By Richard Muhlebach
Principal
Richard Muhlebach LLC
Keep Track of Time and Rate
Troubled properties can be repositioned or converted to become fundable
in today’S marketplace, commer-
cial mortgage brokers may need to
help clients decide what to do with
a distressed property. The first step
to solving this issue is to develop a
comprehensive business plan that addresses every aspect of the property,
from its position in the market to its advertising strategy and leasing potential.
This business plan also must tackle
the major problem of the property’s
time and rate — the T-and-R problem. In
this context, time refers to the period it
takes to lease the property to a stabilized occupancy and rate refers to the
rental rate that the property needs to
be successful.
Evaluate
To solve the T-and-R problem, the property must be evaluated in its current
condition and then reevaluated for the
property’s current market — and possibly
a different market. The first step in this
process is to assess the property’s current competitiveness, which can be done
by surveying the market and determining
where the property stands relative to the
competition. By doing so, your client can
define the property’s target market.
Once you have the answer to the
question of whether or not the property
is competitive in its current condition,
the next step will be to determine the
property’s rental rates and projected
lease up to stabilized occupancy.
The findings of this process can be
surprising. For example, by studying
the demographics of the area as well
as analyzing the property’s attributes
and competing buildings, you may discover unexpected results. The original
target market for the property may have
moved or the building may no longer
appeal to its intended target market. In
these cases, there are alternative solutions to solve the T-and-R problem.
Reposition
The property may need to be repositioned to achieve higher rental rates
and acceptable occupancy. Brokers
can help clients acquire finances to
renovate or rehab the property in order
to improve its standing in the market.
Improvements may include remodeling
the interior of apartment units or renovating the lobby and interior common
areas of an office building. When the
renovations are completed, a market
survey can be used to determine the
property’s position in the market and to
assess its prospective rental rates and
lease timeline.
Convert
A property can be converted to a different use if its target market has moved
“Brokers can
help clients
acquire
finances to
renovate or
rehab the
property
in order to
improve its
standing in
the market.”
or if it can no longer compete in its originally intended market. For instance, a
small enclosed mall developed years
ago to serve a rural community may not
be able to survive if the community has
grown and a regional mall has opened
a few miles away. Similarly, an older
office building with small floor spaces
and limited amenities may struggle to
compete with a newer generation of office buildings or a renovated Class-B
office building.
Often these buildings are in good
locations and can be successfully converted to another use. Some of the
most-common adaptive uses include:
• converting apartments to
condominiums
• converting mid- and high-rise office
buildings that are located in central
business districts to hotels, apart-
ments or condominiums
• converting small enclosed malls to
grocery-anchored strip centers
• turning a mall into a power center
and replacing the shop space with
box stores
One point to keep in mind for cli-
ents is to ensure that the zoning for
the site allows for the change of use.
Illustration: Dennis Wunsch
Other wise, you’ll need to obtain a con-
ditional-use permit.
Richard Muhlebach has 40 years of experience
in leasing, managing and developing commercial properties. He co-authored 18 books
on commercial real estate and is a national and
international instructor. His company, Richard
Muhlebach LLC, provides brokerage and consulting services. He recently co-authored the
Institute of Real Estate Management’s publication Troubled Assets: A Practical Guide for Turning Around Troubled Properties, a top reference
on the subject of troubled assets. Reach him at
rmuhlebach@comcast.net or (206) 660-6902.
