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[IMGCAP(1)]LOS ANGELES-Where the capital will come from to keep deals moving and where the best distressed asset opportunities lie were among the hot topics at the Apartments 2009 conference here Thursday, with speakers generally agreeing that deal flow has increased somewhat but still has a long way to go to reach a normal market. And despite the ever-intensifying interest in distressed assets, speakers agreed that not all sources of distress offer the same opportunities or the same ease of execution in trying to find deals.

[IMGCAP(2)]Panelists throughout the all-day Apartments 2009 conference and networking event at the Westin Bonaventure Hotel in Downtown Los Angeles, which was produced by ALM’s Real Estate Media Group, forecast the coming year as an interim period for the national economy, employment and the apartment industry and its financing. There were over 1,000 people in attendance.

[IMGCAP(3)]Industry leaders at a panel titled “The View From the Top” agreed that one of the chief obstacles facing the apartment market right now is the lack of private capital for multifamily deals, the bulk of which are being financed by government-sponsored entities like Fannie Mae and Freddie Mac. “This is a debt crisis,” said panelist Harvey Green, president and CEO of Marcus & Millichap.

[IMGCAP(4)]Michael Berman, vice chairman of the Mortgage Bankers Assoc. and chair of the association’s Council on Ensuring Mortgage Liquidity, added that “We need to attract private capital back into the debt market. Berman, who is president and CEO of CWCapital LLC, also added that one of the solutions proposed by the MBA for the moribund debt market is the creation of a new line of mortgage-backed securities backed by a new form of government guarantee to spur the secondary mortgage market.

However, the government-sponsored entities will need to continue in their current role “for quite some time” until the industry gets back on its feet with respect to private capital flow, he said.

How Long ‘Til Recovery?

Panel moderator Tom Bannon, CEO of the California Apartment Assoc., asked each of the four panelists to assess how far along the market is in its road to recovery–using the analogy of a football game. The answers ranged from “late in the first quarter” to “in the second quarter” to “halftime,” but the panelists–who included president and CEO Keith Guericke of Essex Property Trust and managing principal/president Greg Vilkin of MacFarlane Partners in addition to Green and Berman―cautioned that how far along we are depends on some important unknowns.

Among those unknowns are what the US Treasury is going to do, what Congress is going to do and a host of other factors, Marcus & Millichap’s Green said. For example, he pointed out the need for regulators to allow more flexibility for special servicers. “Special servicers need relief,” the Marcus & Millichap chairman observed. He explained that the growing number of distressed assets is placing tremendous pressure on borrowers and special servicers alike, with special servicers overloaded with work and often limited in what they can do to help borrowers.

Obstacles and Opportunities

One of the recurring themes of Thursday’s conference was that, along with the obstacles that the debt market’s problems are creating, there are an increasing number of opportunities. Jess Bressi, a partner of law firm Luce, Forward, Hamilton & Scripps who moderated a conference session on distressed assets, point out that there are at least a dozen mechanisms to acquire distressed properties.

These include buying property directly from distressed owners at foreclosure and bankruptcy sales; buying whole loans from lenders and regulators as well as REO (real estate owned by the lender); and buying from court receivers. Bressi also said additional opportunities may arise in the near future at the GSE’s Fannie Mae and Freddie Mac (whose multi-family loans have been some of the last to default). And, he added, there is a remote chance that a successor agency to the Resolution Trust Corp., which dealt with the real estate crises of the 1980s and 90s, will be formed and that the FIDC may decide to permit bidding on individual or small groups of loans.

Panelist Taylor B. Grant, a receiver and founding principal of Newport Beach-based California Real Estate Receiverships, noted that financing for apartment investors is more available and at better rates than other real estate products despite the problems in the debt market. “While new loans for rental projects are difficult, new loans for for-sale condominium projects are all but impossible,” said Grant, who is also a veteran developer. He added that vulture and distressed asset funds “will buy apartments regardless of current economics as long as they can buy an apartment project for significantly less than it costs to construct a new one with comparable amenities and zero land value.”

Grant, whose firm serves as a receiver for Bank of America and several other major lenders, emphasized that apartments will be extremely attractive until home prices and apartment rents reach equilibrium. He defined equilibrium as “when the cost of renting a three-bedroom apartment and the monthly cost of owning a home with a 90% mortgage are about equal.”

Seeking a Capital Comeback

With all of the talk about sluggish debt markets and the tremendous slowdown in deal velocity, panelists in a session titled “Surviving Today’s Capital Crisis” reminded the audience that deals are getting done and private capital is available for the right deal–with each lender having its own definition of the right deal, depending on its niche. Panel moderator Lew Feldman, a partner with the law firm of Goodwin Procter, asked the panelists to comment on factors driving the market, where the most opportunities can be found and today’s underwriting standards versus those of the pre-recession market.

Fannie Mae vice president Heidi McKibben described underwriting as “reasonable” and “back to where it was before things got crazy.” Gary Mozer, a principal and managing director at George Smith Partners, said that lenders generally are offering less debt and requiring more equity from borrowers today, with loan-to-value ratios ranging from about 65% to 70% for stable properties. Sponsorship has become much more important today, even more important than location, he said.

Panelist Stephan Kachani, a vice president at Lone Oak Fund, said that location and sponsorship are both very important considerations for his firm. One of the opportunities Kachani cited was the potential for borrowers to buy back their own debt, often at steep discounts. He also named broken condo deals as an area of opportunity. Mozer advised the attendees to shop very carefully for debt. “The market is very inefficient,” he said, explaining that borrowers, if they approach a variety of lenders for a loan, will find a wide range of quoted interest rates for the same deal.

The capital markets panelists were among more than 60 industry leaders who participated in nearly a dozen presentations and panels at Apartments 2009, which is one of a series of annual events produced throughout the country and online by ALM’s Real Estate Media Group. Real Estate Media is the publisher of Real Estate Forum, Real Estate Southern California, Real Estate New York, Real Estate New Jersey, Real Estate Florida and GlobeSt.com.

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