Six Questions for Greenberg Traurig’s Tom Galli

WASHINGTON, DC-For Tom Galli, a shareholder at Greenberg Traurig, loan restructures, workouts and deed-in lieu deals are his bread-and-butter. He talked with GlobeSt.com about what 2012 holds for non-performing loans and structured transactions.

GlobeSt.com: How much work have you handled for clients on non-performing loan portfolios in structured transactions with the FDIC? 

Galli: Over the last 18 months, I have represented different private equity funds to close on 9 of the last 14 commercial real estate and land loan portfolios in FDIC structured transactions with an aggregate unpaid principal balance of approximately $5.3 billion.  Colleagues and I have also represented investors on the acquisition of billions more in loan portfolios from banks.  Following closing on those portfolios, we are handling legal work on asset management for a substantial volume of loans in those portfolios.  Through our platform of 28 offices in the U.S. and a variety of practice areas related to the real estate industry, we are serving as a consolidated source of legal services for geographically disbursed loan portfolios.  We do so through teams in each of the states in which we have offices, with those teams having a balance of talent ranging from paralegals to mid-level associates to senior shareholders, and including a combination of attorneys in our real estate, litigation, bankruptcy, tax, environmental and related practice groups. 

GlobeSt.com: Why have you invested so much time in developing a knowledge base and network of relationships to assist clients on FDIC structured transactions for non-performing loan portfolios?

Galli: Each attorney at Greenberg Traurig is challenged and empowered by senior leadership to develop business plans, which address continuously changing market dynamics.  That challenge includes envisioning next waves of business opportunities and ways in which we may bring value to clients.  In order to envision those new business opportunities, one needs to well understand the capabilities of a law firm and how those capabilities may best be used to serve clients.  Our success on handling a volume of FDIC structured transactions is evident of that empowerment and the opportunities available to individuals who think out-of-the box in ever-changing legal and business environments.  In 2009, I came up with a five-phase business plan to capitalize on opportunities I believed would become available with distressed real estate assets.  That business plan required analysis of where markets were likely going (or not), how markets would mature (or not), our firm’s strengths, the strength of our competitors, a reasonable and practical approach to seeking out and executing on new business opportunities.  The FDIC’s structured transactions program was the first phase, among five, of that plan. 

In 2009, I expected the FDIC would be the only practical opportunity for the acquisition of any meaningful volume of distressed assets, as there would be a significant bid-ask spread for distressed assets among private sector parties. My focus on FDIC structured transactions has been not only for the prospect of executing on those transactions, but also the prospect of raising the profile of our firm’s brand on the execution of loan portfolios generally.  The next two waves of loan portfolio acquisition opportunities will soon reach shore and continue for some time thereafter.  Additionally, as structured transactions with the FDIC are partnerships between the public and private sectors, those transactions also provided an opportunity to raise the profile of our firm’s brand on public private partnership transactions.  I expect the volume of those transactions will be significant as the capital markets recover and double-digit returns are generally no longer available on distressed real estate assets.  As government entities (federal, state, and local) are largely tapped out on their capacities to borrow, they will turn to the private sector for funding solutions on their real estate requirements.  I am not aware of any other law firm which has executed on a volume of public private partnerships over the last year and a half greater than the volume we have executed through our work on FDIC structured transactions for loan portfolios and other public private partnerships on infrastructure and energy projects.  Through that volume of experience and the spectrum of practice areas available in our firm which are required to effectively represent clients on public private partnerships, I am very confident about the volume of opportunities available for us in this space. 

GlobeSt.com: Why should real estate industry participants pay attention to the FDIC’s structured transactions if they otherwise have no interest in investing in them?

Galli: The fundamental elements of the FDIC’s structured transactions on NPL portfolios are being vetted by investors, banks and other real estate industry participants for the purposes of replicating those elements in sales by banks and others.  During the last six months, we have received an increasing number of calls to discuss transaction structures for (i) investment in loan portfolios owned by troubled banks on terms similar to those for the FDIC's structured transactions program,  (ii) acquisition of loan portfolios owned by failed banks simultaneously with the sale of such banks by the FDIC, and (iii) acquisition of loan portfolios formerly owned by failed banks simultaneously with the FDIC’s buy-out of the Loss Share Agreements covering those portfolios.

