Commercial Investment Real Estate March/April 2013 - Page 28

Dealing WITH DISTRESS CCIMs transform liabilities into profi table investments. by Matt Hudgins Daniel Latshaw, CCIM, played an artful balancing act in marketing a failed mixed-use development last summer in midtown Atlanta. A partner at Bull Realty, Latshaw represented the property owner, who had defaulted on loans for the 2.5-acre site covering most of a city block at 131 Ponce de Leon Ave. Rather than foreclose, however, lenders United Bank and Synovus Bank agreed to hold of while Latshaw collected of ers and conducted a short sale. T e arrangement enabled Latshaw to attract potential buyers eager for a bargain on a distressed asset, but showed that the seller had enough breathing room from lenders to hold out for a fair price. “Because the banks hung in there with us, we were able to retail it,” Latshaw says. “T ere wasn’t a foreclosure so there wasn’t a sense of as much blood in the water.” T e sale drew 10 competitive bids and sold for $6.5 million to Sereo Group and Faison Enterprises. T e joint venture has since submitted plans to redevelop the site into 321 luxury apartments and 8,600 square feet of retail space. Latshaw credits the lenders’ willingness to forego a note sale or foreclosure with enabling him to secure a higher selling price. “We were able to get a signif cantly higher (recovery) amount than what the banks’ internal valuation was for the property,” Latshaw says. The Big Picture Across the nation, CCIMs like Latshaw have tested and ref ned strat- egies for buying, selling, or repositioning distressed real estate. And with economic recovery gaining traction in secondary and even tertiary markets, there is a growing consensus that investors who acquire and rejuvenate the right assets today will be able to market those properties to tenants in a climate of accelerating demand and strengthening fundamentals. 26 March | April | 2013 Indeed, the window of opportunity for distressed-asset investors is already beginning to close as the volume of property loans in default or referred to special servicing declines. Roughly $5.8 billion in loans fell into default or were transferred to special servicers in the third quarter of 2012 — half the volume of the prior quarter — while lend- ers and special servicers worked out $10.9 billion in troubled debt, according to Real Capital Analytics, which tracks distressed prop- erties valued at $2.5 million or more nationwide. Of $387 billion in properties to enter distress since the crisis began, 57 percent have been resolved, the company found. “T e pool of assets in distress is falling rather quickly,” says Dan Fasulo, RCA managing director. “It’s a result of surging property trans- actions in the fourth quarter, and the desire of banks to f nally take care of some of these loans, either liquidating them or taking back the assets. We’re moving into the later innings of the distress cycle.” Resolutions to distress situations in 2012 were concentrated in the top secondary markets including Seattle, Denver, South Florida, Phoenix, Texas, and Las Vegas, Fasulo says. Las Vegas continues to hold the top spot for the most distressed commercial real estate as a percentage of local market inventory, followed by Detroit at a close second. Pittsburgh, Phoenix, Palm Beach, and Miami round out the top six distressed markets, RCA found. And in those secondary markets, CCIMs are leading the charge to capitalize on distress opportunities. Percentage of Sales Associated with Distress Sector 4Q11 (%) 4Q12 (%) OFFICE 18 6 Industrial 4 5 Retail 11 6 Multifamily 9 5 Hotel 49 11 All property types 14 5 Source: Real Capital Analytics Commercial Investment Real Estate