Rescuing Distressed Retail Real Estate
developer bit off more than he could chew,” says Henry Englehardt, CCIM, senior
vice president with Colliers International in Walnut Creek, Calif., explaining
how Rocklin Crossroads, a mixed-use/retail property in Rocklin, Calif., fell
into the hands of Umpqua Bank when the market turned. The property comprised one
18,000-square-foot multitenant building, an operating gas station, convenience
store, and fast food restaurant, as well as four acres of development land
restricted by reciprocal and utility easements.
Umpqua enlisted Englehardt and his team to
assist with the property sale. However, “When the bank foreclosed, it wiped out
the junior interests, such as gas station, convenience store, and restaurant
contracts,” Englehardt says. This would give the new owner something to chew
But Englehardt’s team was ready for the
challenge, and Umpqua eventually received nine offers. After a careful
evaluation process, the bank decided against selling to the highest bidder.
Instead, Englehardt recommended a buyer that already had a relationship with
the bank and a proven strategy for success with distressed properties, as well
as a verified source of funds.
“The buyer was dialed-in, confident, and
collaborative,” Englehardt says. “He refranchised the convenience store and gas
station, which led to a 2 percentage point capitalization rate compression, and
replaced the fast-food contract with a corporate signature.”
But finding the right buyer is only one of
the key factors in dealing with real estate-owned retail properties. “For REO,
there’s a need for brokers and owners to be flexible and react quickly — with
a sense of urgency,” Englehardt explains. “Brokers need to assume a receiver’s
attitude.” He offers the following tips:
- Convince the lender client to buy into the
collateral-asset value recovery strategy.
- Know state and federal laws in case bankruptcy or
foreclosure is a viable option.
- Stop the bleeding with a property tax appeal.
- Evaluate tenants and preserve the good ones.
- If a shopping center has undeveloped land, sell the
pads to recover collateral value as soon as possible.
- Cannibalize the income stream if parts are more
valuable than the center as a whole. For example, parcelize and sell a
McDonald’s ground lease.
- Find out if tenants are interested in buying their
underlying real estate or buying out their leases.
strategies won’t go out of fashion anytime soon, according to Englehardt. “I
think we will see more retailer failure among both national and regional chains
and more independent retailers giving up their space this year, creating a
backfill challenge,” he says. CCIMs who think like receivers — stressing
service asset stabilization and value recovery — can turn this unfortunate
situation into a potentially lucrative opportunity.
Rosfelder is associate editor of Commercial
Investment Real Estate.
more retail asset preservation strategies, read “Retail Goes Downtown” in the May/June
2011 issue of Commercial Investment Real