Reducing Rent Could Have Watershed Effect on a Property

Samuel Wagner (pictured) is chief operating officer of LeaseProbe LLC. He is also the COO of Real Diligence LLC, which offers financial due diligence for commercial real estate clients. Wagner established Real Diligence in 2006 to provide a host of technologically-savvy real estate services. In 2007, Real Diligence began working with LeaseProbe to provide comprehensive financial due diligence to LeaseProbe’s customers. LeaseProbe then merged with Real Diligence, bringing it under the Madison Commercial Real Estate Services umbrella.Wagner talks to MHN Online News Editor Anuradha Kher about the five questions multifamily developers should ask when managing their portfolios in the current climate; about accurate pricing of a distressed property and should owners/developers reduce rents if residents demand it.MHN: What advice would you give multifamily developers about managing a mid-size or large portfolio? Wagner: Multifamily developers and property managers with mid-size or large portfolios should carefully review their income and expenses. Regarding income, while multifamily developers do not have the complex CAM calculations found in commercial leases, having a large volume of tenants does present challenges in ensuring that all applicable rent is captured—especially timely rent and necessary late fees. A key way to handle this problem is to have proper software and know how to use it correctly. Additionally, proper tenant screening with credit checks is also very important.Regarding expenses, it is critical to monitor benchmark numbers and expenses per unit. Multifamily developers and property managers may have areas where they are bleeding money. It is crucial to examine big-line items closely. For example, a utility audit by a legitimate company will likely reveal opportunities for savings. Another area to review is turnover rate. High turnover can be a costly expense. MHN: What advice would you give multifamily developers about managing a very small portfolio?Wagner: Similar to large developers, multifamily developers with smaller portfolios should also conduct proper tenant screenings with credit checks and have a utility audit.MHN: What are the five questions multifamily developers should be asking about managing their portfolio in a downturn? Wagner: 1.    Have I taken advantage of the latest tax regulations to lower my tax liability and improve my cash flow? 2.    When buying and selling property, have I preserved my investment capital by deferring capital gains taxes? 3.    In considering the acquisition of a distressed or foreclosed property, am I certain it is accurately valued?4.    Have I had my utility bills audited by a professional utility auditing company recently?5.    Do I have software in place that allows me to effectively track my account receivables?MHN: How does a multifamily manager ensure the distressed property he or she is buying is accurately priced? Wagner: Ensuring property is accurately priced is important in any market, but it is especially critical in the current market. In fact, it could be argued that inaccurate property valuation directly contributed to the real estate and financial crisis, which pushed the economy into a recession. So perhaps it is the most important issue facing the real estate market today.The key to ensuring that distressed property is accurately priced is comprehensive due diligence. For instance, it is imperative to look closely at the actual income of the property, particularly multifamily property, not just from the perspective of the lease, but from actual bank statements. Because multifamily residential leases are typically for one year, by the time the due diligence is completed, most of the leases are almost up or expired. Thus, checking the historical occupancy rate is more telling than reviewing the leases. Landlords have been known to fill up units and drive up the occupancy rate in the hope of selling the property. However, the historical turnover rate, bank statements and accounts receivables give the real picture. Also, capital improvements can easily sink a project. A building assessment analysis is imperative. Many multifamily developers and property investors have turned to experts for the type of in-depth financial due diligence needed to fully assess the price of distressed property in today’s market. MHN: Do you think property managers of residential portfolios should evaluate all leases? Wagner: Evaluating the leases of residential properties is not as necessary as those related to commercial leases. Residential property leases are typically short-term, form leases unless it is an A++ building. On a day-to-day basis, multifamily housing leases don’t really give much more information than the rent terms and the rules and regulations of the building. However, one thing to look out for is a lease that has a rent-control term.MHN: Should a property manager decrease the rents if the renter demands it? Wagner: On the one hand, there is reason in today’s environment to think so. It may be more cost effective to reduce a tenant’s rent than to replace a good tenant when there is so much inventory available for rent. However, property managers should be careful because it can have a watershed effect. To know if it makes sense to negotiate the rent, a property manager or owner should be fully aware of market comparables and the supply and demand of units within the property’s radius.