Crisis Asset Management

1. Crisis Asset Management Margaret Stagmeier TI Asset Management, Inc.

2. “When you find yourself in the middle of Hell…keep going”.Winston Churchill

3. What’s going on in the commercial real estate market? • Capital markets frozen affecting debt availability for new deals and refinancing. • Economy contracting, affecting tenant income. • Massive evaporation of wealth, eroding consumer confidence. • Capital assets including real estate are vulnerable.

4. GOODNEWS • Interest rates are low. • Operational expenses are flat or falling. • Market is giving permission to reinvent and restructure deals, partnership and business relationships….for survival. • Salaries and wages are flat or falling - new employee loyalty.

5. WhatisAssetManagement? Real Estate Ownership = Risk Management Real Estate Asset Management = Real Estate Ownership Real Estate Asset Management = Risk Management

6. What are the challenges of the Asset Manager in the current economic meltdown?

7. First lets delineate that question with a discussion of the nine basic responsibilities of the Asset Manager

8. Nine basic Asset Manager Responsibilities • Supervise Property Management • Supervise Marketing and Leasing • Cash Flow Management • Refinancing/Sales/Purchase Activity • Reporting • Engagement of Third-Parties (Attorneys, Appraisers, Engineers, Surveyors) • Capital/ Structural Management • Compliance/Contract Adherence • Taxation Issues

9. Supervise Property Management • Tenants challenging leases to get reductions which is time consuming • Limited $$$ to fund expenses and comply with tenant leases • Collection issues – working with attorneys • Loan compliance is heightened • Security issues

10. Supervise Marketing & Leasing • Fewer credit-worthy tenants make market more competitive for leasing • Lower rents and higher build-out costs • Brokers/ realtors demanding higher fees • Rents are in a deflationary environment

11. Cash Flow Management • Tenant defaults reducing cash flow • Risky banks challenging stability of deposits • Lenders demanding heightened reserves • Shortage of investors willing to fund cash deficits • Government demanding more taxes to fund shortfalls

12. Buy/Sell/Refinance Decisions • Shortage of lenders for refinancing • Shortage of buyers due to loan scarcity • Shortage of investors willing to fund capital requirements

13. Reporting • Reduced confidence by investors and lenders is increasing reporting requirements • Investors requesting audits and reviews • Necessity of Sources/ Uses of Cash even more critical to manage cash flow • Investors wanting short-long term budgets and plans

14. Engagement of Third-Parties(Attorneys, Appraisers, Engineers, Surveyors) • Attorneys engaged for crisis management issues (tenant defaults, lender negotiations, bankruptcy) • Appraisals, engineers used to give credibility to discussions with investors and lenders • Indoor Air Quality engineers to protect against tenant complaints

15. Capital/Structural Management • Need capital work for your property… prices are low • Lack of cash to fund capital improvements • Compliance with tenant leases more important than ever

16. Compliance is very critical to manage relationships with: • Lenders • Partners • Investors • Government Agencies • Tenants • Insurance

17. Taxation Issues • Recent IRS rulings on forgiveness of debt • Tax Planning in an environment of future tax rate increases • Deferred income recognized for partnerships • Matching losses with gains and strategic planning for sales/foreclosures

18. With all this bad news, how does an asset manager position their property?Get into the psychology of successful crisis management by understanding these three items and the psychology of your circle of influence:

19. First… The turmoil in the current business environment WILL change your business model. Don’t take this personally. It’s business. Focus your mental energy on using this change to strengthen your position. Focusing on your weakness will become a self-fulfilling prophesy.

20. Second… Understand that crisis management is a smart opportunity to build goodwill within your circle of influence. Follow “bad news asset management” protocol to build credibility.

21. Third… Understand that this crisis is giving you the opportunity to reinvent your relationships with clients, tenants, lenders and partners. Survive on your terms with a stronger business platform.

22. Smart crisis asset management is an understanding of the psychology of your circle of influence…

23. Know that your client/ investor is very very nervous about their investment. Your lender needs some love..too. • Heightened reporting and client meetings/visits with a strong asset management plan

24. Know that your client/ investor is very very nervous about their investment What do you tell them? The truth as defined in the key areas of risk: Best Case / Worst Case* Tenant relations (income streams, tenant surveys)* Marketing (where building stacks competitively in the current market rents, etc.) * Cash flow management (is the property operating at a deficit? surplus? reserves?) * Major capital events on the horizon (new equipment, etc.) * Status of loan and compliance * Use of third-party reports strategically * Clear understanding of partnership or ownership agreement and your clients rights

25. Know that your client/ investor is very very nervous about their investment • As part of the communication, explore all options of the ownership going forward (Buyout, sell, refinance, do nothing, etc.)

26. Know that your client/ investor is very very nervous about their investment • Make sure that the tax consequences of all decisions are part of the discussion

27. The way your lender perceives you and your asset has changed dramatically in the past 180 days If you are in a loan workout, understand that your lender is predominately interested in keeping their job

28. The way your lender perceives you and your asset has changed dramatically in the past 180 days • Treat a lender as you would an investor/ client. • Present a strong asset management plan and show them how you are going to get them repaid. • Make yourself the strongest option that they have to resolve the loan. • Do research on the bank/lending institution to get their inside agenda.

29. The way your lender perceives you and your asset has changed dramatically in the past 180 days See the loan through your lenders perception: • Appraised value • Stability • Value in a sale

30. The way your lender perceives you and your asset has changed dramatically in the past 180 days • Look for leverage with your lender: ( i.e. bank deposits, listing for sale, etc.) • Communicate often with your lender… (If in another state, go visit them for a meeting) • For loan refis, start as early as possible (12 mos)

31. The way your tenant perceives you and your asset has changed dramatically in the past 180 days.

32. The way your tenant perceives you and your asset has changed dramatically in the past 180 days. • Show me the money and I’ll show you the keys. • Sublease space. • Landlords are getting hit up by tenant reductions in rent or space. • Tenants want to remove personal guarantees. • Tenant’s are looking for ways to get out of their lease and challenging HVAC and other “vague” components. • Focus on lease compliance!!!! • Set meetings with your key tenants. • Do tenant surveys.

33. The way that cash is perceived has changed dramatically in the last 180 days: • Make sure sufficient cash flow reserves are available to leverage with tenants, lenders and vendors. • Get your investors to buy into heightened cash reserves • Make sure that all bank deposits are with credible banks or covered by the Transitionary Deposit Program

34. Know that your employees and vendors are very nervous about their jobs • Quarterly meetings/ inspections to discuss status of deals with your employees • Be honest about the situation • Share with your employees the asset management plan. They can be your best ally.

35. Know that you need to understand the taxation consequences associated with decisions. • Forgiveness of debt • Foreclosure • Partnership restructuring • Losses (carry back and carry forwards)

36. Keep a clear perspective on YOUR GOALS! • Your talents have not gone away in this market! • Always opportunity in a down market. • Focus on your position of strength.

37. Be clear on the nine responsibilities of the Asset Manager’s role • Get into the psychology of crisis Asset Management and the psychology of your circle of influence • The turmoil in the business environment will alter your business model. Accept this reality to strengthen your position • Your circle of influence is nervous and the perception of you has changes in the last 180 days. • Focus focus focus on your strengths • Keep going! Crisis Asset Management Summary: