Discussion about distressed assets typically centers on evaluating balance sheets. In many cases, opportunistic investors are looking for situations where borrowers have become overextended — taking on more debt than can be paid back through the income being generated by properties. The decision on whether to buy and what to bid is seen purely as a financial assessment.

According to Ronald A. Altoon, founder and partner-for-design of Los Angeles-based Altoon + Porter Architects LLP, that is precisely the wrong way to go about evaluating distressed real estate opportunities.

Altoon, an ICSC trustee and former president of the American Institute of Architects, has worked on helping resolve distressed assets for decades. In his experience, the real problems that need to be addressed when assuming control of a distressed asset are often the ones you can’t see on the balance sheet.

For that reason, architects can play a vital role in assessing troubled situations and help turn properties around. Altoon has worked on helping reposition 54 distressed assets during his career. And he’s now taken that lifetime of experience and authored a new book, “Retail Rescue: Visions + Strategies for Repositioning Distressed Retail Properties.”

Altoon recently spoke with Retail Traffic on how he came to write the book and what kind of advice he has for distressed real estate investors today.

Retail Traffic: How did this project come about?

Altoon: This all started in January 2009. I was invited to give a lecture at Columbia University and ended up going a day early to attend the annual Association of Foreign Investors in Real Estate (AFIRE) conference.

That night I was invited to a dinner with about 40 people and worked the room. I said, “Tell me where I’m off base. You’re looking to purchase real estate. You’re looking for companies in trouble and properties distressed because nobody is going to sell you an A asset. The opportunity is going to be C property, and turning it into B or B+, or B [property] and turning it into A. The way you’ll analyze it is to take a group of young MBAs and they will sit down and look at the balance sheet and you’ll make your choices.” They said, “That’s right.” And I answered, “Well, how stupid is that?”

You’re talking about distressed assets. Many of those properties have toxic materials that have to be encapsulated or removed, or they have American with Disabilities Act issues that will come into play and you’ll have to upgrade for that. And many are built under building codes that have been supplanted by other codes and will have to comply with that.

If the center is losing tenants, what will you do to replace space? What about traffic? What does the competition look like?

There are so many unknowns that are not on the balance sheet. You can’t buy just based on a financial calculation. That’s just one small piece of the puzzle.

I realized that there was an opportunity to fill a void and educate people.

RT: What did you do next?

Altoon: I went home and found I had done 54 of these kinds of retail projects in my career. What we did ran the gamut —facelifts, vertical expansions, horizontal expansions, fusions where we added new pieces, total transformations, renovations or converting to another use.

I went through those and pulled data — costs, sales figures, whatever information I could share — and put together a PowerPoint presentation. That became the basis for a presentation that I took to Europe where I met with 11 pension funds and other investors. Going through the examples showed them that they did not have capability to analyze projects in this way.

That, in turn, became the basis for the book.

RT: Who is the book primarily aimed at?

Altoon: It talks about all the things an investor may need to know. It goes into whole categories of improvements, depending on issues and conditions that are there.

RT: How many projects do you cover in the book?

Altoon: We pulled about 36 projects. In it we go through issues, opportunities we saw and then the solution. It has before and after drawings and photography and, where information was public, before and after sales information.

RT: What are the biggest takeaways for investors looking at distressed retail assets?

Altoon: Do not underestimate the seriousness of the challenge. Whatever it is, it will not be obvious. It’s the things that you don’t see that are the things that are going to hurt you the most.

For example, in Fort Worth, one of our clients bought a large mall with four department stores for $11 million. Only after they bought it did they find out that three were planning to leave, and the building was riddled with asbestos.

We were ultimately able to make it work out, but the project ended up being nothing like he imagined it would be. We were also able to manage to get two of the department stores to stay. Only when they saw what we were planning to do could they appreciate the potential upside.

Another lesson is that in many cases you’re not going to be able to improve a property forever. You may have to settle for getting 10 years out of it before life catches up. The trick, then, is to see if 10 years is enough to make your investment work and if there is an exit strategy or a way to figure out how to adaptively reuse the property.

RT: What are some other lessons?

Altoon: You have to transform a property in people’s psyches. Subtle improvements are not enough. If you’re going to make a difference, it has to affect people’s lives. It’s not just a visual difference. The offering has to enhance their sense of self. They have to feel better being there than being somewhere else. They have to feel their self worth is enhanced by this place.

Whatever changes one makes, one really needs to go beyond building an investment or building a project. You have to build a community. Retail in my mind has spilled over into the immeasurable — the subjective side of life. You have to connect with people and who they think they are. It is the subjective side that will endear them to you.