May 2012 Program Review: Distressed to Success
Tanya E. Brady, Kirkland & Ellis LLP
On Wednesday, May 30, 2012, CREW Chicago members and guests met at the East Bank Club for a timely discussion about real estate assets that have been turned from “distressed” assets to “successful” assets in today’s market.
Nicole Pecoulas from Cornerstone Real Estate Advisors LLC (photo right) moderated a panel of experts consisting of key players in real estate that included: (photo left to right) Clayton McCaffery, Managing Director at McCaffery Interests; Greg Leadholm, Managing Director, Real Estate Debt – North America at Heitman; and Peter Malecek, Senior Vice President/Market Executive, Commercial Real Estate Banking at Bank of America Global Commercial Banking.
The panelists started with a discussion of what constitutes “distressed” real estate assets and described those as assets with financial, leasing or capital issues, or a combination thereof. The panelists discussed how value is being created today in such real estate assets, how today’s deals are being structured and done, and how they see deals happening in the future. The panelists agreed that there is a good amount of bridge financing available in the market through banks, life insurance companies and value-added debt funds.
After the downturn in 2008, groups that traditionally were equity players found that they were unable to acquire real estate assets primarily due to the uncertainty in the market. Therefore, many equity players began forming value-add funds for investment in (and financing of) real estate assets. Additionally, now that many of the remaining banks have healthier balance sheets, they are more frequently offering bridge financing to borrowers with a strong history and reputation. The panelists noted that the capital basis in real estate assets is more in line with today's pricing versus in the heyday of the 2000s. Borrowers are primarily achieving success by negotiating with their banks for principal loan reductions, and/or adjusting the equity value in such assets through fresh capital injections by existing and/or new owners. There are also value-added opportunities for investors that acquire re-priced assets, primarily from sellers that are motivated to sell as their basis is too high and/or a lack of liquidity. Further, many financing sources look favorably on new borrower that is acquiring a distressed asset by either purchasing the note (i.e., so called loan-to-own where the purchaser of the note immediately pursues acquisition of the asset through foreclosure), or acquiring the assets at a discounted price.
Opportunities in commercial real estate may be found whether the market is trending success or distress. As we surface from our latest cycle of distress, our attendees learned about how near-dead deals gained new life and how future deals would be structured - valuable lessons as we move (hopefully) into a more success-driven real estate market.