Question Marks Still Remain for PPIP

That will be almost as equally as long a process as ramping up the funding was, if not longer. More than likely deals won't start to close in any significant number until Q1 2010 and until that starts to happen the true value of this particular government initiative will not be known.

That has not stopped the industry from speculating on whether PPIP was worth the capital, both financial and political, that had to be expended on its behalf. Opinions, some six months after the program began to take shape, still range across the board, at least based on an informal survey by GlobeSt.com.

One common hope is that PPIP will finally inject some transparency into distressed asset pricing.

With the stock market coming back to life, the returns for these asset managers in distressed assets will not be as great as they would have been ten months ago, says Greg Genovese, president of the securities division at the Irvine, CA-based Thompson National Properties LLC, which specializes in providing value-added real estate investment opportunities and asset management. "The best return typically go to investors that dive into the pool first," he tells GlobeSt.com. "In this case, however, because the stakes are so high even the big risk takers are waiting for other investors to go first.

For that reason, the greatest overall benefit PPIP will deliver to the market will be to prime the pump, so to speak, he says. "There are a lot of people waiting on the sidelines for TARP and PPIP to provide better transparency into pricing."

However, there are those who believe pricing transparency will not be so easily realized even when the PPIP investors start purchasing assets.

There will be two types of impact on the pricing and sales of commercial real estate assets when that happens, says Jeffrey Rogers, COO and president of Integra Realty Resources in New York City: psychological and actual. And the former may cancel out the latter.

The psychological impact will be a feeling that there is liquidity in the marketplace, which will lead to increased prices, he tells GlobeSt.com. "This initial push is small relative to the market of maturing mortgage debt, thus, the actual impact will be small. But, as prices climb, the banks will be reluctant to sell as they wait and pray for even a higher rebound."

PPIP will not be a panacea for the billions of defaulted CMBS loans that will be coming down the pike in the next 12-18 months, says John Long, CEO and founder of Highridge Partners, in El Segundo, CA, a privately held, international real estate investment company. "While the AAA slice may benefit somewhat, the lower rated pieces will still be greatly stressed in terms of pricing and liquidity."

Shawn Howton, director of the Daniel M. DiLella Center for Real Estate and associate professor of Finance at the Villanova School of Business in Villanova, PA, is on the other end of the spectrum in his belief that PPIP, as well as TALF, will have a positive pricing effect on senior CMBS that are eligible for the program. "There is money moving into these markets with the hope of flipping the mortgages to PPIP investors once the groups start buying. Many private equity groups have been formed or are being formed for just this purpose." Unfortunately, the market for origination is still non-existent and in this respect will have little impact. "Senior and super senior CMBS tranches have seen spreads contract by as much as 25 basis points in the last week and 50-100 basis points in the last few months."

PPIP is after all a new source of liquidity in a world that has been drained of capital, and there is a large contingency of real estate experts that say PPIP was a bad idea from the beginning.

"The reality is that uncertainty caused by the prospect of further government involvement is a primary reason that so little is trading in the distressed commercial real estate market," Paul Lyons, SVP at BigBidder.com, an online auction marketplace for mortgage notes in Newport Beach, CA, tells GlobeSt.com.

Why would a seller lower prices if it believes that the government might eventually bail it out of its problems, or at the least, that it will be able to continue managing its balance sheets based on inflated prices and improper accounting methods without any repercussions, he says. "Unfortunately, this is a lose-lose for sellers. If they deal with their problems now, and sell their distressed assets at current market value, they could lose their jobs, or even bankrupt their company. If they choose to wait, they will only face greater losses down the road. Government involvement is only postponing the inevitable." From a buyer's perspective, it is equally as difficult to assess the current cycle. "Even long-term value investors are afraid of paying too much."

The government assistance will cloud any realistic picture of the market's well-being, agrees Vanessa Grout, VP of Acquisitions for real estate investment firm New Valley, headquartered in Miami.

"With the amount of leverage the government is willing to pay, the private investor stands to lose very little in the event of a drop in value," she tells GlobeSt.com. "There is a great deal of [private sector] capital prepared to pay all cash for the true market value of a bank's troubled assets. Leverage simply enables the investor to pay more than the property is actually worth, which leads to less equity contribution, and a greater appetite for risk."

Tino Korologos, Deloitte's distressed debt leader in New York City, thinks that PPIP will have some positive effect on market recovery. However, "the distress is so deep and so complicated there is no one silver bullet solution. PPIP will help facilitate the relationship between investors and the government and create some traction for transaction activity, but it remains difficult for values to hit the level where there is a comfort for investors to step in and acquire assets."