An Asset Manager is an individual who manages a property with the authority to make decisions regarding the property. The Asset Manager term has now become associated with bank owned real estate; however, it originally referred to a person or entity charged with the sole responsibility for decision making. We offer both kinds.
Asset management to investor clients is available to those who want a higher level of property management that would also take into consideration improving the property, its net operating income (and therefore its market value), and its cash flow. We review insurance policies to determine sufficiency of coverage, and suggest better companies for better coverage. We review assessed valuations and challenge taxing authorities to lower taxes. We recommend capital improvements and establish reserve funds for their funding in the future. We apply for public grants when appropriate for infrastructure.
Asset management to financial institutions > that have troubled loans or non-performing properties are a tremendous burden to these institutions because these loans subject the financial institution to increased exposure via new Federal laws that require banks or financial institutions that have depositor accounts insured by the FDIC (Federal Deposit Insurance Corporation) to maintain increased reserve balances in increased amounts for these “troubled loans”. Stress Tests are applied under the Federal Stability Plan and applied. Downgraded loan risk ratings = higher capital allocation required. In the down grading of loans a substandard property or tenant, i.e. National tenant in bankruptcy equates to a substandard loan and requires the bank to have an additional 11% in reserves to cover that loan. A doubtful loan would require an additional 50% in reserves and a loan downgraded to a loss would require an additional 100% in capital reserve requirements. These accounting changes are a serious threat to the solvency of such banks and those banks are being seized and closed by the FDIC which deems them to be weak and systemic.
These loans are considered “Toxic Assets”, and even if the loan payments are current, if a loan’s term is up, the balloon payment is due and the borrower cannot refinance because there is not a market to refinance the loan and move it off the bank’s balance sheet. This situation downgrades the loan to a “troubled asset” category. In such a case the bank requires additional capital reserves to meet its stress test.
If the property is taken back by the bank, it must then operate the property and this is where an Asset Manager is assigned to oversee the operation, management and sale of the property. It is crucial for the bank to reduce distressed assets to free up capital to keep the loan cycle moving.
There are several options when managing these assets:
- Forbearance agreements (where the bank agrees to forebear foreclosure) or restructure with the borrower.
- Short sale, where the borrower sells the property at market value that does not pay the loan in full and the bank must take less than what is owed.
- Deed in Lieu of foreclosure
- Sale of the loan to an investor (not governed by the FDIC and subject to its stress test rules). These sales are typically at discounted prices, and banks would rather take less for the loan than they are owed, than have to have additional capital requirements in reserves which can cause them to fail their stress test and put them at risk of being seized by the FDIC.
If you own such a property, and need to refinance the property because the loan is due, we should talk. If you are a bank and have such a situation, we should talk. If you are an investor and wish to acquire such properties or the loans, we should talk.
Mary Sawyer, CCIM