Life Preservers Buoy Distressed Assets

NEW YORK CITY-A host of factors have mitigated against distressed assets from coming to market, locally or nationally, in the volume most had anticipated, panelists said yesterday at the Eighth Annual RealShare New York. While greater deal flow will happen eventually, the roadblocks need to be addressed.

In the Investors Panel, subtitled “How to Embrace Distress and Find Opportunity,” panelists identified a series of “life preservers” that are keeping troubled properties from sinking as they normally would. They include changes in the mark-to-market and REMIC rules, the low spreads on 10-year Treasuries over LIBOR and banks’ tendency to “extend and pretend” rather than take writedowns.

Robert Knakal, chairman of Massey Knakal Realty Services, also pointed to the inaction of special servicers, who by and large are swamped and often ill-prepared for the mortgage situations they now face. In the “Refinancing When the Mortgage Comes Due” panel, Jonathan Hornik observed, “Special servicers are almost incapacitated, at this point, as to when they can cut a deal.”

On the subject of extending and pretending, Hornik, VP and general counsel at Kennedy Funding, noted that senior lenders have no incentive to get the debt off their balance sheets at a discount. And he minced no words about another type of purging that needs to occur among lenders whose books are laden with toxic loans.

“The banks must fail,” he said. “If they made bad loans, they will have to fail. The better banks will survive. This is the process we have to go through.”

In a refinancing situation, it’s important to know where the senior and mezzanine lenders are coming from and therefore what position they’re in to be able to take a loss, panelists advised. Another must in refinancing is give-and-take: Russell Schildkraut, principal of the Ackman-Ziff Real Estate Group, said if a borrower goes to a lender and offers nothing in return, the borrower will then get nothing. Scott Singer, EVP of the Singer and Bassuck Organization, said a refinancing is a gradual process of moving borrower and lender away from an adversarial position.

Restructuring a loan should not be undertaken without a long-term plan in mind, Schildkraut said. “If you’re not strategic before you restructure, you’re going to fail,” he said.

Next up was a panel of prominent building owners discussing how they’re adapting to the current market, including Charles Cohen, president and CEO of Cohen Brothers Realty Corp.; Peter Duncan, president and CEO of George Comfort & Sons; Michael Katz, co-CEO of Sterling American Property; Norman Sturner, principal with Murray Hill Properties; and Ofer Yardeni, managing partner at Stonehenge Partners. “You’ve got to face the fact that we’re in a tough cycle and grind through it,” Duncan said.

Sturner noted that there’s been a beneficial change in attitudes over the course of 2009. As 2008 gave way to the new year, he said, “All we heard about was fear and catching falling knives. I think that nonsense has subsided.”

The conference, which was attended by more than 300 industry members, concluded with a keynote address by William Green, CEO of Tannery Brook Partners. Titled “What May Happen from Here and Why,” the presentation predicted that the lending industry won’t return to normal operation until 2015. As evidence, Green said that historically, spreads have taken three to six times as long to tighten as they took to widen, hence the protracted time frame for their normalizing in this cycle

In the interim, Green said he sees the TALF program being extended into a permanent component of the landscape, as part of a long-term increase of government involvement in commercial real estate financing. “The government is in love with the notion that retaining risk makes lenders more prudent,” he said. He added that banks and insurers would resolve their balance sheet issues by chipping away at them.