Lenders Find Alternatives To Flooding Realty Market

By Marilyn Bowden
A widely anticipated torrent of commercial REO properties — troubled assets foreclosed on and repossessed by lenders — has not flooded the market, largely, experts say, because lenders are finding other ways to deal with them.

"We have not seen a real flushing of the system," said Charles J. Foschini, vice chairman of the Debt & Equity Finance Group at CB Richard Ellis.

"The last time we had a significant decline in real estate values and rise in foreclosures, the government set up the Resolution Trust Corp., or RTC, whose sole purpose was to flush those properties through the system quickly.

"This time, there is an incentive to do nothing and not to acknowledge the true value of the real estate. As a result, we have not seen a lot of banks push properties through the system."

Instead, he said, lenders are selling the loan notes to investors who may or may not foreclose on them.

"They may be able to work something out with the owner," Mr. Foschini said, "as a bank, which is federally regulated, could not."

Neil Rollnicke, a real estate attorney and partner at law firm Hinshaw & Culbertson, concurred with this assessment.

"There is not a lot of pressure placed on banks to get rid of potential problem properties or loans," he said, "so what we are seeing is something that takes the shape of an REO, but isn’t an REO.

"Many don’t want to go through the process of taking the property back on their books. So we are seeing far more sales of notes and mortgages than foreclosures and taking properties back as REOs."

From the bank’s standpoint, Mr. Rollnick said, it makes more sense to avoid the expense of a foreclosure and rid itself of a troubled asset. Once it goes to the private sector, "without regulatory issues, there are more facile way of dealing with it."

Another factor, Mr. Rollnick said, is that institutions with significant amounts of troubled assets on their books have been taken over by the Federal Deposit Insurance Corp., or FDIC.

"The FDIC generally enters into some sort of transaction in which they immediately take over the asset and sell it to an institution," he said. "If it’s taken on by another institution, there is usually a loss-sharing agreement between the government and the entity that has the troubled asset stating that if the institution takes a loss on it, the government will share in the loss.

"So the banks are not prone to taking action against owners, but are better served by handling it on a completely different level."

As new development planning once again heats up in South Florida, Mr. Rollnick says, there’s a lot of demand for well-located, bank-owned, unimproved real property — but the hurdles involved are great.

In addition to unrealistic pricing, "the bank wants it off the books rapidly," he said. "But most of these properties are not ready for development. They need to be site-planned or platted or need to go through some sort of growth management study to make sure they are cost-effective. New site plans require a lot of approvals and take a lot of time."

Financing for REOs can also be expensive. Permanent financing for stable properties where the owner is simply overleveraged is widely available, Mr. Foschini said. For distressed assets, however, it’s a different story.

"Bridge financing is available for that type," said Michael Boggiano, president of SL Capital, "at different levels, depending on a number of factors such as sponsorship, property type, the sense of urgency by the borrower. The shorter the term, the higher the price they have to pay."

For the most part, he said, seasoned operators will get the better price.

"Mom and Pop operations will get greater scrutiny," Mr. Boggiano said, "because they don’t have the expertise. These properties are REOs for a reason, and generally need to go through a period of transition.

"Lenders don’t want to take the property back again, so they are looking for someone with experience behind them. They want to know this is not their first trip to the rodeo, and that they have with an exit strategy down the road."