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2017 NIC Fall Conference Rewind

Thumbs up or down? Session audience votes on real life redevelopment projects

Let’s say a business opportunity lands on your desk. Maybe it’s an older property that needs some updating but has a great location. Perhaps it’s a newer building with occupancy problems, or a property with any number of other challenges that seem fixable. What would you do? Would you take the risk? What are the factors to consider beyond the obvious ones that could determine success or failure?

The session, “Determining If It’s Time to Redevelop Your Properties,” highlighted case studies that represented a variety of projects with a mix of results. Some were successful, others fell short of meeting expectations, and the audience was challenged to separate the good deals from the flops.

In a creative twist with an assist from the audience, a panel of operators and capital providers moderated by Michael Schonbrun, founder and CEO of Balfour Senior Living, Louisville, Colorado, took a deep dive into three real life redevelopment opportunities at the 2017 NIC Fall Conference. The panel experts, from their perspectives as industry stakeholders, gave their candid thoughts and opinions on whether to purchase, invest, or walk away from each deal.

Panelists representing equity investors included Phil Anderson, chief investment officer at Bridge Seniors Housing & Medical Properties, and Chris Kazantis, director at AEW Capital Management, L.P. Input from an operators’ perspective came from Dan Gorham, partner at Kensington Senior Living. And Imran Javaid, managing director at BMO Harris Bank represented a lender’s viewpoint.

The question of whether to invest in a problem property comes at a pivotal time in the industry. A wave of new buildings is opening and increased competition could lead to opportunities in several years for investors, operators and lenders willing to tackle challenged properties.

The session was structured something like a Harvard Business School case study. Property details were presented to the audience, including location, size of project, history, land value, purchase price, market demographics, competitors and loan terms. The proposed plan to revitalize each property and maximize its value was also presented. The discussion highlighted various risk factors. For example, is it smart to put money into an old building, or is it too risky and a lost cause? How important is property management? What loan terms make the most sense? “We want to know what they would do if these deals were presented to them,” said Schonbrun.

The panel weighed in on the merits of each deal discussing their willingness to make a commitment to the project. Using a smart phone app, attendees at the session were asked to vote on whether they would be “in,” or “out” of each deal.

Lessons learned

Regarding the deals and the issues, and the conclusions that were drawn about whether or not to move forward with a deal, some of the key lessons learned included the importance of working with a seasoned operator, and recognizing threats to basis in the form of additional costs, additional time, and additional carry that may be overlooked. And while it can be a challenge to gather the information, it is critical to gain an understanding of the resident profile the deal will inherit to ensure the residents are appropriate for the plan and the plan is appropriate for the residents.

Additionally, panelists warned of functional obsolescence. According to Chris Kazantis, “When we look at this space, there is much more functional obsolescence than you’ll find in other asset classes, even multi-family, and a lot of it has to do with the fact that the resident profile has changed over time. A renovation will be competing with brand-new product with purpose already baked in. If you’re not going to compete with that, then you must have basis low enough to drive enough revenue to be the low-cost alternative while providing the same level of care as the competition.”

Strong branding is a plus. The panelists agreed that brand-new operators will be challenged to develop a reputation, noting that it is important to recognize that it takes time.  For the investor, having a strong brand going into the deal will alleviate some of the pressure. “It is easy to underestimate the time and effort it takes to turn around a negative reputation,” cautioned Phil Anderson.

Thoroughly understand the market’s existing supply before you pull the trigger. If there’s a lot of supply, how well is existing supply doing? “Competition is of concern, clearly, and you have to know who it is and how to fit the operating platform into the marketplace,” said Dan Gorham

Operations trumps real estate. For Imran Javaid, the local operator and sponsorship are key. Chris Kazantis agreed, adding, “Success comes down to operations; knowing that the building is a fit for the operator’s model.”

The session concluded with a “big reveal.” Was the deal profitable after the property was refurbished? Were operating losses curtailed? Was the new owner able to drive the needed changes? The actual results of how each deal played out over time were presented, and session attendees were able to test their decision-making prowess by comparing their votes to real life results.


For more recaps of the 2017 Fall Conference click here!

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