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THENEXTLEVEL
FINANCE
Distressed Funds Lining Up for Prime Assets
Investors wait for wave of properties and note packages to hit market
BY JULIE NAKASHIMA erties, according to Lundin. created an even larger decline in values, which lanche of distressed assets is barely a snowball.
CREJ Staff Writer “We would be buying debt for things we frankly has eaten all the way through in many Louis Tomaselli, an executive vice president
R
wouldn’t mind owning,” Lundin said. cases the owner’s equity and is into the debt.” with Voit Real Estate Services’ Commercial
einforcing the entrepreneurial nature She said LBG is concentrating on retail because The fund is targeting assets in the $3 million to Brokerage division, said he thinks there’s going to
of the finance community, distressed it’s the historic strength of the principals of the $30 million range for properties in California, Ari- be some inventory next year, but the majority op-
asset funds have been on the rise since company, which beside herself also includes zona and Nevada. Sheward said the focus will be portunity is going to be in buying note packages,
the economy entered a downswing. Doug Beiswenger and David Goldman. property types the company has done historically, either from the Federal Deposit Insurance Corp.
At least a couple of times a week, According to Lundin, things are going to get including industrial, low-rise office and medical or lenders.
Scott D. Lamontagne, western director of the “ugly” on the retail side. office. “I think there will be some hard assets available,
Special Assets Services division at Marcus & “People say it’s never going to come back, but Turner’s fund is $100 million, which is quite a but I don’t think it’s going to be as large an oppor-
Millichap Real Estate Investment Services, it always does,” she said. “We believe you can get bit smaller than some of the other funds targeting tunity as many believe it will be,” Tomaselli said.
gets a request from a large owner or new fund that these prime properties right now and not pay for distressed assets. Sheward said Turner Opportu- But if someone is willing to buy a pool that could
is looking for distressed assets. vacant space and then ride the market up.” nity Fund will be supplemented with other funds potentially have four different product types and
“There’s a tremendous amount of demand right and that the company has the ability to use lever- multiple-state geographics, he said, that’s where
now,” Lamontagne, who also is regional manager Keeping the Dogs — or Cats age, if there’s debt available. the opportunity is.
of Marcus & Millichap’s Encino headquarters, While LBG’s fund is just getting under way, “We plan to be very active participants in the ac- “The FDIC can sell that entire portfolio and
said. “Unfortunately, there’s not a lot of distressed Newport Beach-based Turner Development quisition of distressed loan portfolios or distressed not have to deal with the one-offs, and the buyer
inventory to supply those funds.” Corp. recently closed its first fund. Sean Sheward, properties, as much as we can acquire profitably can create value through one-off sales.” Tomaselli
He said the business models of yesteryear, chief investment officer for the Turner Opportu- and intelligently,” he said. said.
where you had a private or quasi-institutional nity Fund I LP, said the fund is fully subscribed: The loan portfolios it would be buying, especial- Lamontagne seems to have no doubt more dis-
syndicator that was looking for hard assets, have closed and ready to invest. ly portfolios of nonperforming or subperforming tress is coming. He said Marcus & Millichap has
shifted in many cases to more of a vulture-fund “We’re being patient but opportunistically look- loans, are illiquid, messy and management-in- 158 REO properties listed on the market.
scenario where they’re syndicating the equity ing for properties or, more likely in the near term, tensive, so they fit well into an opportunity fund “That number seems to be growing steadily,” he
sources that want distressed assets. distressed loan portfolios,” Sheward said. construction, he observed. They also require high said. “Less than 60 days ago we were at 100.”
Lamontagne said the funds come in The fund’s investors are high-net-worth in- returns. Moreover, Lamontagne said, there’s in excess
“two flavors”: Some, he said, are looking to ac- dividual, with no institutions for the most part. “We’re cognizant of that and prepared to jump of $250 billion in commercial loans that will be roll-
quire good underlying real estate assets by way That’s pretty much how Turner has capitalized into that arena knowingly,” Sheward said. ing over and coming to term over the next year.
of foreclosure, its development projects, by creating single-asset On the loan side, however, the company will “We simply do not have the liquidity to replace
“The other model is they’ll do an arbitrage play, entities with high-net-worth private investors. need to be more flexible because the portfolios that,” he said. “The indications are that we will
where they’ll acquire a pool of notes at 40 or 50 Sheward said many of its stalwart investors consist of varied collateral types. have a fairly lengthy return to liquidity in the
cents on the dollar, then turn around and sell the have agreed to go into the new fund, in many cas- “In addition to our focus on industrial, low-rise capital markets, and I think what most of the
notes individually to other private investors,” he es bringing in their friends or business associates. office and medical, we’ll see some retail, some funds that are raising capital right now believe is
said. But he said part of the evolution of the fund is that hotels that failed, self-storage,” he said. that because of that pressure in the capital mar-
In one of the newer funds to be launched, Los a year ago when Turner first spoke to potential Sheward said it’s like buying a portfolio com- kets, it’s going to force a lot of owners to hand the
Angeles-based LBG Realty Advisors is seeking investors about the upcoming distress, many of posed of both dogs and cats, when you’re focused keys over.”
