CrunchedCredit : Capital Markets Finance and Real Estate Attorneys

Many of the panelists illustrated this general sentiment by noting that:

(1) spreads are compressing—strike that—have compressed,

(2) it is harder and harder to get the yields desired (again, something we can all probably relate to),

(3) it is challenging to find distressed debt worth buying (would Europe just hurry up and sell already??),

(4) low interest rates are making this a good time to be a borrower but the concern regarding refinanceability in 5-10 years is starting to creep into the market (but not enough worry to stop lending—thank goodness!),

(5) risk retention and all of the bad things that will likely go with it (freezing the B-piece buyers market, making investment grade bonds illiquid if B-piece buyers buy them to make the risk retention thresholds and then have to hold onto them (who thought of this again?), CMBS market becoming less competitive as a result (good news for lifecos)…) are on folks’ minds, especially those in the B-piece bracket, and

(6) Europe’s crisis is looming on the horizon (this may be the Black Swan in Camo).

At this point in 2013, it appears that the market is bustling. Now, in the U.S., if only the regulators will either act or not act (the latter being our desired outcome) and bring finality to the guessing game and, with respect to Europe, well…we’d like to think that the proposed legislation regarding the safety of bank deposits in Cyprus, for example, will make the US more and more attractive (which isn’t a bad thing) and at some point, we will see banks selling portfolios like we saw over the past two years in the U.K. but for now we are enjoying the bustle!

By: Krystyna Blakeslee and David Pildis
 

The conference kicks off on Wednesday with a series of panels discussing distressed debt issues and opportunities for 2013. First up is a panel titled “Market Trends and 2013 Opportunities,” moderated by TriMont’s John D’Amico. The panelists will include David Harrison of PNC Real Estate/Midland Loan Servicers, Gregg Chiota of Garrison Investment Group, Shari Linnick of Trepp, Bliss Morris of First Financial Network and Brian Olasov of McKenna, Long and Aldridge.

The discussions continue throughout the day on Wednesday and include panels such as “Creative Workout Structures” (hosted by Joe Sarcinella of Thompson and Knight) and “New Capital, Bridge and Rescue Lending and Equity” (hosted by Greta Guggenheim of Ladder Capital Finance LLC).

Next up, the balance sheet lenders will take center stage as Dechert’s own Rick Jones moderates a panel on balance sheet lender viewpoints. The panelists will be David Bouton of Citigroup Global Markets, Mike Moran of Allstate Investments, Elizabeth Fitzpatrick of Bank of America, Brian Furlong of NYLIM, Ivan Lehon of Ernst & Young LLP and Greg Null of Carlton Fields. This all-star group will discuss opportunities in the distressed debt market for portfolio lenders as well as hurdles portfolio lenders face in the distressed debt market.

Next up, the mezzanine lenders get a word in edgewise during the “Tranche Warfare” panel moderated by Bill O’Connor of Thompson & Knight. And it wouldn’t be a distressed debt conference if the special servicers didn’t get a say – day one of the conference closes out with “Special Servicer’s Roles in CMBS Secondary Markets” in a panel hosted by Kevin Donahue of C-III Capital Partners. Panelists include Jim Callahan of Pentalpha Capital Group, Bill Landis of Raith Capital Partners, Lea Overby of Nomura Securities International, Isaac Pesin of LNR Partners LLC and Tom Ruffing of CT Investment Management Co., LLC. The panel will discuss structural changes in CMBS 2.0/3.0 as well recent trends and current challenges of special servicing in the debt markets and is sure to be riveting.

Day two starts bright and early with a panel on exit strategies (moderated by Jan Sternin of Berkadia) and continues with “Enforcement of Foreclosure Rights” (moderated by Craig Welin of Frandzel Robins Bloom & Csato). The conference closes out by lunchtime on Thursday with back-to-back panels on the perspective of the B piece buyer, moderated by Nelson Hioe of Raith Capital Partners, and of owners and operators, respectively. Wrapping up at 12:30 on Thursday will give everyone an opportunity to network with old and new friends, and possibly sneak over to the Garden for day three of the Big East Tournament.

Dechert will continue to blog throughout the conference, and we look forward to seeing many of you there. Welcome to New York.

By: Krystyna Blakeslee and David Pildis
 

Over the past few months, an inter-disciplinary group of Dechert finance, real estate, regulatory, banking, securitization and financial services attorneys have had several conversations with clients discussing how these deals will work.  This week, I co-authored a brief article together with my partners Patrick Dolan, Mac Dorris, Bob Ledig, Ralph Mazzeo, Tom Vartanian, Jay Zagoren and Gordon Miller that highlights an innovative program initiated by the FHFA, designed to convert thousands of single family REO to rental properties.  This article focuses primarily on the issues faced by investors, and provides a detailed explanation of the FHFA’s plan and recent events related to the initiative.

