Back office talent key to working with FDIC

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

Because we are working under so many constraints in the process, we have to be especially innovative in how we get our leasing done. We also have to be rigorous in our tenant due diligence to get the deal approved. Ultimately, the end game is to get the property back into good operating shape and out for sale.

Of all of the various property types that they have received into their portfolio, the most volatile are retail properties. Among management companies, we believe that retail managers have traditionally tended to be more multi-skilled and marketing-oriented than other types of managers. These specialized talents are especially important in dealing with distressed properties where a multi-level approach to stabilization and value enhancement is essential.

The sheer complexity of the ownership situation surrounding distressed properties necessitates an early intervention strategy just to keep properties from losing any more value or slipping in net operating income while the status of the property is being determined legally.

This is where third-party management becomes its most creative as our turn-around team tries to negotiate a fair balance between a frustrated lender and a troubled owner. As managers, we must be prepared for a number of changes in the property's ownership as it sometimes wends its way through the bankruptcy and foreclosure proceedings. Typically, properties will have passed through a number of cycles before landing in a federal agency portfolio, and this can pose real challenges for third party managers trying to maintain an equilibrium among various owners and tenants - all parties to the eventual outcome of the turn-around.

Working with the FDIC:

A Case Study

The rewards in these particularly challenging turn-arounds, however, far outweigh the added fiduciary responsibilities and difficulties in processing deals. This delicate balancing act is particularly well-illustrated by one of our major third-party management assignments for a property in Greenwich Village in Manhattan.

A 37-store retail complex encompassing East 8th Street, Broadway, and University Place and at the apex of one of Manhattan's most populous tourist districts, the property had been owned by Chicago syndication giant VMS Realty since the mid-1980s. By 1991, trouble was afoot.

VMS had fallen behind in its property taxes by nearly half a million dollars. It was also in default on its first mortgage to Goldome Savings Bank of Buffalo. As Goidome moved to foreclose, VMS countered by placing the property into bankruptcy. Complicating matters was a second mortgage held by VMS's management affiliate.

Meanwhile, 30 of the 37 original tenants at the site were in revolt and had stopped paying in full on what were in many instances by 1991 market standards, above-market rents. Enter Brookhill.

Goldome called us in essentially to salvage its investment. The subsequent turn-around program we devised highlights the range of challenges facing a management company seeking to do business in this climate.