to raise $250 million for a high-yield real estate them didn’t know what he was talking about. on one type of animal. Lundin notes that the amount of distressed
opportunity fund focusing on retail, debt and joint- Now the discussion centers on how much dis- “We’ll keep the dogs and find someone else to property to hit the market on the retail side has
venture equity investments. tress there will be and the right time to jump back buy the cats,” he said. been just a trickle, unlike the gush on the land and
According to Leslie Lundin, the newly formed into the investment market. residential side. But she expects that to change as
company’s managing partner and president, LBG “We have counseled our investors and our Preparing for a Snowball or Avalanche? property owners run out of money.
primarily is focusing on existing California retail investors have counseled back to us that patience It can seem as though everyone is looking at “At some point, the lenders just won’t be able
properties that are distressed in some way, such is a virtue and one that we’ll be employing to the distressed asset funds these days. Even Eliot to extend any longer. There’ll be more pressure
as overleveraged ownership or loss of tenancy, in best of our ability. Spitzer, the ex-governor of New York and son of to bear on them, and they’ll just have to move the
prime infill and primary and secondary markets. He called this the first foray into the discretion- a Manhattan real estate mogul, entertained the assets,” she said.
She said there are lots of properties to be had ary fund world for Turner. Sheward said that 12 to idea of starting a vulture fund to buy distressed Sheward agreed, although he’s not sure when
at a significant discount to replacement cost that 18 months ago, the company recognized that the real estate after being forced out of office by a the wave will hit.
have lost tenants but are well-located. commercial real estate market would be entering prostitution scandal. “But we’re starting to see some signs of dis-
“The only reason they’re so beat down is a period of distress and started to put into motion In July, Information Co. Inc., a business informa- tressed properties trading hands, more notices
because we’re in this blip where tenants are drop- an opportunity fund where it would have full dis- tion provider based in Katonah, N.Y., released an of default, more foreclosures and more portfolios
ping like flies,” Lundin said. cretion over the funds. electronic database of 200 distressed asset funds that are becoming available for sale,” he said. “All
She said LBG plans to get its hands on these “We expected at the time a significant decline that invest in distressed and undervalued assets of those factors leads us to believe we’re moving
properties either through direct acquisition or in valuation and the opportunity to buy distressed — up from 150 distressed asset funds in the data- quickly toward a resolution and we ought to see
distressed debt purchase, buying debt with the property from property owners whose loans ma- base it released a year ago. some activity by the end of the year if not early
intention of potentially foreclosing. The com- tured,” Sheward said. “But as it turned out, the But while distressed funds continue to take 2010.”
pany also plans to buy distressed debt secured combination of the capital markets dislocation shape, one question that comes to mind is: Where
by retail, multifamily, office and industrial prop- and weakness in real estate fundamentals have are the distressed properties? The anticipated ava- — E-mail Julie_Nakashima@DailyJournal.com
GUEST COLUMN
Hard Money Lenders Making It Easy
BY CHARLES HERSHSON to lend. The money is provided by pension � Conversely, if for some reason a loan isn’t Banks got into trouble by over-leveraging the
funds, high-net-worth individuals and individual possible, prospective borrowers can be told values of the properties they were encumber-
W
ith all the news about California’s cli- retirement accounts. While some companies immediately as there is no two- to three-month ing. When the value of the property is less
mate being bad for business it is easy specialize in commercial real estate, there are waiting period for the bank loan committee to than the loan balance and the borrower can no
to forget that the Golden State is the independent mortgage companies that focus on make a decision on whether to offer funding or longer service the debt, defaults and foreclo-
seventh largest economy in the world. Even fac- the residential side of the market. reject an application. sures are the natural result. It happened in the
toring in Sacramento’s budget troubles and the subprime meltdown and soon the commercial
stalled credit situation in the financial market, Apples and Oranges The Strategy arena will be hit too.
economic indicators are leaning more toward Though both lend money, banks and inde- In order to execute this type of streamlined
vibrant rather than dormant — particularly in pendents differ in many aspects. These include loan process, independents currently may limit Secrets of Success
commercial real estate. the following: the loan amount, derived from an equation The key to success in the lending business
It is true that banks and traditional institu- � Independents take a kinder and gentler tied to the value on the property. The loan sum is evaluating the property to be secured. While
tional lenders have all but shut off the flow approach, lending on the credibility of the real amount figures to be roughly between 40 and the mantra used to be “location, location, loca-
of money to borrowers, regardless of their estate and not solely on the credit-worthiness of 50 percent (at maximum) of the property’s tion” and sales comparables, the independent’s,
qualifications or credit rating. The independent the borrower. worth. This conservative approach has kept or hard money mantra is “equity, equity, equity”
mortgage companies, however, the hard money � Independents require less paperwork this financially independent niche in business. and income stream. Additionally, and perhaps
lenders, are busier than ever closing deals. which often allows the turnaround for funding a It also limits exposure to investors in down
Unlike the banks, independents have money loan to happen in seven to 10 business days. markets — like in today’s present environment. See HERSHSON, page 15
PAGE 14 SEPT. 8, 2009 CALIFORNIA REAL ESTATE JOURNAL WWW.CAREALESTATEJOURNAL.COM
THENEXTLEVEL
FINANCE
REICHWALD that this revised ratio is the minimum and could
well be higher under selected circumstances, at
the FDIC’s discretion. A failure to maintain the
that if only a transfer to an affiliate was involved,
it would not unreasonably withhold approval.
pressed concerns that the SOP would be applied
in a highly subjective and uneven manner.