GlobeSt.com: What trends have you seen over the last two years on the sale of non-performing loan portfolios?

Galli: There have been a number of trends.  First, the substantial majority of loan portfolios sold to date have been small balance portfolios.  Portfolios with small balance loans are usually marketed through auction platforms, while portfolios with modest and large balance loans are usually marketed through large brokerage firms.  Second, we are seeing an increasing number of portfolios bid through an indicative bid process, rather than an absolute auction process.  This gives bidders the opportunity to delay due diligence until a later round in the process to which a limited number of others is invited.  Third, we are increasingly seeing teaming arrangements among investors bidding on geographically disbursed NPL portfolios secured by a variety of real estate properties, with different investors in the group focused on loans secured by real estate asset on which they have expertise.  Fourth, bidding is increasingly competitive on all portfolios as hundreds of billions of dollars available for investment remain undeployed and in search of acquisition opportunities.  Fifth, financing is increasingly being used to acquire loan portfolios in an effort to reduce investors’ average cost of capital and increase bid amounts.  While acquisition financing has largely be limited to modest and large average principal balance loan portfolios, investors are searching for financing options for small balance portfolios as bidding becomes more competitive.  Sixth, the turmoil in the capital markets which occurred in June/July caused a delay in marketing efforts for the volume of NPL portfolio otherwise anticipated in the thi^rd quarter.  That volume was delayed to the four^th quarter and we now see approximately 60 small balance NPL portfolios for sale in Q4, with a few larger balance NPL portfolios available for sale.  The volume of those portfolios appears to be split between off-market transactions to which a limited population of bidders is invited, and portfolios that are marketed through auction platforms and brokers. 

GlobeSt.com: How do you see non-performing loan portfolio sales evolving over the next year?

Galli: I expect a number of developments in this space.  First, as banks increasingly realize profits, they will be able to absorb losses from write-downs on loan portfolios they elect to sell and, therefore, be able to sell more loans.  Second, we will begin to see banks take pages out of the FDIC’s playbook for the sale of non-performing loan portfolios by offering take-back financing, retaining “upside” on loan portfolios in the form of equity kickers, and entering joint ventures on non-performing loan portfolios.  We have already begun to see this trend with two banks in Puerto Rico and one bank in the Southeast.  Third, as the FDIC recently announced its interest to buy-out its exposure under Loss Share Agreements, we will begin to see simultaneously executions on transactions for (1) the sale of loan portfolios formerly owned by failed banks which were sold subject to Loss Share Agreements, and (2) buy-outs by the FDIC of those Loss Share Agreements.  This is an exciting new opportunity available on terms that are beneficial to each of the FDIC, healthy banks which acquired failed banks, and investors, provided those transactions are structured appropriately and on balanced terms.  Fourth, as investors are seeking to deploy hundred of billions of dollars in real estate opportunities and a relatively modest volume of opportunities are available, many investors continue to reduce return requirements.  Lower return requirements will result in higher prices paid for assets.  Fifth, we are seeing increasing availability of financing for the acquisition of loan portfolios with large average loan balances.  We are hearing about increased interest by banks and other sources to provide financing for the acquisition of small loan balance loan portfolios.  Sixth, pricing will continue to trend upward as (i) investors’ return requirements continue to trend down, (ii) acquisition financing for loan portfolios becomes increasingly available, and (iii) the capital markets recover.

GlobeSt.com: How are investors approaching underwriting for bids on NPL portfolios?

Galli: One of the most challenging aspects of bidding on NPL portfolios is controlling the cost of due diligence to support underwriting.  Modeling is more appropriate for small balance NPL portfolios.  For other NPL portfolios, bidders are taking advantage of a program we developed to significantly reduce legal fees for due diligence efforts.  That program offers clients a competitive advantage in the bid process as it permits them to engage in more extensive due diligence to verify the existence of risk or the lack of risk.  By verifying the lack of risk in a particular portfolio, a client is able to increase its bid amount (substantially reducing or eliminating the discount otherwise associated with a lack of due diligence) and, therefore, increase the likelihood of that clients’ success on a bid.  This program is a winner for all in the process – our clients, sellers and brokers who are usually compensated based on the amount of the winning bid on a sale.