Tanya Little, founder and CEO of Dallas-based Hart Advisors Group, tells GlobeSt.com that a borrower needs to be like a well-trained train engineer, able to guide a property down the stretch of the loan and look ahead at see what’s coming. While many borrowers can recognize the warning signs of trouble, such as a location losing luster and rent stability, or major vacancy announcements, the properties that lose out invariably have a borrower that’s asleep on the switch, she says.

“In the past, an asset manager didn’t have to pay too much attention to the property or the loan covenants,” Little says. “Now, it’s critical to know your loan rights inside and out, and be willing to talk to your lender about any problems that could come up.”

Too many times, she says, she’s seen borrowers struggle because they didn’t want to face a looming problem such as a weak market or weak fundamentals that can cause problems with a loan. “Today, it’s more critical to know your loan than to worry about what the property physically looks like,” Little says. “Knowing what can force your property into distress, and a willingness to face it, is what can keep a borrower alive today. You have to look ahead, and be prepared to talk to your lender immediately, rather than wait until a dire situation arrives and it’s too late to fix.”

Be Smart

Taking shortcuts and ignoring smart business decisions to save a property never works in the long run, says Richard Walter, president of Irvine, CA-based Faris Lee Investments. He says he’s seen a few cases where retail borrowers, for example, either ignore or make bad judgments that cause a troubled property to completely fail.

For example, Walter says trying to work around a co-tenancy issue rather than doing as much as possible to keep tenants when times turn bad is just an effort in futility. These co-tenant deals, that allow other tenants to pay less rent if an anchor leaves, are unfortunate, he says, and were written during times when no one thought they would be enforced.

“If you have this situation, you’re going to do everything you can to keep that tenant, or your rent troubles are going to get even greater when they do,” he says. “You need put a lot of money out to keep them happy, because if you don’t, your impact to your NOI is going to be much worse than what you’re spending.”

Other issues Walter says he’s seen are borrowers who act in desperation and pick the wrong tenants (a flea market, for example) to “temporarily” fill a vacancy. You can’t bail a boat with a busted pail, and you can’t save a center with stores that drag it down, he says. “You have to look at the long term, or you’re not going to recover the property,” Walter says. “An alternative is just to land bank the property, or get creative and fill a need in the community, like a small grocery store.”

There are ways for borrowers to fix mistakes in tenancy, though they aren’t always easy, Walter says. Newer retail centers that just haven’t leased up, for example, may be the fault of a poorly designed property that just needs some knock-downs. “It’s a difficult analysis to make, no one wants to tear down a working building,” he says, “but if the property wasn’t designed with good visibility you have to consider it to make it a more viable site.”

Be Quick

Gene Fuller, director of asset and property management at Voit, says the key to fixing the extremely troubled sites, those properties with almost total vacancy and have owners afraid to show their face, is to get back to the basics. Representing lenders, Fuller has led teams to take on these properties where tenants may not have paid rent for months and utilities can be shut off.

“The first thing to do is get in there quickly, change the locks, take charge of the rent roll, and to make sure the tenants are happy,” Fuller says. “In many cases the borrower has ignored them, a lot of times they’ll be happy to just finally see someone on site. Get the infrastructure going again, make sure the fire safety equipment works. Speed is essential.”

These C and D assets have to be examined much faster than a firm such as an institution would handle a stable asset or tower, he says. “If they’re only 25% leased, you’re not going to take them to 70% or 80%, Fuller says. “You have to be flexible, try to get the tenants happy, spend a little bit of capital, and get out,” he says.

He says retail makes up about one-third of the troubled assets his firm handles, and distressed condos have flooded the market, “I don’t see an end to distress in 2012, you’ve got a lot of borrowers who thought they could meet their debt service, now face maturity and can’t handle the note,” Fuller says. “I think if we can keep working these properties correctly, we can get to a normal market, but it’s possible we might not see that even this decade.”