Adapting and Growing your Business

Posted by Frank Mallon on November 13, 2009  |  No Comments

    What market defines your industry?  The answer to that question has a strong influence in identifying the dominant drivers to lead business decisions that serve the basis of building long-term stability and maximizing your profitability.  Should you seek to differentiate your product, should you look to compete by aggressively pricing your product, should you look to make capital investment in cutting edge technology to keep ahead of your competition?  The correct answer to each of these questions depends on the market your industry functions within. 

    While it would appear that each of the questions noted here have a simple answer, in actuality the answer varies based on the industry the business functions within.  For instance, if you are one Firm of very many who are competing in your industry you may need look to diversification of your product to gain any advantage in controlling the price your product can command in that market. 

    To the extent that technology may be essential to provide you the ability to diversify your product, decisions to make investment in cutting edge technology make sense.  However, if the ability to diversify is better accomplished through effective R&D, or marketing efforts, then your money would be far better spent by investing in those services rather than in new technology. 

    If you are one of very few firms competing in your industry then gaining and keeping market share is critical.  You can not afford to allow your competition to gain a productive advantage over you whether that advantage is through efficiency, utilization, or unique manufacturing capability.  That said, it is imperative you maintain your stock of capital assets in a highly productive and technologically advanced state.  While it is not necessarily a requirement to remain on the cutting edge of the technology, you can not afford to allow your capital asset base to become disadvantaged by age or lack of new technical capabilities that are enjoyed by your competition. 

    The best strategic business decisions are made when taking into account not only knowledge of your individual Firm, but also by understanding what role your Firm currently plays in your industry and what potential there is to improve that role within the industry.  Decisions leading to the improvement of a Firm’s position within its industry lead to greater long-term stability and profitability for the Firm.

Opportunity in the Commercial Real Estate Market

Posted by Joe Stampone on November 11, 2009  |  No Comments

*** This is the first post written by Joe Stampone, who will be an active contributor to the Real Business Blog.  His personal website can be found at www.joestampone.com.  Joe has several years of expereince working with real estate development and investment companies.  He is currently pursuing his master’s degree in real estate at New York University.  ***

Most people in the real estate industry believed that the crash of the early 1990’s would be a once in a lifetime event. However, it appears that the distress of the current economic environment will far exceed that of the early 90’s. Counter-cyclical investors took advantage of depressed values and made fortunes. Similarly, the period between now and 2013 will represent the greatest opportunity to cash in on distressed properties.

So what exactly will the opportunities be to invest in distressed property?

Distressed Debt Acquisitions
Due to the sharp decline in property values, many of the loans made to finance certain real estate acquisitions exceed the value of the underlying property. Additionally, as many loans approach maturity, investors are unable to refinance in an environment filled with de-leveraging. Therefore, investors with patient capital will be able to acquire first mortgages or other debt instruments at a deep discount.This could result in a near term high IRR realization or acquisition of the property via foreclosure.

*Update: Many banks have taken an “extend and pretend” approach to maturing loans as the FDIC wants to allow banks to rollover commercial loans that are at maturity, and not require they be marked to market. If the FDIC forces loans to be marked to market at maturity, we’ll realize a flood of distressed deals coming to the market. Although there has been a lot of capital raised to purchase distressed assets, it wouldn’t nearly cover the amount of distress. This could cause an even greater crash. On the other hand, if the FDIC allows loans to rollover, banks have time to sure up there balance sheets and eventually realize the loss when they can handle it. This will lead to waves of distress, which can be absorbed by the market.

Recapitalizations
Companies with expertise may be able to step in during a restructuring and take control of the day to day operations of a distressed property. The borrower may be left with a tax deferral or some sort of income stream. The firm will provide equity capital to the borrower to allow them to retain some involvement in the transaction.

Failed Developments
There will be many projects where the developer goes into default prior to completing the project. In such a scenario, most construction lenders are ill-equipped to finish the jobs themselves. There will be opportunities for companies to buy into the developments at a significantly reduced price, complete the job, and potentially give the lender some sort of back-end participation. Such an effort would require vast development experience.

Institutional Divestitures
Institutional real estate investors are many times forced to exit the real estate market at inopportune times in a cycle. Many of these investors are being forced to sell healthy real estate assets in order to generate liquidity, for a variety of reasons. These opportunities can be viewed as another form a distress. If a company has the ability to act quickly, they will be able to take advantage of these opportunities.

Although there are very little distressed deals at the time, over the next couple of years opportunity will be unprecedented. It will take strong relationships, experience, and capital to cash in on these deals. Where do you see the most opportunity in this market?