Animal spirits are stirring again in the commercial real estatemarket after the sharp drop in prices. But many properties remainin limbo because financial and legal problems are making shortsales, or even traditional sales, difficult, if not impossible. Sohow are some investors re-entering the market? By purchasing theloans on the properties.

|

Buying loans tied to the underlying properties enables equityinvestors to take control of the physical asset and then addressthe problems by restructuring the paper, making improvements,renegotiating leases, changing the tenant mix or anything else thatwill add value. Fundamental to this approach is a cost-benefitanalysis that factors expenses and risks.

|

For those willing to consider loan purchases as the route toproperty ownership, there are many opportunities to buy assets thatare 50% to 75% below their price just several years ago. Moneycenter banks, insurance firms, finance companies and investmentbanks are selling a growing volume of non-performing loans toimprove the health of their portfolios. For investors, theaccelerating number of loan sales translates into an unprecedentedopportunity to purchase distressed properties. Loans secured bymultifamily, industrial, retail and office projects are all forsale.

|

In addition to selling loans tied to distressed properties, manyinstitutions are selling performing loans to rebalance theirportfolios. These higher quality properties are typicallyconservatively levered, but they, too, represent an opportunity toinvest in the property by purchasing the loan.

|

Buyers are gravitating toward loan purchases not only because ofthe wide choice, but also because online marketplaces in particularmake it easy to identify buying opportunities. Investors can surveythe entire market quickly and efficiently, and gain an accurateread on loan and property prices. Because all of the loan andproperty documents are online, investors can review loan files,rent rolls, legal documents without traveling to the sellinginstitution to inspect the physical documents.

|

As a condition of participating in an online marketplace, buyersmust abide by the established rules. First, buyers must beregistered and approved. Prospective buyers are typicallyinstitutional investors and are screened to ensure they have thefinancial resources to close a transaction. The buyer's ability tomake good on the sale is always a key concern of the hundreds offinancial institutions that routinely sell loans online.

|

Buyers must also agree up front to use standardized legal andtransfer documents. Standardized documents expedite the closingprocess, reduce the expense of separately negotiated contracts, andultimately lead to more choice. Standardized legal documents haveworked exceedingly well over the past 10 years, and they are thereason transaction closings now take just seven to 10 days,compared to 60 days or more for a traditional loan sale.

|

To make an offer on a loan, investors place a sealed bid or bidelectronically online, depending on the property and the seller'spreference. Loans may be sold individually, or as one component ofa larger pool. Typically, equity buyers will be bidding againstopportunity funds, hedge funds and other institutional investorsprimarily interested in the loan.

|

One key consideration before placing a bid is understanding thecurrent market pricing for commercial property loans and its effecton the underlying asset. At the end of December, the aggregatevalue of the more than 60,000 loans priced by DebtX in the CMBSuniverse was 75.9%, down from 77.7% at the end of November. For allof2009, loan prices declined by 5.4 percentage points. The pricedecline was due mostly to a weakening of the collateral.The goodnews for equity buyers is that more institutions are willing tosell to investors who want to purchase loans to own the property.With more choice than ever before, commercial real estate buyershave a unique opportunity to find properties that build theirportfolio in a distressed market.


GlobeSt.com News Hub is your link torelevant real estate and business stories from other local,regional and national publications.

Want to continue reading?
Become a Free ALM Digital Reader.

  • Unlimited access to GlobeSt and other free ALM publications
  • Access to 15 years of GlobeSt archives
  • Your choice of GlobeSt digital newsletters and over 70 others from popular sister publications
  • 1 free article* every 30 days across the ALM subscription network
  • Exclusive discounts on ALM events and publications
NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.