Back office talent key to working with FDIC

Real Estate Weekly, Nov 17, 1993 by Ronald B. Bruder

Strong management skills, a proven track record in turngrounds, and deep resources in the back office are just a few of the requirements of property management firms seeking to do business with the Federal Deposit Insurance Corporation (FDIC) and the Resolution Trust Corporation (RTC). And of these three key requisites, the back office set-up is probably most important of all.

Having worked on numerous distressed property turnarounds from the agencies' portfolios, it would be fair to say that proven management expertise is the bare minimum. What is really going to make the difference between success and failure in working with them is a management firm's ability to deal - technically - with the bureaucracy's micro-management of reporting.

For the past five years we have compiled a steady fee income from working with the FDIC. And, along the way, our management team has developed a tight and efficient in-house system for meeting the federal agency's main reporting and compliance standards.

As the FDIC portfolio fattened during the heaviest downturn in real estate values in the late 80s, many private property management firms - and even some development companies - have attempted to enter the "distressed property" turnaround market with varying degrees of success. From our experience, an important component of a successful relationship is the depth of the back office talent available to channel to these projects as distinct from a firm's everyday private sector management assignments. Compliance issues alone, in working with these agencies, dictate which management firms will and won't succeed.

Spot Audits and No Illusions

The shear size of their portfolios is a tempting source of opportunity for management companies struggling to find new business in a depressed marketplace. But a company must be able to tolerate a high level of intervention and oversight that is inherent in doing business with federal agencies. There are no illusions among those firms that have done a number of deals with them about just how much ingenuity it takes to turn properties around in these situations.

When dealing with the FDIC and RTC you have to be continually on top of your game; you can't allow for a sloppy moment in the reporting process because as part of their oversight, they will allow no flexibility in paperwork requirements. They also will spot audit firms engaged in managing their properties. These audits can take place at any time, and you must be prepared to drop everything and provide up-to-the-minute documentation of all activities related to an ongoing project.

These procedures must also be watched over by key appointees in the firm who, as part of their daily responsibilities, deal directly with their service agents in specific areas - whether in leasing, management, or accounting.

Maintaining an Office

Within an Office

What are some of the specific requirements of working with the FDIC and RTC? We have found that the size of the firm is not as important as the way in which it has been set up to do the technical business of property management. Key to meeting compliance issues is a sufficiently powerful and sophisticated computerized reporting system that can be customized to fit the their standards, as well as continue to run the programs for the firm's private sector business. One of the most characteristic aspects of working with a federal agency is the act of filing innumerable reports on a regular basis; this means having in place a very deep back office capability including accounting, computerization and lease administration functions in house.

In addition, many of the accepted practices of the back office - common to most management firms - are quite different for these government agencies. This translates into the need to develop a parallel set of reporting structures, formats, and budgeting procedures just for their projects. Even the standard management statements must be specially tailored for these properties because of government mandates for setting up chart of accounts, income and expense reporting, - in addition to the requisite list of forms that must be completed for each project.

And because management firms doing business with these federal agencies are working predominantly with distressed properties (in many instances as third party managers) they have to be prepared for a whole new level of project oversight.

We routinely spend significant back office time simply transmitting information to their service agents. All of the reporting requirements are rigidly maintained and we work with a Standard Operating Procedure Manual that was designed to oversee this enormous portfolio of projects while minimizing the possibility of fraud. Needless to say, there is very little room in the reporting procedure for creativity.

This fact, on the other hand, necessitates a great deal of creativity in processing leases that not only conform to the FDIC ratios, but also work for tenants and prospective owners should the properties go to auction.