The importance of property maintenance falls not only on nonrecourse lenders but also on the property owners, brokers, and potential buyers- effectively the entire market. In the September/October issue of Commercial Investment Real Estate (CIRE), Tim Follain, FI Consulting co-founder and principal explains, “Neglected properties affect not only deal participants but the market as a whole as the industry tries to move itself forward in a stubborn economy.”
Follain refutes the practice of postponing maintenance activities on commercial real estate properties in “The Big Fix: Is deferred maintenance the next obstacle to market recovery?”
The first challenge is when incentives drop along with property values, and defaulting property owners with negative equity are best served by deferring property repairs and maintenance. They find it in their interests to extract equity at the expense of property maintenance.
Unfortunately, this casts lenders as some of the biggest losers. Lenders must turn to monitoring borrowers’ quarterly or annual operating statements to identify such properties before reviewing their loan documents.
While a casual look at the properties’ net operating income or debt coverage ratios won’t necessarily expose the ticking time bomb associated with deferred maintenance, looking at this data in more detail can help to identify trends in expenses indicative of deferred maintenance.
According to the article, property owners anticipating default should also consider the implications of deferred maintenance. Their ability to secure debt funding in the future may be jeopardized by their actions (or lack thereof). As lenders and equity investors devote more time to reviewing evidence of property maintenance in properties, brokers should anticipate a longer sale cycle. In spite of skewed incentives and challenges, deferred maintenance comes at a cost, one felt by all participants in the market.
Read the full article here.