RE Journals

Op-Ed: Triage for real estate investors

March 31, 2020

First and foremost, our priorities must be to assist those among us who are suffering from COVID-19. Next, our resources must be marshalled to mitigate its spread and to safeguard those we love. This is the triage, or prioritization, that we as society have assigned to this crisis.

But there is another triage that all of us in business are performing. Regardless of whether someone is a factory worker or a real estate investor, we are all trying to prioritize in a way that helps us successfully navigate this storm. Of course, the longer it lasts, the more complicated the path will be. Those of us in real estate share many of the same triage challenges and I hope that sharing some of my experiences will prove useful to others, if not merely cathartic to me.

Time will tell if these are the most effective responses, but my triage has been guided by a compass that I believe points towards fiduciary responsibilities and ethical behavior. I mention the latter because those of us in business during the Great Recession witnessed many decisions based on convenience rather than conscience. This crisis will end, but our reputations will follow us.  

To begin with, I am a principal in several real estate businesses that have managed to endure for thirty years. The first is as a partner in an investment real estate brokerage business in Chicago. The second is as an owner of apartment properties across the country. There are certainly differences regarding my triage responses to each of these businesses, but there are far more similarities.

Our first priority is always to the well-being of staff and residents. We implemented a social distancing policy more than a week before the shelter in place order was announced and have been working with our brokers, managers, maintenance teams and residents to implement safety protocols while trying to provide business continuity.

In the brokerage business, many of our younger teammates were not yet in the business world in 2008. We have been helping them to recognize that working hard during the slowdown will pay dividends when it’s over. Although this is a stressful time, it is also an opportunity that must not be wasted being unproductive. Consequently, we are having ongoing calls, trainings, video-meetings, plus a few virtual happy hours.  

On the investment side, it seems like we have been triaging non-stop for weeks. We implemented numerous management policies ranging from virtual leasing tours to waiving fees if a resident would like to add a roommate. We have been diligent about communicating with residents and have asked them to do the same.  

Next, we started examining the portfolio, analyzing the ratios of monthly cash flows to monthly income to determine how much vacancy loss we can absorb. Similarly, we looked at the capital reserves at each property, and have postponed any non-essential capital improvements. Moreover, we have postponed distributions to investors in order to provide us with as much cushion as possible for as long as possible. This decision has been fully supported by our investors, who appreciate our efforts to protect the equity in the properties.

We own little commercial space, but one of our commercial tenants is a restaurant who asked us for financial relief. It is in everyone’s interest to help them get to the other side of this crisis. But in order to agree to any rent abatement, we first asked for their financial statements and are working out what we believe will be a mutually beneficial agreement. It is worth noting that our loan documents require us to obtain approval from our lender for any abatements, so we have started that dialogue as well.

And on that note, it is critical to understand actions that could inadvertently trigger recourse for non-recourse loans. Often this can occur not only for materially modifying leases without lender consent, but also for things like telling your lender “the deal is upside down,” or that “the deal doesn’t have any money,” as these statements could be deemed acknowledgements of insolvency that may trigger recourse.   

Lastly, this crisis is fast and fluid with new information arriving every day. Consequently, our triage needs to remain fluid as new problems arise. For example, rent collections in April may not look like rent collections in May or June. And even when the health crisis ends, there will still be a financial recovery period as residents find new employment and commercial tenants find their footing.   

For us, the triage has been safety, management, analysis, investors and lenders. As in any crisis management, the common element throughout it all has been communication. After long meetings about painful subjects, the last thing any of us is in the mood to do is sit down and write another email. But that is what’s required. Communicate. Communicate. Communicate.

While there is no one path through a crisis, this is the one I’ve followed. I also believe we will all be well served by demonstrating empathy and remembering that fear is often worse than reality. In other words, work hard, be kind and stay positive.   

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Tagged in this post: Doug Imber