Gibson Dunn & Crutcher's David Furman

GlobeSt.com: Not surprisingly given the market you've been dealing with workouts. What are you seeing there?

Furman: One of the trends I am seeing is the growing tension between lenders and borrowers over who will infuse much needed capital in a troubled property. As we are seeing more maturity defaults there are new questions on whether a lender should extend a loan. One criteria they have is that the borrower puts in more money for capital improvements. But we are also seeing pushback from borrowers who don't want to infuse additional capital. Their stance is, 'if this is a troubled asset why should I put new capital into the loan without making sure this new capital is not at risk.'

GlobeSt.com: What type of terms are they asking?

Furman: Some are asking that if there is a foreclosure they want to share in the proceeds on a pari passu basis. So to give an example – if a loan is $90 million and the property requires $10 million in new capital, if there is a foreclosure and the property generates only $10 million the borrower wants to share in that $90 million because it put in $10 million.

GlobeSt.com: There has always been this tension, though, between borrower and lender when an asset becomes troubled. What is different this time around?

Furman: This time around the lenders really don't have the money to put into a deal; also many of the borrowers do have money – a lot of property is owned by real estate opportunity funds that have the cash but aren't going to spend money on an asset where they may not get the return on it. So they are evaluating projects as though they were entirely new deals.

GlobeSt.com: So it's a stalemate of sorts?

Forman: Yes. The property needs money but the lender has to give the borrower priority if it wants the new infusion. I've been seeing this play out mostly in development deals over the past six to eight months, but more recently I've been seeing it in office deals that need capital.

GlobeSt.com: Let's talk about the flip side of this issue – many in the market were expecting to be able to pick and choose among the distressed assets and properties that were supposed to have flooded the market by now. Those transactions haven't happened – at least not at the levels expected. Why is that?

Furman: Part of the problem is, there is a dearth of appropriately priced debt. There is still price dislocation and it has been that way for six months to ten months or so.

GlobeSt.com: Again, why is that?

Furman: I couldn't tell you really -- I don't have an underlying explanation for the continued price dislocation; I don't know why the owners of debt aren't selling, and why buyers think it should be priced lower. It's possibly because buyers are looking for higher return relative to risk. Another possibility is that many of the mezz loans are being appraised out.GlobeSt.com: Yes, Jones Lang LaSalle is calling it tranche warfare.Furman: Apt. So as you know, if the most junior piece is not worth anything, there is an appraisal and the servicing shifts to the next tranche. So there are fewer mezz loans in general, and what mezz loans there are out there, there is still price dislocation.