LONG BEACH, CA (April 8, 2014) ― Investing and acquiring distressed commercial real estate through note sales was the focus of discussion at the recent luncheon hosted by the Association of Corporate Real Estate Executives (ACRE) of Southern California. Held April 8 at the Long Beach Grand, attendees gathered to gain insight on the opportunities and pitfalls that exist within this submarket of commercial real estate.
Moderated by Carson Faris of Western Bay Group, the panel emphasized that investors who purchase bank notes should be knowledgeable in many facets of real estate. To mitigate risk, investors should understand applicable state and federal real estate laws, loan documents, Borrower and Tenant rights; environmental conditions, and entitlement rights. Faris stated that the most important thing for any investor to understand when purchasing a note is that they are purchasing a lender’s position, not real property.
Panelists ― including State Court Receiver and Coreland Companies Principal Pat Galentine, Bob Roades of Union Bank’s Special Assets Division, Adam Weissburg of Cox Castle Nicholson LLP, and Matt Beck of Beck & Co. ― warned that buyers interested in pursuing bank note purchases should not overlook a borrower’s rights or real estate fundamentals.
“When considering a purchase, the very first step I take is to look for the local experts. I gather as much information as I can from local brokers or management teams that can give me information I might not receive from the bank,” said Beck, who specializes in the purchasing of notes and environmentally distressed assets. “Before I make an offer I perform extensive due diligence on the property, the loan documents, and the relationship between the lender and borrower.”
“I’ve seen buyers get caught up in the value of the note, without ever taking a close look at the state of the asset,” shared Galentine who specializes in rents and profits receiverships of distressed commercial real estate properties throughout California. “If there is a receiver in place, buyers need to take a very hard look as to why that is. There could be environmental or structural issues, or you might not have the access you need to the property or tenants because of the dispute.”
Panelists addressed how banks evaluate their options when dealing with distressed real estate.
“Banks don’t automatically pursue a note sale to resolve a nonperforming loan,” said Roades. “Banks have options. They could elect to accept a discounted payoff in connection with their borrower’s short sale or refinance of the property; they could elect to restructure the loan to enhance the likelihood of the borrower being able to repay the loan; or, they could choose to foreclose and sell the property themselves.
“Small banks, which may not be well staffed to manage and sell foreclosed commercial real estate, and banks (large and small) that may be under pressure from regulators or stockholders to quickly reduce nonperforming assets, are more likely to conduct note sales.”
“A lender looking at real estate will do a cost-benefit analysis and decide if it is worth the time and brain damage to hang onto the loan and foreclose on the property,” shared Weissburg. “They will then turn to their relationships to find a less difficult way out. Interested investors need to maintain relationships with people who are selling; then they must be equipped to quickly understand what they are getting into as closings typically happen within 10-15 days.”
Attendees questioned how to best compete for notes of distressed assets and panelists emphasized the importance of relationships. Relationships start with a phone call to a lender and, if nurtured correctly, can lead to a long synergistic relationship. All participants agreed that building the right team is the key to successfully purchasing a note and achieving positive results.
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ACRE (www.acresocal.org) is a non-profit association that provides a forum for the exchange of ideas and networking between retail commercial real estate professionals. Panel discussions and special events are held throughout the year bringing together developers, tenants, brokers, lenders, consultants and other related professionals involved in the Southern California retail commercial real estate industry.