Howard

SAN DIEGO-Disposing of distressed assets involves more than just offering notes or REO for sale―much more―as panelists pointed out here Thursday at the Grubb & Ellis annual meeting. The event, titled "2011 Deal-Making Summit," brought together some 1,000 attendees from throughout the country this week for a host of panel discussions and other events at the Manchester Grand Hyatt hotel.

The distressed assets panel (moderated by the author) focused on how service providers like Grubb & Ellis can best serve the interests of banks and other clients in assisting them in disposing of distressed assets. Conrad Andersen, executive vice president and managing director of financial services asset management at Grubb & Ellis, explained that those issues fall broadly into two categories: concerns regarding pre-foreclosure dispositions including note sales, and concerns regarding post-foreclosure REO sales.

One of the key decisions that banks and others holding distressed assets face is whether to dispose of an asset on an as-is basis or whether to dispose of it on an as-stabilized basis. Since stabilizing the property is likely to take some time, Andersen pointed out, service providers who recommend that approach need to be sure that it can be accomplished in a reasonable period of time and that the lender will receive an appropriate return on whatever is spent to reach stabilization.

Distressed Assets Panel

Panelist Paul Nakae, an executive vice president and CRE workout manager for Bank of the West, said that his bank tends to take a long-term approach to the recovery of assets, so it is willing to wait for an as-stabilized disposition if it can maximize recovery that way. "We try to look at the timing and the reward of the cost of managing it through the stabilization process," he said.

Nakae cited the example of a partially completed seniors apartment project that Bank of the West foreclosed on that was about 80% complete. The bank completed construction, hired an outside property manager, initiated a leasing program and now has the property about 85% leased, with plans to put it on the market this spring. By contrast, senior vice president Wayne Pitman of UK-based Lloyds Banking Group said his bank―although the decision is very much based on the individual asset―would probably not tend to take such a long-term view.

Andersen noted that whether the bank disposes of a property on an as-is basis or an as-stabilized basis also has implications for the property management needs of the client. For a short hold, the bank may only need short-term property management that is pretty much a caretaker role, but for a longer hold for stabilization, the assignment could include a whole range of property management and repositioning services, he pointed out.

On the general question of whether to dispose of assets via note sales or through REO deals, Grubb & Ellis senior vice president and senior note sale adviser Craig Sherman observed that many banks favor note sales these days for a variety of reasons. Note sales keep them out of the chain of title on some challenging assets, provide a quick solution compared with foreclosure proceedings and, in today's market, produce returns that are relatively close to REO values.

Whether note sales will continue to deliver those returns remains to be seen, Sherman said. "Right now, there absolutely is a pricing bubble in note sales," Sherman said.

Attorney Karol Denniston, a shareholder and the managing partner of Brownstein Hyatt Farber Schreck’s Los Angeles office, said that pricing in the distressed assets arena in general is a result of "too much capital chasing too few quality deals." Denniston, who is a member of her firm's Corporate & Business Department and Bankruptcy & Restructuring Group, also offered some advice on some important considerations when placing an asset into receivership.

"You have to be sure that the receivership's order is comprehensive and covers what the objectives are," Denniston said. "Out of all the things that go on, one of the most important considerations is that order." She pointed out that in bankruptcy cases, the receivership should be in place before the bankruptcy order is filed, "which reduces the cost and makes the property more manageable because the lender is no longer in possession."

On the question of what constitutes a good disposition, Denniston said that it's a deal that meets the objectives and concerns of all parties. By contrast, she said, "The worst deal is one that results in litigation after the fact."

Andersen pointed out that a good disposition involves much more than just closing the sale. "You can knock the ball out of the ballpark on a disposition, but if you're not reporting back to the client on a regular basis, you're not going to get a good mark," he said. He advised service providers to keep clients informed about property operations, offers from prospective buyers, where the deal is in terms of escrow and other matters all along the way. "It's really about communicating real-time information on an ongoing basis. If you do that, and you execute as you should, you'll have a happy client," he said.