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Q&A with Allegiancy CEO Steve Sadler, Part 2

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Q&A with Allegiancy CEO Steve Sadler, Part 2

By: Baker Lynn

February 16, 2015

Steve Sadler, CEO of Allegiancy, a Richmond-based commercial real estate asset manager, answers frequently asked questions about his ever-changing industry, and what his company brings to the table. Here, in Part 2 of a three piece series, Steve discusses the fundamentals of Allegiancy’s approach to commercial real estate asset management.

Allegiancy is changing the business of asset management for commercial real estate owners and investors. With an advanced technology platform and singular focus on serving as the owners’ advocate, the company brings fresh vigor to an often poorly understood business.

Missed Part 1? Read it here and then continue on to Part 2 below.

Would you share with readers some of the rags to riches stories your firm has transacted that have brought new life to distressed properties?

One of the things we’ve done a lot of is taken over properties where there were challenges. In most cases, those challenges were due to lack of attention by previous asset managers.

Certainly in 2008-09 era, there was a lot of stress in the marketplace. But what we see 70 to 80 percent of the time real is that the real crisis was self-inflicted by management that wasn’t paying attention.

For example, we have a property in North Carolina where, when we came in, the tenants were very unhappy. Some of their bills had not been paid. In fact, $1.5 million was owed to two tenants for improvements they had made, which hadn’t been reimbursed.

We did the things that I would think any reasonable person would do. We walked in and had face-to-face meetings with those tenants, listened to them, and found out what they saw as the main issues. At the same time, we sat at the table together and negotiated a solution that would get them most of what they wanted, and allow us to continue to operate the property for the benefit of our clients. Then we executed on our commitments to the tenants and the owners. The end of that story is that that property has almost doubled its net operating income. It’s been refinanced, and the ownership is very solid and stable with good cash flow.

We also have numerous examples that may be less dramatic, but tell a similar story. We had a property in Arizona where the previous asset manager had evaluated the air conditioning control system and decided it needed a new one. They had bid it out, and found that the price to replace was $120,000. When we came into the property, it had little or no capital, so an expenditure of $120,000 was a problem.

We reevaluated the situation and came back with a system that would cost the owners considerably less. It didn’t have all the bells and whistles of the more expensive system. But interestingly, that expensive control system could also control the building’s lights, doors, and water flow; yet none of those were compatible with the proposed control system.

So as an owner, you were going to end up with a $120,000 thermostat. At Allegiancy, we were able to get Internet-controlled thermostats installed throughout the building for $20,000. So there, we saved those owners $100,000 in capital. That’s the kind of meaningful impact that an asset manager who’s paying attention can have. It’s real money, and it makes a difference.

What is the importance of tenant interviews and surveys to your work?

At Allegiancy, we ultimately we have a couple of different audiences.   We communicate with our property owners, the tenants in the building, and the various vendors who work for us.

Ongoing interviews and communications with tenants give us direct feedback, so we know how our people are doing, how our services are perceived, where we have opportunities to improve, and how our various vendors are accomplishing their tasks.   Direct communication with tenants is an important way we know what’s really happening on the ground.

What do you require of investors? What are their qualifications for making a minimal investment?

Allegiancy is an asset manager, so we’re not typically involved in setting up the investment side of a commercial property. But on the assets where we are managing, a typical investor is accredited with a couple of million dollars of net worth. On average, their capital contributions to a property are around $250,000.

Many investors are turning to real estate to diversify their portfolio, and some are being told that it is a real simple deal: just invest and collect the checks. Why is that not necessarily the case? What is the reality of real estate investment?

The reality is that, like any other business, there are many moving parts that have to be accounted for in commercial real estate. If you were to look at the average suburban office building — and look at it as we at Allegiancy do – as a standalone operating company, here’s what you would see: That “company” needs a president to look at every aspect of its operations to make sure it’s efficient and profitable.

If you look at an office building as a business, it may have $3 million in revenue and $2 million in expenses, with a $1 million profit margin. In the grand scheme of things across the United States, that would be a large “small business.”

As with any other small business though, there are a lot of things that need to be taken care of – there are tenants, vendors, and physical property that need to be cared for. All of that is real work.

What an owner needs is someone protecting their interests and executing on a business plan for their property so that the owner can just relax and cash a check. At the end of the day, what you’re really looking for as a passive investor is someone you can have faith and trust in to execute on a business plan. Without that partner on the ground making it happen at your real estate investment site, your returns aren’t likely to be as good as they could be.

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