Spring 2010 • Issue 36, page 12

Examining the Nuts & Bolts' of a Business Turnaround

By Wyant, H. Michael*

[On occasion receivers find themselves operating commercial structures, sometimes as a stopgap while warring parties litigate control, sometimes while secured creditors and the debtor’s principals negotiate a workout, sometimes under other fact patterns. When they do, receivers may have an opportunity—perhaps a duty — to “turn around” a failing property to preserve its market value. In this article H. Michael Wyant provides tips and war stories garnered from fifty years’ experience on how to successfully analyze and correct problem practices of a property in decline. Ed.]

Every property, company, department and project is different, even though one might look similar to another. Two high-rise office buildings in the same location built identically at the same time may have substantially different net operating income (NOI). The buildings may have different owners, different tenants, different management and different financing, as examples. But there are fundamentals basic to the beginning of any evaluation / study.

My list of these fundamentals is the result of more than fifty years of solving problems. I owned my first automobile when I was thirteen. I remember the day the junkyard wrecker towed that piece of steel, metal and parts into our driveway. It was a 1941 Crosley with a two cylinder air-cooled engine, which had been abandoned many years before.

My father made a living as an attorney, but in my opinion he was a better mechanic and problem solver. He taught me how to take apart every nut, bolt, electrical wire, cotter pin, piston — all the parts — and put them into labeled cigar boxes. I had to learn what each part was for, what role it played in the overall operation of the car. I learned diligently from him and put that Crosley back together, replacing worn out or broken parts as I did so. What a thrill it was to drive that compact vehicle around when I finished the turnaround on it.

Today, I use the same steps learned so long ago. First visualize taking apart every piece of what makes up a troubled property and putting that part into a labeled box. Then evaluate whether that part functions properly or needs to be repaired or replaced. Finally, if you can put it all back together with repaired or replaced parts you have successfully turned around a problem. Certainly, the receivership process is more sophisticated, but it can be done.

FIRST STEPS: STOP, LOOK and LISTEN!
STOP: Make your analysis at a specific point in time. Why? A property, its tenants, staff, seasons of the year, outside factors, the economy and much more all have an effect on what is happening in the property or business being studied. Energy costs are a huge part of the operating expenses of an office building, for example. Some large utility companies change electricity charges four times in a year — winter rates, summer rates, phasing in of already-approved rate increases, with new rates pending. These facts need to be recognized, understood and adjusted when comparing energy costs month-to-month and year-to-year. Occupancy levels also must be adjusted before making proper comparisons.

LOOK: Take a personal tour of all the property, making note of its physical condition; note everything that may affect the property’s image and marketing. Support this with ample photographs. This will save time preparing your written report and also illustrate details of your recommendations.

Always tour the property with the staff member responsible for that aspect of the property you are reviewing, whether a chief engineer, tenant improvement coordinator, marketing specialist, property manager, security supervisor, parking supervisor, landscaping maintenance supervisor or the property’s outside contractors. Perform each tour separately with the appropriate person, since each supervisor will provide more details when others are not around. Pay special attention to the physical condition, the warranties, the operating efficiencies, potential energy improvements and the like.

You might take a tip from former President Lyndon Johnson. When a group of people met in his office to make a presentation, President Johnson would sit back quietly in his chair with his finger tips together and listen to all that was said. When the group finished their presentation, he would ask one simple question, “AND?” The group would quickly respond with more information than they were prepared to give in order to fill the quiet void in speaking and would produce more facts to show they were totally familiar with what they were discussing. After repeating this several times with the group, the president would end the session. Then he would look to his own staff – who had been diligently taking notes – and request follow up investigation on all the additional information presented to set the facts straight before making his decision.

A careful receiver should go beyond what he or she sees and work to understand why the situation is the way it is, how long it has been this way and what recommendations the supervisors would make to improve the situation.

LISTEN: As with “looking,” the receiver should work beyond what is being said in order to discover the history and specific details of any problem issues. A part of my assignment on a large consulting job where marketing success had diminished was to prepare a new marketing plan. A good part of my compensation was tied to the success of that plan.

I spoke with everyone in the marketing department to gather their ideas and analyses of what plans had worked and why other plans had not. I went into depth on some of the previous marketing failures. When my marketing plan – a part of the overall business plan — was implemented, sales reached three times the volume of previous years. I earned handsome fees on the enhanced sales but I didn’t take credit for being a marketing genius. I gave credit to the marketing team, to which I had listened intently. The owners of the project had apparently stopped listening to their own staff!

