Chapter 12

Question 1

What is the distinction between performing and non-performing assets?

Answer 1

Performing assets-results in the property selling for cash or in a new loan to a borrower

Non-performing-a loan or lease that is not meeting its stated principal and interest payments (I.e. Commercial loans 90 days past due or consumer loans 180 days past due).

Non-performing assets don’t produce any income.

Question 2

What issues should an asset manager focus on when working to convert an REO to either cash or a performing asset?

Answer 2

Buyer apprehension
caveat emptor
demographics and needs of buyers
competing sellers and competing properties

Question 3

How does an asset manager make a decision to sell a property as-is versus holding it?

Answer 3

The decision is based on an evaluation of market dynamics, strengths and weaknesses of the property, the external financial network, availability of capital, and a potential buyer’s motivations for purchasing the property.

Question 4

What factors are critical in managing the repositioning of an REO property?

Answer 4

• minimizing expenses and maximizing value by carefully evaluating expenses and increasing occupancy
• timely resolution of deferred maintenance at competitive costs
• completing needed capital improvements and addressing life safety/code violations
• evaluating market conditions, competitive rebid of all major service contracts, new tax assessment

Question 5

What responsibility does legal counsel have in all the property disposition process?

Answer 5

The most critical hand’s-on responsibility

• drafting or reviewing and commenting on the purchase and sales agreement provided by the buyer
• confirming the title is valid and that there are no clouds which would prevent the seller from transferring the property
• preparing conveyance documents to include the warranty deed.
• amendments to the purchase/sales agreement
• confirming that the deed is recorded with the title/escrow company after closing

Question 6

Define REO.

Answer 6

Real Estate Owned Property-a non-performing property owned by a lender due to a borrowers default.

Question 7

Identify three ways REO properties may be acquired by lenders.

Answer 7

Trustee’s sale (non-judicial foreclosure)
judicial foreclosure
through a deed in lieu of foreclosure

Question 8

What is a lender’s primary objective with an REO?

Answer 8

To convert the asset from non-performing to performing status and /or recover the loan principle through disposition of the asset.

Question 9

Identify and describe the three critical factors that an asset manager should address when converting an REO property to either cash or to a performing asset.

Answer 9

Buyer apprehension-distressed nature of the property will affect value therefore asset manager must minimize or eliminate problems that characterize it as an REO property.

Caveat emptor-make full disclosures to prospective buyers in writing.

Market conditions

Question 10

What market factors should an asset manager address to move towards a successful resolution for a troubles property?

Answer 10

Understanding market dynamics because they dictate value and pricing

strengths and weaknesses of the property as well as what is curable and what is not

external financial climate

Question 11

Provide examples of deferred maintenance items that would need to be addressed for a property to be sold as-is.

Answer 11

HVAC repairs
leaky roof repairs
broken window repairs
all building systems should be working properly

Question 12

What types of costs are evaluated to determine whether or not it makes sense to sell a property as-is?

Answer 12

Discounted price
repair or improvement allowance to the buyer
closing costs
bonding or insurance policy

Question 13

Describe the three types of capital improvement projects that mat be the result of a decision to hold a property versus selling as-is.

Answer 13

Remodeling-most economical, least time consuming

Rehabilitation-repairs to all building systems. It restores the building to its look at a point in time.

Renovation-delivers a “new” building as its final product

Question 14

What critical areas are used to develop a hold/sell analysis?

Answer 14

-Collect market and specific sub-market data on leasing and sales comparables

develop a DCF (discounted cash flow) model which includes lease-up assumptions, operating expenses, capital improvements, and reserves

compare the analysis to the owner objectives

Question 15

Define DCF

Answer 15

Discounted Cash Flow-a financial analysis tool that gives a present value to an investment and is used for calculating comparable evaluators for investments with future cash flows

It estimate a properties value and cash-on-cash return after improvements and lease-ups.

Question 16

Define collateral value

Answer 16

The value of an asset pledged as collateral to obtain a loan

Question 17

What are the primary tasks an asset manager engages in to protect collateral value?

Answer 17

Evaluate security and maintenance
insures the property
maintain utilities
inspect mechanical systems
check for hazardous waste

Question 18

What are the secondary tasks that should be done to protect collateral value?

Answer 18

Secure rents
resolve tenant concerns
evaluate condition of the property
obtain title report
obtain architectural plan
bid out work

Question 19

What are the management decisions an asset manager needs to make once a property has been repositioned?

Answer 19

• Find a property manager
• Select a leasing agent
• Develop a marketing schedule and meet with ad agencies
• Evaluate curb appeal

Question 20

What strategies does an asset manager employ to manage stabilized property successfully?

Answer 20

• Respond quickly to tenants
• Consider placing property manager onsite
• Unused areas should be maintained
• Work with utility companies to lower rates

Question 21

In marketing a property for sale, what should an asset manager do?

Answer 21

• define the price
• engage a qualified broker
• Define concessions (not disclosure)
• Assemble current rent roll, leases, tenant correspondence files
• Define advertising and promotional events
• Identify most likely buyer profile

Question 22

What is the role of the broker once terms and conditions of a sale are finalized?

Answer 22

Identifying tenants, sub-contractors, or other related parties of the impending sale

Preparing market surveys, comparable lease data, and demographic reports

Confirming the time and date of closing with the buyer, seller, and others involved

Question 23

The property manager’s tasks, once the terms and conditions of the sale are defined, focus on what issues?

Answer 23

Advise tenants in change of ownership

Request utilities be pro-rated to the day of closing

Reconcile accounting associated with rent collection

Terminate services and/or notify insurance company or any contractors of change in ownership

Reconcile accounts associated with property after closing

Ensure smooth transition to new owner of property

Question 24

Define warranty deed

Answer 24

A deed that expressly includes one or more covenants of title

Question 25

Define encumbrance

Answer 25

Any claim or interest in real property that is held by a person other than the owner and that diminishes the value of the property without preventing title to the property to pass from the owner.