Ocean West Saves Floundering Assets

LOS ANGELES-The huge volume of distress in the commercial real estate world is all about money, but in another sense it isn’t just about money. Capital alone won’t always solve the problems of borrowers, lenders and special servicers saddled with distressed assets—which is where companies like Ocean West Capital Partners come in.

The Los Angeles-based company, launched earlier this year, is providing capital for its clients, but—as Ocean West partner Troy Miller tells GlobeSt.com—the capital is only part of the solution. How the capital is structured and how the distressed asset is managed are keys to solving the problems that beset borrowers, lenders, special servicers and others who are trying to get out from under distressed assets or turn them around.

Ocean West’s approach is “to really try and manufacture deals where we will identify a distressed asset and put together both a capital and restructuring solution for the lender or the special servicer and approach them with a whole package solution,” Miller explains. Just one example of the types of assets that Ocean West is targeting are so-called “zombie buildings,” a term that has been used with increasing frequency in reference to some office buildings. These are buildings whose owners lack the capital to provide tenant improvements and other incentives to attract tenants—placing them at a distinct disadvantage in trying to compete with better-capitalized landlords. “Given what the debt load is on the assets, usually the sponsors aren’t really willing or able to put in new equity to lease space up, so these buildings have been sitting,” Miller says. Ocean West can bring in new capital for leasing costs, capital expenditures and principal paydown. It can also restructure the debt and take over operations and management of the properties if necessary. “It is a really good solution on assets where you have an office building, for example, that is 50% leased, and the lenders don’t want to take it back today and sell it at today’s levels,” Miller says.

An integral part of Ocean West’s approach to distress is its use of A/B note structured financing, a technique that involves conventional mortgage financing, but with a senior mortgage interest (A) and a subordinate mortgage interest (B), sometimes in one note, and in many transactions, in two different notes. However, both notes are secured by a single mortgage instrument. Although Miller says it takes a lot of steps to get comfortable with the structure, valuation levels and to get it through the system, “there are some big advantages.” One of those, he points out, is that the structure works in the Remic Trust.

Ocean West isn’t the first company looking to do these types of structures, but according to Miller, not many are happening. “The assets really seem to be stuck with the servicers, which are trying to work through the best exit strategy for the assets, and it takes a while to work through the various valuations and different scenarios as to what is going to maximize recovery for them,” Miller says. Then, once the servicers determine what the best route is, Miller points out that there are various approvals required—both internally with directing certificate holders and at the rating agency level, among others.

And Ocean West is more than just concepts. It recently completed the acquisition of an eight-building, 295-unit apartment portfolio in Costa Mesa, CA. The transaction was completed off-market in a direct negotiation with the seller, a private trust, therefore Miller was unable to disclose price or certain details of the transaction.

Russ Allegrette, a principal at Ocean West, explains that “This was a rare opportunity to acquire a portfolio of this size given that there have been only five trades of over $40 million in Costa Mesa in the last 10 years.” He adds that “The portfolio fits well within our strategy of acquiring good quality assets in excellent locations at low historic values.” 

The properties straddle Newport Boulevard/55 Freeway in coastal Orange County and are each located within two to three miles of the Pacific Ocean, Newport Beach, Orange County-John Wayne Airport and South Coast Plaza. “This is a supply constrained market with excellent fundamentals given its convenient access to the employment centers and amenities of Orange County,” adds Miller.

The company is also still working on a couple of “rescue deals” with banks that Miller says is taking a long time to come together. Despite the sluggish pace of distressed asset sales compared with what was expected, Miller expects increased sales activity through the balance of this year and into 2011.

“I think you will see more stuff coming to market, but it isn’t the flood that people thought,” Miller says. “I don’t know if we will ever get to a point where there’s a real flood, but we are starting to see the ice crack a bit.” On the buy said, he adds, capital is not a problem because healthy amounts of equity and debt capital are available if the deals come along. Miller also expects restructuring activity to increase as more and more lenders develop programs for A/B structures and other types of refinancing and recapitalization that are emerging. “As people get more used to them, the industry will begin to transact more of them,” he says.

All of this is likely to mean more deals for companies like Ocean West. Although capital is only part of the solution, Miller points out that Ocean West is tapped into plenty of it, with seven separate account sources ranging from opportunity funds to some international pension money to high-net-worth individuals. Also, the company isn’t just waiting around for distress signals. It is tracking databases to find out about loans that are either delinquent, or past maturity or otherwise in need of help. The company also relies on longstanding relationships with lenders, borrowers and special servicers, who are calling more often these days.

Those calls are likely to continue for some time because, as Miller points out, commercial real estate industry fundamentals “are still going the wrong way,” with rents still generally declining and occupancies still down amid weak demand for virtually every class of commercial space. That weak demand, however, ultimately produces strong demand for the types of solutions that Ocean West provides.