Industry veterans recommend fixing the roof while the sun is still shining. Stanley Ross, chairman of the USC Lusk Center for Real Estate and a former top Ernst & Young L.L.P. executive, suggested that companies undergo quarterly checkups of their portfolios and pipelines. He also counseled that they drill down for a more in-depth examination at least twice a year. Those exercises will determine how stabilized assets are performing and whether the development pipeline needs some tweaking.
Ross also said companies should develop contingency plans for difficult scenarios. Analyze the impact of a one-year drop in a building's occupancy from 90 percent to 80 percent, for example. Consider what other services the company could offer its clients. Build flexibility into the company's business plan. "Don't fall in love with (assets)," Ross said. When a storm hits, companies may have to move properties around to build shelter. For a development project, that could mean changing the mix of property types or even leaving a major element on the back burner.
For a California company, Ross studied plans for a multi-family/retail project, considered development costs and the local market and then advised delaying the residential component. At his suggestion, the client also approached its lender and asked for a modification in several covenants that regulated the sponsor's net worth and the debt-to-equity ratio of the project's financing. The lender readily agreed, and although financial default was not a concern, those changes saved the developer from technical default.