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14C — September 27 - October 10, 2019 — Fall Preview — M id A tlantic
Real Estate Journal
A ccounting
By Jason Borofsky, CPA, MBA, SAX Prepping real estate firms for an economic downturn
E
conomists, CEOs and business owners each have their own opinion
Regardless of the timing of the recession in the future, adequately addressing a down market is essential to business survival. What steps can real estate firms take now that will help them get through a reces- sion and come out the other end even stronger? Loan Considerations Evaluate your portfolio to determine which properties will be most vulnerable during a recession. If passing your loan covenants are an issue today, would the company still pass if there was a decrease in occupancy or if you were forced
to freeze or decrease rents to retain tenants? Decreased occupancy or rents would also result in a lower net operating income and a decreased valuation. This could be an issue if the loan on your property is ma- turing within the next several years and the company will need to refinance. What you can do now is run various sce- narios and evaluate if it makes financial sense to refinance today, as rates continue to be low, or wait for the maturity date of the loan. Most com- mercial loans have a prepay-
ment penalty outlined in the agreement that would have to be taken into consideration. One potential result of per- forming your projection on loan covenants or ability to ob- tain necessary financing dur- ing a recession could lead to a decision to sell the property. Better to sell the property now than during a recession when your valuation is likely to de- cline, and the company may be dealing with loan covenant and financing issues with the bank. Improve Quality of Assets Do you have significant de-
ferred maintenance on your property? You should consider completing deferred mainte- nance through funds avail- able from current cash flow. During the downturn, this could prove to be difficult due to decreased cash flow, issues with capital calls with existing owners and the potential dif- ficulty in obtaining financing to complete the maintenance. In addition, consider per- forming renovations or invest- ments in technology that will improve the quality of the property and even result in re- duced expenses and increased attractiveness to tenants. More and more properties are being built or retrofitted with smart technologies that will enable the building to operate with greater efficiency. An example of a smart technol- ogy is the ability to easily track and perform preventive maintenance on the property. As a result, this will reduce the likelihood of equipment breaking down, ensure the equipment is running as ex- pected, and prolong the life of the equipment. Whether you are reducing your deferred maintenance projects, performing renova- tions, or making investments in smart technologies, this will only improve the quality of your property and the at- tractiveness to buyers or ten- ants regardless if you are in a recession or not. Another way to improve the quality of your asset(s) is to evaluate the likelihood that your tenants can withstand a downturn. Your net operating income and valuationmight be acceptable today, but what if your tenant is negatively af- fected by the downturn and va- cates their space? Performing financial stress tests on your property based on the likeli- hood that the tenant will stay in business and pay their rent is an important component of financial planning and will help you make informed deci- sions in the areas previously discussed. Planning now for the next recession will only help you stay ahead of the curve and continue to capitalize on op- portunities as they arise be- fore, during, and after the recession. Jason Borofsky, CPA, MBA is a partner at Sax LLP and a member of the firm’s Real Estate Practice.
on if or when t h e U . S . e c o n o m y will fall into a recession. Some experts indicate that the r e i s a good chance an economic
Jason Borofsky
downturn or recession will happen within the next two years, making it logical for real estate professionals to begin bolstering protections.
The Real Estate professionals at Sax understand what it takes to achieve profitability, growth and long-term success. We leverage our industry expertise to advise real estate owners, developers, investors and family-owned businesses on the best ways to face industry challenges, stay compliant, seize new opportunities and reach their financial goals. Lean on the strength and knowledge of Sax’s Real Estate industry advisors to exceed even your own expectations. Learn more at SAXLLP.COM.
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