Now if only we could convince this year’s crop of college graduates to rent an apartment instead of returning home … 

Click here to access the full Dechert OnPoint.

By:  Matthew Clark

One of the themes of the conference as well as one of the more important lessons we are learning as we in the industry deal with this volume of distressed debt, is that the same workout strategy will not work for every property. The type of collateral and the jurisdiction where the collateral is located are extremely important in determining the best workout strategy. In particular, lenders working out loans and buyers acquiring distressed debt all indicated that when analyzing distressed debt, it’s all about “Location, Location, Location!”  Now this is nothing new in the real estate market, but when it comes to distressed debt the location consideration is unique. Lenders and purchasers are asking whether this is a favorable location for foreclosure. Not surprisingly, lenders are learning that taking back a property in Texas through a non-judicial sale (which can be done in less than 1 month) is very different from foreclosing on a property in New York (which can take years). Similarly, certain states will allow receivers to step in and immediately control the cash at a property, but in other jurisdictions, the lender would need to prove that the owner is committing waste at the property before the court would even consider appointing a receiver, and even then, the receiver may be anything but an expert on managing real estate. In this case location is not just about value, but how quickly and efficiently the workout process can proceed. 

As with many things during the great credit bubble, many did not focus on the variations in local foreclosure law and how it would impact their realization on the underlying real estate. Now that the issue is front and center, the question is, how long will we remember the lesson?

By: Matthew Ginsburg and Jessica Seger Bula

This is a really encouraging story – a successful distressed-debt play on a big-time asset and one of the largest CRE trades in the country this year. The Hancock Tower was acquired by Normandy/Five Mile in 2009 for $660 million (give or take) – a number that put a point on exactly how far values had fallen (the defaulting borrower had taken the building down in 2007 for $1.2 billion). Normandy/Five Mile was smart and aggressive in acquiring debt at the right levels – and then – maybe more importantly – had adequate know-how and sufficient dry ammo to turn things around (re-purposing underground space for parking, building a new lobby restaurant, earning LEED certification, and inking a 15 year lease to Bain Capital for 200,000 sq. ft.).

I (Boston College A&S ’97, Law ’00) sit on the 27th floor of the Hancock and have watched this story play out – as tenant, participant, observer and blogger – for the better part of five years. Each night, beginning at dusk, you can watch as large bands of dark space begin to stripe the building’s tenanted floors – the outward scars of rolling leases that were never replaced as the credit markets ceased and the bottom fell out of everything. Is this story an aberration? Without doubt; the owners seemed fully ready to carry the building for another 4-5 years. Getting out in 18 months with a massive gain sui generis for certain. But it seems that, soon enough, when I leave at night, there won’t be as many dark windows.
 

By Matt Clark.

The story of Bay Colony, distressed-debt case study, begins with Beacon Capital Partners purchasing the property in 2005 for $272.5 million. (You’ll note this week's price was a 33% discount to this figure and see where this is going.) Two years later, the property was acquired as part of Broadway’s buy-out of Beacon (a transaction that included the Hancock Tower, itself a distressed-debt story covered here). The deal was completed at the height of the market – the buyer leveraging upwards of $450 million on an increasing rental stream that never materialized. Just four months after losing Hancock, with maturity looming and hopelessly underwater, Broadway turned the keys over to its mortgage lender, Lehman Brothers, in July of 2009.

As we all know, and in a twist worthy of good soap opera writing, Lehman was bankrupt by the time it seized the property and was unable to bear the debt-load. Eastern Financial, which itself had obtained a portion of the Broadway mezz package at a discount, foreclosed and succeeded to ownership of Bay Colony. For Eastern, the deal looked like an opportunistic loan-to-own play; until the moribund, jobless recovery saw one 30,000 sq. ft. big-pharma tenant into bankruptcy and caused another (200,000 sq. ft.) to reduce its space by half. Unable to stabilize the property, Eastern turned the keys over the Prudential earlier this year, which took control subject to the $140 million securitized-first that Boston Properties agreed to assume this week.

A staple of American radio and, later, television programming for the better part of the 20th century, the midday serial was conceived by salesmen (soap salesmen - think Proctor & Gamble, Colgate-Palmolive) as a means of entry to the burgeoning post-war middle-class household. And it's leaving us, the victim of myriad cultural phenomena (dual-income households, cable television, the internet, TiVo); and with it, a vaudevillian bridge to a small piece of our past. Absent a catalyst for (a lot) of new jobs and cars to fill the parking spaces at places like Bay Colony, however, the story of distressed real estate will continue to run for years to come.

By Matt Clark.