It’s all in the title, “Stabilized and Unstabilized Assets” which is the condition that the asset is in but also describes the investment as being stable or unstable. Unstabilized assets are assets that need certain ‘events’ to happen for the asset to perform in comparison to the market.
In this article, we will be talking about Stabilized and Unstabilized Assets and what the key differences are.
The term Stabilized is used to describe the type of asset from an investment perspective. Stabilized assets typically become stable when they have a certain level of occupancy or cash flow in comparison to similar assets in the same market. The key difference with stabilized assets is the ability to obtain permanent financing. Banks lend with favorable terms against assets that are occupied and achieve a strong net operating income that can support debt service.
All commercial property begin unstabilized. Unstabilized assets are assets that are not yet stable. For an unstabilized asset to become stabilized, certain key events need to be executed depending on the specific deal/type. For example, if a property was vacant, a permanent loan would not be able to be used to lend against the asset. The asset would need to be ‘leased-up’ to a certain level in comparison to the market for the asset to qualify for permanent financing. In the case of raw land, entitlement, construction, and lease-up would need to occur for the property to become stabilized.
These types of assets quality for bridge debt or construction financing.
Whether you expand your portfolio into stabilized or unstabilized assets, should depend on your investment goals and risk tolerance. Stabilized assets offer investors a risk-aversed stabilized return with an upside. Unstabilized assets offer investors an opportunistic investment profile with a higher potential upside. At DOVETAIL, we focus on opportunities both on the stabilized and unstabilized side.