Distressed Debt Financing

 
Distressed Debt Financing:                                                                           Distressed Loan Details
 
 
Providing distressed debt financing, commercial bridge loans, and transitional debt for real estate borrowers in the multifamily, retail, hospitality and other commercial real estate sectors, nationwide.
 
Loans are completed by investing directly in real estate through the origination of high-yield bridge loans, and direct acquisitions of collateralized real estate obligations. The objective is to leverage the extensive depth of real estate and finance experience to the benefit of high-quality commercial and residential real estate projects nationwide, by meeting the needs of time-sensitive transactions by specializing in small-medium balance debt opportunities and select joint venture equity participations with owners, operators and developers throughout the nation.
 
A great need has emerged from both borrowers who have quality assets in well-performing markets throughout the nation, but which are facing distressed situations relating to legacy debt issues. With unfavorable loan-to-value ratios resulting from legacy loans originated pre-2008, banks and lender’s holding these distressed debt assets need to either escape or restructure their debt positions, often quickly and creatively. That’s where our Lenders/Investors are able to offer a solution to both the borrower and the existing lender.
 
Many distressed real estate owners today are being offered the ability to pay off aging real estate loans at a discount, often with a short closing window. Alternatively, opportunistic investors may be trying to seize upon a fleeting opportunity to purchase assets at prices below intrinsic value at auction or from a seller who values a quick close more than the highest bid price on the asset.
 
According to Trepp, a provider of CMBS analytics and data to the securities and investment management industry, there will be more than $2 trillion of commercial real estate loans maturing by 2017. It’s estimated that half of them are “underwater.” This of course means that fully $1 trillion in commercial real estate loans will mature without a clear refinancing strategy. These loans will not be able to be refinanced at existing debt levels, due to a decrease in underlying asset value, and today’s lending standards are much tighter than those of the middle 2000s, which further compounds the problem.
 
The lenders holding these overvalued loans will seek to either (1) right-size the loan balance at maturity through a large equity injection by the borrower (if an extension is even entertained), (2) foreclose on the loan and sell the underlying collateral, or (3) sell the loans at the maximum price attainable (oftentimes at a discount to the par value). In each of these resolutions, there will be significant opportunity for borrowers and third-party buyers alike to purchase real estate or real estate debt at significant discounts to legacy value.
 
This massive de-leveraging of commercial real estate not only creates valuable buying and restructuring opportunities, it also highlights an even larger underlying problem: Who is going to be the capital provider for these fast-moving and non-traditional real estate transactions?
 
 
 
All-Too Common Scenarios:
 
A commercial real estate developer that financed a retail project in 2005 today finds that the property is now worth less than the face value of the debt owed on the asset. Tenants have left the property, rents have fallen from peak pricing, and though new tenants are seeking to lease the space at lower rental rates, there is a need for capital to pay for tenant improvements and leasing commissions. To add to the complexity of the situation, perhaps the existing lender has recently called a maturity default and is not willing to offer any extension or forbearance options. Since this loan may be non-recourse, and currently not covering debt service payments, there is little incentive for the borrower to make interest payments out of pocket or inject a large amount of fresh capital into the project to “right-size” the loan and find a new conventional lender.
 
In the above scenario, there are several different potential outcomes for the asset, and several pitfalls with conventional financing for each:
 
1. The original lender forecloses on the asset and sells to a new owner: A new operator sees this as a value investment, but few lenders are willing to lend on an asset that is being operated by a bank or receiver, and is underperforming, and will not cover debt service upon the inception of a new loan. Therefore, only cash buyers can purchase the now distressed asset.  Constraining the buying pool to this group reduces asset pricing, and therefore the bank’s ultimate recovery.
 
2. The bank offers the borrower a discounted payoff on an existing loan. In this situation, it is very difficult for a borrower to find a new lender to provide the capital to pay off the legacy lender, both because the payoff opportunity is likely only available for a short period of time and because there is institutional reluctance among banks and traditional lenders to replace what is viewed as a competitor’s problem.
 
3. The bank sells the loan at a discount. Lenders may take this approach to achieve a quicker resolution than they might get through foreclosure and sale, to potentially preserve a banking relationship with a customer, or simply to get the bad loan quickly off the balance sheet. It also allows the legacy lender the ability to avoid the moral hazard of providing the existing “bad” borrower a discounted payoff opportunity.
 
Traditional real estate lenders—banks, conduits, and insurance companies—are simply not able to provide the responsiveness and creativity that these scenarios often demand. Typical 60-90+ day closing timelines, extensive third-party appraisals and multiple layers of management often negate any potential financing before a loan application is even submitted. Accelerated and reliable deal execution is almost completely non-existent in this new lending landscape, and yet it is the most important factor in managing the tremendous overhang of legacy debt.
 
 
 
Where to Turn?
 
Commercial real estate bridge capital sources—nimble and capable debt and equity providers—are stepping up to fill the void that conventional lenders can’t and won’t. Niche capital sources will indeed welcome the opportunity to provide the borrower necessary proceeds for a short period of time to re-stabilize the asset, and ultimately refinance it at an appropriate debt level.
 
Such a partner can:
 
1. Provide the debt necessary for the operator to quickly purchase and re-stabilize the property so that it will be more attractive for financing in the traditional real estate debt markets.
 
2. Seek out these value opportunities and can provide the capital necessary to allow the borrower to take advantage of a discounted payoff opportunity. The borrower would use the lender’s proceeds for a short period of time to re-stabilize the asset, and ultimately refinance at an appropriate debt level with a traditional real estate lender.
 
3. Facilitate opportunities for a new value-seeking borrower to purchase a property that a traditional lending source may not want to lend on, particularly if it has been neglected by the prior owner.
 
4. Acquire notes to manage, service and work out, potentially in partnership with the original borrower.
 
 
 
To Make Matters Worse:
 
Compounding this problem can be issues of deal size and geography. Transitional situations are more typical for loan and property sizes under $10 million—too small for larger institutional investors to take interest in.
 
 
 
Getting Creative:
 
For borrowers and lenders alike, the lessons are these:
 
1. Don’t assume. There is a danger in assuming the banks are freely lending again…and equal folly in assuming that there are no capital providers looking to invest in opportunistic situations. Do your homework and evaluate all options.
 
2. Understand your position and desired outcomes. If you are a property owner, do you want to retain the asset and create value, but feel like you’re in a no-win situation with your current debt situation? Determine what your true endgame is—it’s often not default—and find the solution that will achieve it.
 
3. Time is of the essence. Know your time horizons. If traditional lending sources are not going to be an option for you to restructure your debt, it’s better to know that as early as possible so that you can start making plans B and C.
 
4. Deal with trusted partners. The dynamic financing markets, coupled with the great need for capital, and the promises of new and lucrative opportunities have given rise to a lot of new names and players promising solutions that they cannot deliver. Do your homework, get references, and make sure you are dealing with capitalized partners that have a verifiable track record of honest and responsive business practice.
 
 
 
Ultimately, the chief lesson is this:
 
We must recognize the reality and severity of the times that lie before us. The over-leveraging of over-valued properties pre-2008 will not be solved by organic value growth, increasing rental revenue, inflation or otherwise.  The near-term expiration of nearly $1 trillion in legacy debt will require a broad-based de-leveraging, and the entire universe of players in the commercial real estate market—borrowers & lenders —need to work in concert to develop creative, flexible solutions for the spectrum of property owners throughout the country that will need them.
 
 
 
Provide a Detailed Loan Scenario on our Distressed Debt Loan Submission Form  page and we’ll get back to you quickly.
 
Thank you, and we look forward to serving you now and in the future.




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