Brokers Shift Focus to Notes in Default

[IMGCAP(2)]RcmaGroup's first deal, which closed recently, was a construction loan secured by a newly built mixed-use property in the San Francisco Bay Area that sold for 42 cents on the dollar to a local developer and owner who plans to lease up and operate the property, which was empty at the time of the note sale. Rcma's second deal, scheduled to close early this month, is a $5.5 million note secured by an 80-room hotel near Denver that the buyer is acquiring for $500,000.

Ayer tells GlobeSt.com that he and Cassidy, who have 10 years and 14 years respectively as commercial real estate brokers, spent the past year laying the groundwork for their new endeavor and have about 18 other note sales in the works. "One of the things that we have done in the past year is spend a lot of time meeting with key people within the banking system to introduce ourselves and outline a business model," Ayer says. "Our goal the first year was to get to know the banks and get some deals going. Now we are at the stage where we are working with investors."

RcmaGroup is focusing on deals of about $2.5 million to $50 million, although it is involved in one deal of $65 million. It is looking at notes on self-storage, multifamily, broken condo retail, hotel, office and industrial properties throughout the 11 western states and is presenting offers from all-cash buyers. "We are trying to identify properties where the notice of default has already been recorded, says Ayer. He points out that, "It's easy to identify the distress, but closing it is a different story." A lot of investors, even those who own a lot of real estate, "don't know how to buy a note," he explains.

Ayer says that the offers that Rcma's clients make are often well below the face value of a note or the appraised value of the collateral property. "We are bringing in offers on an all-cash basis, based on the collateral and the income stream," he says. He explains that a lender might want $10 million for a note because that is its par value, but the collateral might be worth less than half of that par value. "That's one of the big disconnects right now," he says. Another disconnect, he points out, is that so few property sales are closing that "There are very few data points" to determine a property's value.

In addition to brokering the note sales, RcmaGroup will in some cases participate in the purchase of the note. Ayer provides an example: If the note is secured by a shopping center that is half-empty, Rcma might broker the note sale, take part ownership of the property and act as part of the management team with a view to stabilizing the asset with the goal of either keeping it or selling it at a profit.

Ayer and Cassidy operate RcmaGroup in association with ReMax in Agoura Hills. The two decided to form their firm after realizing that, "Stabilized assets were not trading because owners didn't want to sell in a declining market," Ayer says.