset, a number of skills sets and features should be present:

1.Experience-many firms have rushed to get on the distressed real estate bandwagon. Be careful of the hype-the bells, whistles and marketing fanfare. Carefully evaluate the firm to ensure they have been there before and know how to “operate” real estate, and aren’t simply learning on the job with your property and at your expense.

2.Diversification-look for a firm that has diversified experience and is capable of providing the full range of management, brokerage and financial services required to complete an assignment fully. It is a sophisticated and complicated process with each phase relating to the next. A firm that can see the big picture and handle each of the steps along the way can be more efficient and, ultimately, more effective on your behalf.

3.Focused product line-There are many companies now touting their turnaround expertise; all of them likely are very qualified at what they do. Yet at its very core, distressed real estate is about the real estate and all of its operational nuances. Therefore, given the very specific reasons for the distress, the professional retained to assist in the turnaround should be focused solely on real estate and have strong local knowledge.

4.Process-driven and creative-working through the distressed process, which may include a foreclosure, a receivership or an REO workout, requires a defined set of steps and principles-a process that cannot be circumvented because of the involvement of the courts and myriad other parties. A firm being considered for this type of work should be quite familiar with the processes and systems yet also have the creativity to identify and execute solutions where the process allows and calls for it.

“The significant problems we face cannot be solved by the same level of thinking that created them.” Albert Einstein

Randy Podolsky is managing principal of Podolsky Northstar CORFAC International.

Tags | Chicago, Distressed, Podolsky Northstar

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