Gray and Wrinkles Look Better and Better
The switch is on...
Real estate investment managers transform into asset managers and work out specialists from deal people. It's a matter of survival. To clients, the sell is stick with us so we can help you lose less and protect value. Raising new money isn't in the cards. But taking over portfolios from advisors who drown in problems and don't possess asset management/workout skill sets presents opportunity to build assets under management or at least helps offset some of the inevitable drop off.
Not surprisingly, the post-2002 crop of private equity/hedge fund style investment firms face uncharted waters when it comes to managing their real estate holdings. Asset management wasn't part of job descriptions when the strategy was to buy and sell as quickly as possible in upturning markets. You didn't have to pay much attention to holding onto to tenants and cutting operating expenses. Now knowing tenants and understanding bricks and mortar building issues trumps broker relationships. Knowledge of special servicing process and bankruptcy issues has greater currency than pricing acquisition bids.
But more than a few investment managers, which grew up in the wake of the mid-1990s recovery, never staffed appropriately to focus on asset management and never knew workouts. They entered into operating partner relationships with "local sharpshooters" to handle managing properties and execute leasing strategies. Interests were aligned as long as operating incomes increased along with values. Now that property cash flow forecasts get trashed and writedowns ensue, many operating partner relationships fray, especially in ventures that used plenty of leverage to acquire or worse yet develop properties. Negotiating refinancings with bankers or dealing with capital calls pushes once friendly partnerships into acrimonious divorce, and fund investors may be caught in the middle. Many advisors discover that managing through these problems is a lot more time consuming and complicated than negotiating buying or selling properties. And of course, the prospects for big promotes and extra fees don't present themselves when you're trying to stanch portfolio losses. It's not fun or highly profitable while you try to handhold upset clients.
The advisors who have an edge are staffed with more wrinkles and gray than recently minted MBAs. Clients get comfort, working with managers who navigated through the early nineties and have the battle scars to show for it--if for no other reason than they are testament to making it through tough times. But these old pros are just better equipped to deal with the problems.
A couple of years ago, one of my old colleagues, now more than slightly balding, told me the story of meeting with the early 40-something head of a major whiteshoe law firm's real estate practice. This lawyer wasn't paying much attention to workout issues in drawing up contracts with partners and bankers, and most of his clients weren't paying much attention to what he was doing either. It just wasn't part of the mindset. My friend gave the attorney a copy of his old workout manual from RTC days to provide some perspective and guidance in drawing up the contract for his deal.
Well, the new RTC days are here and experience counts for a lot.
Please check out http://citiwire.net/, which features weekly articles from the Citistates Group (I'm an associate). The Citistates Group is focused on metropolitan regions and how they position themselves to cope with the demanding economic, environmental, and social challenges of the 21st century.