At the instance of Director Dugan of the OCC,
Continued from page 1 required level of capital at the outset, or well-capi- “Silo” Structures the SOP contains a requirement that it be re-
talized status after three years, would trigger an Complex structures in which the actual ben- viewed by the Board within six months to judge
as the institution in question has maintained an “undercapitalized” designation, thereby implicat- eficial ownership and decision-making authority its effectiveness and impact.
overall CAMEL rating of one or two continuously ing the restrictions on operations contained in the is difficult to determine and actual ownership The day after the release of the SOP the FDIC
for seven years. Federal Deposit Insurance Act. and control is separated will not be approved to announced that its list of very-troubled banks
acquire a failed institution under the SOP. had increased to 416. At the same time, the CEO
Capital Cross Support In addition, the SOP contains limitations on of BankUnited stated that over the next two
While the FDIC retreated from its original The original FDIC proposal included require- transactions with affiliates, the application of years some 1,000 banks will be lost. Notwith-
proposal that a failed institution acquired by ments about cross support among commonly foreign secrecy laws and the disclosure of confi- standing these very troubling numbers, the
private equity maintain a Tier 1 capital leverage held companies, which caused a great deal of dential information contained in any application. Chair of the FDIC stated that the Board majority
ratio of 15 percent for three years and be deemed negative comment. The FDIC has scaled that felt that the SOP truly extends a significant and
to be well capitalized thereafter, the SOP adopts back. Under the SOP, a cross-support obligation FDIC Board Action realistic invitation to private-equity to participate
a different requirement. The recapitalized bank would only be required if the same investors own The SOP was adopted by a 4-1 vote, with in the necessary recapitalization of the banking
or thrift has to maintain a ratio of Tier 1 common 80 percent or more of two or more depository the only negative vote coming from Director industry in the United States. The private-equity
equity to total assets of at least 10 percent for institutions. The SOP contemplates that the stock Bowman of the OTS. He spoke against the SOP community will have to decide if this invitation
a three-year period. The FDIC recognizes that of these commonly held institutions would be because he believes that far more flexibility on comes with too many strings attached. �
this requirement may result in less-than-opti- pledged to the FDIC, to be exercised to recoup the part of the FDIC is required since, generally
mum pricing for the failed institution; however, any losses incurred by the deposit insurance fund speaking, the banking industry needs substantial
it reflects the FDIC’s choice to force private in the event of the failure of the bank or thrift. capital and private equity can be an important Harold P. Reichwald is co-chair of the Banking
and Specialty Finance Practice Group at law
equity to manage the institution for long-term source of that capital. Bowman suggested that
firm Manatt, Phelps & Phillips LLP. Reprinted
prudential growth, not short-term profitability. Continuity of Ownership all potential bidders should be treated equally, with permission from the Manatt Banking Law
Thereafter, the institution would have to maintain The FDIC kept the three-year ownership even though private equity presents a different newsletter.
a “well-capitalized” status. It is important to note requirement of the original proposal but added risk profile from other potential acquirers. He ex-
HERSHSON retirement income funds greatly diminish are
now looking to real estate to recoup and rebuild
wealth. It is certainly a good time for it.
“blood on the streets” in the residential lending
area because of the overly aggressive refinanc-
ing frenzy in single-family homes. Nostradamus I
continue to grow and prosper.
The media need to take a wider look at the
lending industry. There’s a lot of good news to
Continued from page 14 This adage still holds true: Money is made am not, but I and many other professionals in my share. �
in real estate on the purchase, not on the sale. field can read the economic signs. And let me
more importantly, determining whether or not With independent lenders still lending and tell you a little secret: I am not optimistic about
a debt can be serviced in a down market is a sellers often willing to give a loan in second the immediate future. Charles Hershson is founder
major factor in the decision-making process. position to help close the sale, opportunities are I do not think we will have stability in the and president of Southern
California-based Fidelity
out there for the knowledgeable investor. commercial market until the last quarter of
Mortgage Lenders Inc., which
Real Estate, Not Stocks 2010. In the meantime, banks will be forced has been funding real estate
Investors who have pulled out of the stock Uglier Before Better to change their traditional business models loans since 1971.
market and have seen their portfolios and Two years ago I predicted there would be and independent mortgage lenders will
CLOSE HAS ITS CONSEQUENCES. Even when something is slightly off it can have
a big impact, especially with property data. Make sure you get the exact data you need with ParcelQuest. It’s
the only data company dedicated solely to California property. ParcelQuest, precise data for precise people. W W W . P A R C E L Q U E S T. C O M
WWW.CAREALESTATEJOURNAL.COM CALIFORNIA REAL ESTATE JOURNAL SEPT. 8, 2009 PAGE 15
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