NEXT STEPS – CONSIDER ALL FACTORS
I group most critical factors under two headings: Inside Factors and Outside Factors. Always remember to analyze the following:

INSIDE FACTORS:
Operations: When evaluating property management staff members consider: are they the right people for the jobs assigned to them; do they have enough time to do the job; what hinders a successful operation; what are the factors to success; what is their motivation for successfully performing their job? Don’t overlook any departments, especially engineering, accounting, parking, security, tenant improvements, landscaping maintenance, the fire/life safety team, the concierge (if the building has one). Pursue key questions with the marketing team, the leasing specialists (and their advertising methods). Check out financing conditions, real estate tax status (recommend the owner go for reductions due to the economy, if possible), and more.

Utilities/Energy usage: Has the building been through a complete energy analysis and, if so, were the recommendations implemented? I was involved in one office building that was a huge energy hog. We brought in an engineering team to evaluate every potential for saving energy. Their list of 26 key areas was impressive, but the payback over a number of years did not justify the cost of recommended changes. We did make 16 of the suggested changes at a cost of $1.2 million, however. We saved more than $600,000 in the first year alone and more in succeeding years even as the utility companies’ rates continued to rise

We signed a contract with the engineering firm to implement these sixteen changes with no financial outlay — the engineering company covered the price of the equipment and installation out of the monthly energy savings over five years, at the end of which we had an option to purchase the equipment for $1. The tenants also saved money on the pass-through costs.

Tenants: Talk with your tenants and their network of suppliers, clients and contacts. You may find it advantageous for a large tenant to have their company contacts and suppliers located closer to them. This might save all concerned time and money in decision-making, shipping, postage, telephone calls, etc.

OUTSIDE FACTORS:
Competition: What / who are your biggest competitors? What are they doing that your property is not doing? What is their occupancy level compared with yours, etc.?

Neighborhood: Evaluate whether your building is in a prime location and, if not, what can be changed to bring more people to your doorstep? A bank building I once represented was in a prime traffic location on two major thoroughfares. But the community became more of a walking community than a driving one. So we bought a small commercial building adjacent to the bank and a vacant parking lot. We remodeled the front of all the tenant spaces, entered into new leases with continuing tenants, and opened several small boutique shops that fronted on the acquired vacant lot. Through attractive landscaping of the lot and carefully-selecting the boutique tenants we were able to attract much of the walking traffic to the adjacent bank building.

Region: What is happening in your region? How does it affect your property? Are there new competitive properties coming on the market and, if so, what can you do to sign up tenants before that competitive property starts its advertising campaign?

Traffic: What are the traffic counts at your property and nearby? What can you do to attract the drivers’ attention?

Demographics: Do current demographic factors favor your specific property? How will these factors change? What can you do to enhance marketing to a specific type of tenant based on the demographic information?

Economy: How do the local, regional, national and international conditions affect your property and the financial status of your current tenants (or prospective tenants)?

Political Conditions: Are local or national politics affecting the property? Can you take advantage of conditions for your own marketing purposes, i.e., look for tenants that may wish to downsize while staying in the same neighborhood (and eventually grow again into more space)? Use creative leases to anticipate and make provision for such needs tailored to specific tenants.

Is there an Economic Development Department in your city? Can you study its list of favored types of businesses? That department may assist you in developing marketing plans and even provide prepared factors on tax benefits, lower utility rates and employee count ratios. This information will help in keeping your tenants’ needs met and allow you to market these and other advantages to new prospective businesses / tenants.

Meet with your local political body to see what it can do for you and what you can do for the area. Remember that the city will reap higher taxes from many sources, not just from the building leases, but also from its tenants, their product sales, and tenants’ expenditures in the local economy. There is a normal turnaround factor of new money coming into a local economy – it is recycled at least 2 ½ times before it leaves the local community.

SUMMARY: LEAD THE MARKET!
Your goal is to be first in the market place when the bottom of the U economic curve starts to go up! So remember to:

• Look at the property first, the location second, the region third and the political situation fourth.

• When you take apart something, be sure you label it and set it in separate “boxes” so you know exactly how to fit that part back into the whole project.

• Analyze every part to see what is working and what needs to be replaced or repaired.

• Prepare a preliminary turnaround strategy.

• Prepare a financial budget to coincide with the strategy.

• Prepare a flow chart with the above and allow room for delays and changes.

• Inspect each step along the way while reviewing the agreed upon strategy to determine if anything needs to be changed during the course of implementing your new plan.

* Mike Wyant is a principal of Wyant and Associates, a full-service real property firm specializing in receivership, acquisition, development, construction and management of commercial and industrial properties. Mr. Wyant formerly served as a member of the California Economic Advisory Council. His firm may be reached at www.wyantandassociates.com.