Workouts are unusual in affordable housing, but when they occur they are also unusually difficult and complex. Affordable housing transactions often have multiple layers of financing and regulatory requirements, public, private and non-profit participants, and complex community considerations, all in addition to the market and financing issues now affecting real estate more generally. In other words, affordable housing workouts require specialized expertise.
In TCAM’s experience, there are four steps that owners or investors with troubled assets can take to efficiently limit risk and improve the performance of assets in their portfolios:
- Overall portfolio assessment to identify the assets that could most benefit
from watchlist and/or workout attention. In our experience, there are some problems that are relatively easy to fix, with enormous benefits to the capital provider. Conversely, there are problems that cannot be fixed without enormous cost, or yield very little in the way of benefits to the client. The portfolio review would prioritize the assets on which the capital provider should spend its time, thereby allowing for targeted and efficient use of resources; - Assessments of individual assets: Once the priority assets are identified, the next step is an in-depth assessment of the asset’s operational, financial, and sponsorship issues. The assessment should include full site visit, market survey, assessment of site management performance and property condition, compliance review, identification and description of issues and of the owner or investor’s exposure. The assessment should address the capabilities of the GP/developer(s) and/or property manager and their ability to solve or contribute to the resolution of the problems of the property. The assessment should also include a recommendation as to specific steps for the capital provider to address and remedy the issue and exposure identified;
- On-going oversight for those assets that are determined by the assessment to need intensive on-going attention, but not major restructuring or other intervention by the capital provider; and
- Implementing the actions identified in the assessment for those assets that are determined to need major restructuring or other intervention. These actions would include on-going oversight and analysis as well as implementing steps involved in the workout, such as repositioning the asset, implementing new leasing strategies, introducing cost controls, replacing site and/or regional managers and projecting the potential impact of capital restructuring proposals.