Buildings and land are purchased with the best intentions. The first years are fantastic, with high usage rates and (hopefully) everything going as you and your organization expected. However, overtime, you may notice that the glamour has worn off. Expenses increase, usage decreases, and worst yet – you may not know if anyone else would even think about purchasing it.
Definition of a Stranded Asset
In Real Estate there is term to describe this scenario - a stranded asset. This is “an investment that has suffered from unanticipated or premature write-downs, devaluations, or conversion to liabilities.” This occurs due to various factors, including changes in regulations, market dynamics, environmental concerns, technological advancements, or maybe just a change in the services that you are providing to your people.
Importance of Understanding Stranded Assets
Understanding stranded assets is crucial for organizations to manage financial risks and avoid significant losses. It helps in strategic planning, ensuring that investments are resilient to changes and continue to support the organization’s mission.
It helps to identify which assets are no longer being used to their full potential, as this creates an opportunity for you. Knowing that you aren’t getting the usage you once did, and working to create a structured plan of what to do with the asset, helps owners to preserve their money and better utilize their future efforts. It is crucial for an organization to identify inefficiencies and work to fix them. In the non-profit space, this is especially important, as you likely run a lean operation and have members that rely on the services that you provide. By identifying and taking care of your stranded assets, you can positively impact the people who rely on you and build a more resilient future for your entire organization.
Historical Context and Background
Stranded assets are not a new phenomenon. Historical examples include obsolete manufacturing facilities during the Industrial Revolution and properties impacted by urban redevelopment projects. We are fortunate that there is often a plan to assist with stranded assets, and many examples of successful previous projects to revitalize a property or area. Often, there is a higher-and-better-use, meaning that while the property may not be performing for your particular purpose, it can serve a different organization if legal zoning rights or access is amended.
Technological advancements can render certain assets obsolete. For example, the transition from coal to renewable energy has left many coal plants stranded.
Characteristics of Stranded Assets
Financial Implications
It may not be apparent that your asset is becoming, or is, stranded. You may have activity at the property, or still be generating revenue. Overall though, there is likely a trend of Reduced Asset Value: Stranded assets often experience a significant decrease in market value if you continue operations as-is. This leads to negative Impact on Investment Returns: The loss in value can negatively affect overall investment returns, leading to financial instability.
Operational Implications
Stranded assets often incur high maintenance costs without generating corresponding revenue. This, in turn, limits their usage, restricting how these assets can be used and limiting their operational efficiency. Impact on Mission: The inability to effectively use these assets can hinder an organization’s ability to deliver services and achieve its mission, hurting the people that you are trying to help.
What to Do About It
At Scout Real Estate Advisors, we have a structured plan to identify and fix potentially stranded assets.
Operational Assessment
By evaluating your current organization's operations and what your members are doing, both with your properties and with your overall mission, you get a full grasp on what is important. A full analysis includes looking at engagement, goals, activities, retention, recruitment, and more.
Financial Analysis
Understanding your overall financial position is crucial. Your properties can be beneficial or detrimental to your success, and having a grasp on what you are capable of doing, want to do, and need to do, is critical to plan for the future of your organization. Real Estate can be expensive to maintain, and underperforming or stranded real estate is even more so.
Property Value Assessment
What value does this property hold to you, and what are the associated expenses and revenues of the property? What value would this property hold to others in its current form, and if it was converted to other uses?
By comparing these factors, a true "value" can be assessed. Remember, this depends on each user's intended use of the property and what it allows each organization to do.
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