Distressed debt: We’ve got a long way to go

Anyone holding their breath for the commercial real estate market’s recovery had better stop, now. Anyone expecting to once again do business like the good old pre-recession days better readjust their thinking, fast.

While the economy is seeing some recovery, according to Judy Hoffman, chief operating officer of San Diego’s Trigild, “we’ve got a long way to go,” with many problems still plaguing the market.

Hoffman moderated a recent education program hosted by CREW San Diego, focusing on the status of the local distressed debt market. Attendees received an extensive education on the various aspects of the debt market by a panel of high-powered female commercial real estate professionals and learned how continuing challenges in this sector are shaping the way deals get done.

Hoffman shared several interesting facts about the debt market: The current commercial mortgage-backed securities loan default rate is at 10 percent, while the bank loan default rate is at 3.5 percent. About $1.5 trillion in commercial loans will mature between 2012 and 2017. Property values are down 35 percent from the height of the market. These and other factors, Hoffman said, make it harder to get a loan.

There are several types of sellers in the market, and "it is important to understand what is motivating the seller so you can make the best deal with them,” according to panelist Debra Shannon, a senior vice president with California Bank & Trust. Federal Deposit Insurance Corp. rules can stymie the process, however, as the regulatory agency would rather have problem debts be worked out than sold.

Valuing assets in the current volatile market is also proving to be problematic. Defining today’s value is difficult because observable market transactions used in valuations are often lesser amounts than what a seller wants, according to Mo Vakili, a partner with Deloitte. In other words, sellers want more for their property than what the comparable sales show the value to be. The FDIC also plays a role in determining value in that the agency enters into unique arrangements with each bank that is purchasing assets, depending in part upon the risk involved, making it difficult to compare deals.

Some lenders choose to put distressed properties into receivership as an alternative to foreclosure, finding that this strategy can actually improve and maximize the value, according to Kelley McLaren, managing director of receiver services at Trigild. Selling a property through receivership also has multiple advantages, and in some cases this is a good strategy for getting the highest recovery.

Marjorie Burchett, a partner with the law firm of McKenna Long & Aldridge, commented on how the dramatic changes in the real estate market have caused many within the profession to change their mindset, causing a shift in the way business is done. Because of the way properties are disposed of, basic documentation, such as leases, cannot be found. Title companies and others involved in the buy/sell process have gained significant expertise just in the past three years by dealing with new challenges. She also sees an opportunity for those who lost their jobs in recent years, as buyers are hiring back individuals familiar with properties, realizing the value of their institutional knowledge.

Romy Loseke, general counsel to Westcore Properties, also spoke of the challenges of the current market conditions, sharing that she has had experiences where her firm has had as little as 24 hours to put in bids on distressed properties. She also noted that her company is "incredibly selective" when buying notes and properties.

Given the status of the current market, Vakili warned of the dangers of looking at an entire portfolio as a whole. Instead, her approach to dealing with current market challenges is by “taking a step back from the madness and looking at each property strategically.”

Warren is president of TW2 Marketing and handles public relations for CREW San Diego.

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