As the Coronavirus continues to take a toll on the global economy, many commercial real estate property owners and commercial property management companies are experiencing significant financial hardship. With millions of Americans out of work, tenants are unable to pay rent. As a result, property owners face the possibility of missed mortgage payments, bankruptcy, or foreclosure.
At Lumicre, we are working closely with banks and other lenders to effectively manage acquired properties, dispose of relinquished assets, and ensure financial stability in the commercial real estate arena. Here, we’re examining ways for banks and lenders to manage and offload newly acquired relinquished properties. However, as more property owners relinquish their commercial real estate, they become the responsibility and liability of financial institutions and lenders. With the potential for an influx of foreclosed CRE properties, how can banks effectively manage these properties without becoming insolvent themselves?
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The COVID-19 virus (also known as the novel Coronavirus) has impacted every state in the nation. The economic effects are as varied as the people affected by them. For months, small businesses, large corporations, office buildings, schools, and factories were forced to close as we attempted to slow the spread of the deadly virus.
While these closures were necessary for public health, they took a toll on the U.S. economy. As a result, the commercial real estate (CRE) market has seen significant impacts as well. It’s a ripple effect: as more industries feel the strain from lost income, the effects reach far beyond each employee.
The Domino Effect
As a result, millions of Americans lost their jobs as businesses can’t afford payroll. Even as states slowly relax restrictions and Congress works to provide financial relief, many businesses will take months or years to recover, if they recover at all. Businesses that previously 
rented large office spaces are discovering that telework is cost-effective and will likely downsize their operating space for the foreseeable future. Most states instituted strict shelter in place policies in March 2020. Some businesses set up teleworking networks, allowing work to go on largely unencumbered. However, many companies, particularly those in the service industry, were unable to work and stripped of income.
Without money coming in, these businesses cannot pay rent to landlords. Consequently, CRE landlords are unable to pay their mortgages. Even with billions in government bailout programs, economists predict a deluge of bankruptcies and foreclosures in the coming months.
Ultimately, it’s lenders who end up with the responsibility – and liability – of foreclosed properties.
REO Commercial Properties: How to Manage Relinquished Properties
With an influx of bankruptcy filings and foreclosures, many commercial properties will end up as real estate owned (REO) or other real estate owned (OREO). In essence, this means the financial institution or mortgage lender of the property takes ownership when the borrower can no longer pay.
However, taking ownership also means taking responsibility for everything attached to the property: the tenants, commercial property management, operations, and maintenance.
Bankruptcy Trustees
Some institutions may not be the direct lender of a CRE property but are named trustees through a bankruptcy proceeding. In this instance, the bank or other financial institution named as a trustee must make important financial decisions to avoid foreclosure.
While a timely disposition with limited financial losses is the ultimate goal, the current economic climate could make CRE dispositions difficult. In the interim, hiring a knowledgeable property management firm is critical. Expert property management teams like those here at Lumicre can manage current tenants, find new high-quality tenants, and manage everyday operations until the property sells.
Your Options for REO Properties
If your financial institution acquires a property due to a foreclosure, you have three options:
Sell Property As-Is
In strong economic markets, banks can choose to sell a relinquished property as-is. Instead of investing heavily in renovations, the financial institution makes only necessary repairs and disposes of the property as soon as possible.
Hold and Lease Until Market Value Increases
In a sluggish market, an immediate disposition could be costly. Instead, the lender may choose to hold the property until market value increases.
In this case, the bank will hire a property management company to oversee daily operations, manage tenants, and make other improvements to help increase market value.
Depending on the condition of the relinquished property, the holder may choose to invest in improvements to increase its value. Some improvements can drastically increase tenant interest and warrant higher rent prices. Technological advancements, for instance, are often a worthy investment. These improvements can increase a property’s value and draw in new, high-paying tenants.
Finding ways to increase the REO property’s overall value can lead to a higher sales price when the bank does dispose of the property.
Hold as an Income-Producing Asset
With the economy being in a downturn, banks may choose to retain the REO commercial property indefinitely. In this case, the bank uses the property to create monthly income. This option allows financial institutions to hold an asset until it achieves a stabilized property value.
Commercial Property Management of REO and Foreclosed Properties
No matter which option you choose, it’s important to find knowledgeable, professional commercial real estate firms to guide you through the process.
At Lumicre, we work closely with banks and trustees, providing lease-up, property management, and disposition of foreclosed properties and other REO. Our team of experienced brokers and property managers will assess your situation and suggest a solution that makes the most financial sense.
Commercial Property Management and REO
Banks and other financial institutions can benefit greatly from hiring a knowledgeable commercial property management team. Our property managers and brokers have decades of experience working with banks and lenders to manage the operations and dispositions of REO properties effectively.
No matter which option you choose, it’s important to find knowledgeable, professional commercial real estate firms to guide you through the process.
A commercial property management company will:
- Assess the current property and provide valuation estimates.
- Inspect the property to ensure it’s up to code.
- Audit documentation to make sure everything is correct, minimizing the potential for liens on the property.
- Tenant communications and leasing services.
- Oversee daily operations.
- Provide regular financial reporting.
- Suggest improvements to increase your property’s value.
- Find potential buyers to dispose of the asset when you’re ready.
Our dedicated team of CRE property managers will manage current tenants and aggressively seek out new tenants. At Lumicre, we follow a “tenant-centric” approach. When tenants are happy, they become long-term renters. In these uncertain economic times, having reliable tenants can stabilize your earnings and increase the property’s value. An increase in new tenants means lower vacancy rates, which in turn increases property value. In the end, serving tenants well ultimately means a better outcome when disposing of an asset.
Other Considerations for Banks, Lenders, and Trustees
As you obtain relinquished properties, there are some guidelines you can follow to protect yourself:
- Secure the property immediately after taking ownership. This might mean changing locks or establishing other security measures.
- Add the property to the bank’s foreclosed properties blanket insurance policy. Make sure you have canceled other insurance policies under the former borrower.
- Identify the property’s financial problem spots. Create a plan to minimize losses and increase income and property value.
- Have the property inspected and identify code violations and other necessary repairs. Hire someone to fix these as soon as possible.
- Identify possible updates or renovations. Consider the cost and potential benefits of building improvements.
- Consult with a commercial property management company and a commercial real estate broker to discuss your options.
Contact our property management team and experienced CRE brokers at Lumicre to learn more about our services. We have two decades of experience helping banks, lenders, and trustees manage and dispose of REO properties.
For more helpful resources designed to help the commercial real estate industry, check out this comprehensive guide from National Real Estate Investor.