GlobeSt.com: Tell me about the new fund and the mission.

Procida: The new fund is not that different from the old fund or from any of our strategic investments. It's been made to sound like a distressed fund, which it isn't intended to be, although distressed debt will be a component of it. But this fund will be predominantly for late-stage developments that need liquidity to get through the down time; it's set up to step in and provide the gap capital needed to get from point A to point B. It will not be doing ground-up development. But there are exceptions to the rule.

GlobeSt.com: So it's more than just distressed relief?

Procida: That part doesn't come first. When the market begins to slow, the first test of opportunities will be to provide cash to keep the developer solvent through absorption. What's bizarre is that the banks cause these problems. They cause the bubble and the burst. They have all of these regulators and no one thinks about the one thing that's intelligent, which is that when you oversupply a market, you create a bubble. Builders are like drug addicts. If you make money available, they'll find things to build.

GlobeSt.com: And you see the banks at fault?

Procida: Going back to the days of the RTC, if the savings and loans were permitted to provide liquidity to all of those deals that were half built or finished but not leased, we never would have had an RTC or an S&L crisis. No one could argue with that statement. Every piece of that real estate got its original value back. Regulatory stupidity caused the entire debacle. The reality is that regulators will never stop the banks from making loans until they think all real estate is devalued. When they have to start writing things down they'll either say we've made enough profit, let's dump it or let's slug it out. Either way, the builders are going to want to hold onto their properties. And they'll say to the banks I have more dough to put in the game. I'll pay you down a little, whatever it might be. That liquidity has to come from somewhere.

GlobeSt.com: And do you expect more developers to start coming up short?

Procida: You're going to see more one-off debt deals because you can't throw development stuff into pools. Everyone starts a deal and fixes their capital structure. They figure they need $50 million and they'll sell the asset for $70 million, giving them the typical spread. If they hit a bad market and need $5 million to carry them through for three years, that capital can be used to carry it, maybe buy down leases. It gives them time and opportunity. Lack of dough gives you no time and no opportunity. That's the key to life: When you get into a bad spot you need dough.

But there's a bubble and it's going to burst. It could be an absorption burst or a pricing burst. It could be both. I believe there'll be an absorption slowdown first, which builders address with price reductions and incentives.

GlobeSt.com: So we haven't learned in 10 years?

Procida: We haven't learned in 100 years. I can't imagine we need another office building, shopping mall or apartment that starts at $1 million. If this industry had half a brain, which it doesn't because it's greedy, and the government had half a brain, it would stop all new construction right now, let the market absorb what's out there and then force the industry to rebuild America. There is so much stuff sitting vacant in Newark and Detroit and Paterson. Let's finish fixing the country.

GlobeSt.com: Generally speaking, where do you place your capital?

Procida: We're looking at some funky stuff.

GlobeSt.com: Define funky.

Procida: In the past, we were traditional condo-office-retail people. In the past year, we've done ski resorts, chemical plants, manufacturing facilities and golf courses, all in addition to the traditional stuff. We're looking to put out $250 million in volume a year. Our average transaction is $5 million to $10 million--pocket stuff. We've bought in St. Louis and Kutztown. I like to go where everyone else ain't.

Instant Insights /

Billy Procida ofPalisades Financial

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