Oct 23, 2008

Asset Repositioning Analysis, Part 2

---

By: Rick Davidson & Tim Dimond

Identify value enhancement opportunities
The following factors should be considered when identifying value enhancement opportunities:

• Market Location — The position of the asset is determined by its location within its respective submarket as well as its relationship to comparable properties.

• Market Perception — What do tenants and brokers in the market think of the property? Is it seen as a prime business location?

• Ownership/funding source — Is the owner aware of the market and its requirements? Is the owner institutional, public or individual, and how tenant/customer-oriented are they? Is the property run equal to or better than comparable properties?

• Infrastructure — Is the supporting structure adequate, are the surrounding roads sufficient to support the level of traffic?  Is adequate water, sewer and drainage in place? Is emergency egress sufficient?

• Amenities — Are the amenities basic (convenience/food, dry cleaning, etc.) or geared more towards higher-end users, (auditorium, conference center, meeting rooms, audiovisual capabilities, high-speed cable, etc)?

Evaluate capital enhancements and overall financial benefit
This portion of the analysis is empirical in nature and should be done on an ongoing basis.

• Income — What is the value of the current rent roll, what is the current/projected lease roll-over exposure? Is the current tenant credit base adequate or could it be increased with new tenants?  Does it account for the total occupancy of the building, including allowances for vacancy projections?  Will the market allow roll-over rents to be increased without exceeding the current market or will rents reduce due to market drops and shifts?  What are the market vs. actual lease rates and are the lease rates below, equal to or exceeding the current market rates?  (The analysis should factor all comparable factors based on the individual submarket, free rent, tenant improvement allowances and commissions.)

• Expenses — Are the base operating expenses in-line with the market? Are real estate taxes based on the correct assessments and are direct ownership expenses in-line with the cost of operating expenses?

Assess and analyze overall market for product type
Consider if the current market demand falls in-line with the building type and operation.

• Highest and best use — What is the property’s density? Is there additional FAR (Floor Area Ratio) to be achieved, are there any transferable development rights that can be attached and is the property in a receiving zone to receive them?  Are the use and utilization appropriate to the facility?  Are there conversion options that would achieve a better and higher use?

Operations
The following operations components are key to the analysis:

• Deferred maintenance — Are any deferred maintenance items present; are they expense related and can they be recovered?  Will they have any ability to result in increased rents or are they capital in nature?  Are there long-term capital projects planned that will impact the property or its efficiency of operations?

• Financial or functional obsolescence — Is the property fully amortized? Is the value consistent with the remainder of the owner’s portfolio, or functionally obsolete in terms of its tenant base and the operation of the facility or the systems within the building?

Determine short- and long-range investment goals
What is the type of owner and how do their investment goals relate to their corporate structure?  Is the purpose to maximize the return in the shortest period?  Is the owner an opportunity-cost owner? Does he or she prefer long-term holds, and will the hold period have greater value than the return?  Does the owner have set, specific and defined investment return criteria requirements?

What is the relationship of the specific asset to the owner’s larger portfolio?
Does it currently meet the larger portfolio objectives; will it meet them if repositioned?  Are investments made to achieve a diversified and balanced portfolio?  Or, if an asset no longer fits the owner’s portfolio requirements, is it considered obsolete?
The SWOT Analysis will provide for the owner a specific, formulated repositioning plan, to help capture current market conditions, improve the property’s position, and add value that might otherwise go unrealized.  If planned and implemented properly, the analysis should result in enhanced value returns with potential for:

• Increased and improved ROI

• A more stable and credit-worthy tenant mix

• Reduced or stabilized expenses

• Improved market position

• Highest and best use

Taking the time to conduct a SWOT analysis is highly recommended for asset repositioning. A team approach is critical not only for a successful analysis, but to the overall effort.  Input from management, leasing, finance and investment advisory are necessary to develop the most comprehensive summary and recommendations for the property.  Only an integrated approach will result in the full benefits of asset repositioning for both the owner and management company. 

When repositioning an asset in the market, having a thorough understanding of the owner’s goals and objectives is the foundation of the plan.

For recommendations on asset repositioning for your Montana investments, contact one of our commercial brokers at Coldwell Banker Commercial Wachholz & Company.

Information and analysis contributed by Rick Davidson and Tim Dimond
Coldwell Banker Commercial Insider, The News Magazine for the CBC Professional, April 2008

Visit our blog at http://blog.cbcommercialmontana.com

commercial@cbwrealestate.com