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Finding Value in Non-Performing Real Estate Assets

By: Joe Verdoorn and Mark Baker

During the past five years of economic turmoil, many banks have found themselves the recipient of real estate assets that have been foreclosed on due to bankruptcy or non-performing development activity. It is the elephant in the room that is not discussed and is typically swept under the rug. The sheer number of distressed and returned real estate assets is forcing financial institutions to either off-load the property for pennies on the dollar or step into the unfamiliar world of land development.

Neither choice is ideal. However, the decision to invest a little time and money into a non-performing asset may reap rewards for the institutions willing to choose the land development option.

To succeed in this endeavor, it is important to employ the same strategies as successful land developers. One vital step is composing a team of experienced consultants who provide land planning and development consultation services. These professionals are the advance team on any land development project, studying the:

Based on this evaluation, they are able to determine the highest and best use of the land to maintain or enhance its value. Their findings are the basis for the developerís decisions regarding the project. The process is not only beneficial to financial institutions but also provides potential buyers with a better understanding of the value of real estate assets and determines the most cost-effective course to realize a return on their investments.

Engaging a consultant team of a land planner, civil engineer, attorney and market analyst to evaluate an asset also reduces the bankís risk. Many non-performing assets are a Pandoraís Box of existing agreements, expiring entitlements, half-finished utilities, negotiated timelines and other hidden obstacles, which can negatively impact marketability and sale price. As the economy changes, so does market demand. A consultant team helps reposition the land to understand yields and development costs to revise the pro-forma to better address market needs. An additional resource of the consultant team members lies in their professional networks, which can be used as needed to ensure the appropriate strategy is being employed to meet market demands as well as provide a network of client investors to promote and market the property.

It is worth noting that real estate assets are more vulnerable to the influence of time than other real estate investments, frequently losing value, which can fall to or below the original starting position. Playing catch-up is a time-consuming and potentially costly endeavor. Therefore, if faced with performing the due diligence to liquidate real estate assets, it makes sense to go one step further to secure or enhance the value to mitigate potential losses or realize a return on investment.

Three examples demonstrate the value that a little due diligence can bring to non-performing land assets. More importantly, understanding the hidden value of a tract of land can mean the difference between realizing a loss or a return on investment.

In 2010, a bank found itself in possession of 200 acres in Austin, Texas. The land was saddled with entitlements that were no longer in line with market conditions. Recognizing the value of the land, the bank partnered with a local developer and hired a land planning firm to understand the opportunities to reposition and market the property.

The consulting team, working with input from local builders and development experts, modified the land plan to fit current market conditions and to offer the products, programming and amenities sought by todayís home buyers. Neighborhoods were designed to create lot premiums which had not previously existed, including preservation of trees, views to open space and access to amenities. These premiums increased the value of each lot and, in turn, the opportunity for a higher return on investment when sold to builders. The land planners also established an amenity program appropriate to a community of its size. Once the revisions were finalized, the consultant team worked with the city to gain the appropriate regulatory approvals and entitlements to allow the community to move forward with development.

With its entitlements in place and a revised land plan in hand, the bank and its consultant team prepared marketing materials that highlighted the community amenities, lot premiums and appealing lifestyle to attract buyers and increase interest in the project. Based on the consultant teamís ability to create a marketable product to sell at a premium, builders competed for lots within the community, allowing the bank to recoup the lost revenue of the asset.

A second bank found itself in possession of a non-performing land asset in north Texas. The consultant team assembled by the bank found language in the development agreement that resulted in the bank realizing a refund of the cost-sharing fees paid to the municipality. Without the experience of the consultants who understood the intricacies of land development and the myriad of influences, those funds would have been lost. Additionally, the team was able to work with the municipality to secure the projectís entitlements, ensuring the assetís value when it went to market and allowing the bank to increase its asking price, resulting in a better return on investment.

Back in Austin, a third bank engaged a land planning firm to determine the best course of action for a tract of land it foreclosed. The propertyís size and location in a desirable area provided the incentive to understand the value of the asset. After studying the site, development plan and existing development approvals, the consultant recommended revising the development plan to create a product more attuned to the current market. A number of development scenarios were explored to determine the highest and best use of the property to achieve a better return on investment. The selected plan worked within the existing entitlements to allow development to move forward. Working with its land planner, the bank was able to make informed decisions to best position the land for maximum profitability.

The steps to protect and secure an asset require little more than the pro forma due diligence required to evaluate and sell an asset. By investing the time and money in an experienced consultant team, informed decisions can be made efficiently and a strategy put in place to transform a non-performing asset into a more attractive investment opportunity when placed on the market.

Joe Verdoorn is a principal at SEC Planning, LLC, Austin, Texas. For more information visit

Copyright (c) December 2011 by BankNews Media.