SAN DIEGO-Distressed opportunities exist for all who are interested in pursuing them—the trick is knowing where to look and the various factors impacting the players involved. According to panelists at RealShare Investment & Finance here last week, understanding the motivations behind holders of troubled assets and notes is key to working through the system.
Moderator Jess Bressi, a partner with McKenna, Long & Aldridge in Orange County, said that there are several factors driving and inhibiting the availability of distressed investment opportunities. First, the FDIC has preferred whole bank transactions with loss share “collars.” Banks that have acquired the assets of other banks with loss share are very protective of their loss share agreement, and borrowers and investors don’t understand them.
Also, some banks were “turning the other cheek,” “slow walking” or amending without bothering to pretend, especially when parties are underwater. And, super-low interest rates allowed partially occupied properties to stave off foreclosure. There have also been conflicting interests among loan participants and tranches of certificate holders. In addition, Brian Morelan, managing director of commercial real estate for Trigild, added that many special servicers have challenges–such as the sheer volume of distressed properties and the difficulty in the valuation of properties–about which potential investors may be unaware.
“There’s a notion that distressed loans are being kept alive via low interest rates,” said Rich Walter, senior managing director of Bank Assetpoint. “There’s a shadow market of potential delinquency that the FDIC doesn’t show.”
Because interest rates are so low, prices have been rising since 2010, the peak of delinquency, added Bliss Morris, founder and CEO of First Financial Network. Bressi added that CMBS refi needs are rising through 2017, which presents distressed opportunities for investors.
With more than 7,000 banks owned by holding companies, there will be consolidation, and borrowers will be able to meet directly with those banks for distressed-loan purchase opportunities, Morris said. Morelan recommended doing your due diligence and being “savvy about what loans you want.”
Walter cautioned, “The banks have a tremendous amount of delinquent loans, and they will need to divest of them, but they will want to get rid of the worst loans first.” He added that the banks were the last to get into the distressed markets, and there is a lot of motivation for regulated lenders to divest of these assets, but they don’t want to be public about it.”
Morris concurred. “The community leaders don’t want [local owners] to foreclose.” In addition, she said that huge private-equity funds can buy up loans, but they’ll divest of them “in strategic sales that never hit the market—you might never hear about them.”
Bressi pointed out that opportunities in distressed assets and notes can be found in:
- special servicers and advisors
- life insurance companies
- special servicers of CMBS
- FDIC and related contractors and advisors
- banks and balance-sheet lenders
- stressed owners.
“The best source is the guy you know nad have a relationship with,” summed up Shlomo Chopp, managing member of Case Property Services. Walter added, “Get your ducks in a row” before bidding.
When asked where we were in the baseball game of distressed asset opportunities, panelists responded around the sixth or seventh inning, particularly in core markets, with the potential to go into extra innings. “Look at the residential side,” recommended Morris. “There’s a lot of residential to be picked up, so consider it.”