These days, lenders own more real estate through foreclosure than they have in the past. While some hesitate to dispose of their real estate owned (REO) in hopes that improvement in the market will restore some of the property’s value, they also may be reluctant to invest additional money in these troubled properties.
That is unfortunate, since property management has great impact on preserving the value of an asset. Throughout the life of a loan, lenders would be wise to monitor the management services and physical condition of the property with site visits and detailed reviews. Making property management a priority will minimize potential losses and protect its value.
The service joint venture alternative
Lenders who are intent upon minimizing management fees on non-performing properties may prefer a service joint venture, in which the lender retains a management firm as its agent with the understanding that the agent will receive a reduced fee until the property is once again generating cash flow and achieves a specified net operating income. At that point, the asset manager receives a designated percentage of the NOI.
When it comes to lease-up fees in a service joint venture, the lender and service agent once again are partners in the property’s success. For commercial properties including office buildings, industrial and retail, the agent typically will receive a full leasing fee in the form of a commission when the property is leased up. Likewise for sales commissions, the manager can expect to receive a portion of the sale price beyond a previously identified amount, in addition to a commission which may be slightly below the traditional percentage.
Service joint ventures are based on the concept of everyone having “skin in the game,” assuring that properties will be managed on behalf of lenders by like-minded people who have their own money on the line and share a stake in the asset’s success.