Last Friday I moderated a panel at the 11th Annual IMN Real Estate Opportunity and Private Investment Forum in New York. The two-day event consisted of about 40 separate concurrent panels and drew over 800 industry participants. The topics covered revolved around distressed debt investing – loan workouts, exit strategies, tranche warfare and distressed asset sales.
My panel‘s topic was “Loan -To-Own” strategies. Our conversation began with the panelists discussing the common characteristics of successful loan-to-own transactions. The common areas of focus included the importance of stringent property-level due diligence, exacting legal due diligence with respect to loan documents, a realistic understanding of foreclosure processes and timeframes, accurate modeling of acquisition and stabilization costs, and the importance of the local expertise that can be gained from local developers and operators.
When discussing why deals fail (either prior to acquisition or during the REO period), the panelists cited issues including an insufficient understanding of how to own and operate real property, a lack of understanding of the loan documents and remedies and underestimating the hold-up leverage of borrowers and subordinate debt holders.
From my perspective, the most intriguing portion of our discussion regarded the complexity of loan-to-own strategies involving securitized structures and mezzanine loans. I think the group unanimously agreed that the biggest pitfall is not having a sufficient and detailed understanding of the loan documents and applicable pooling and servicing agreements, intercreditor agreements, participation agreements and co-lending agreements. A too-common misstep made by some investors is confusing a general understanding of how these structures “should” work with a detailed understanding of how a particular structure “actually” works.
As I often tell clients and colleagues – every mezzanine intercreditor agreement written in the past ten years provides for the same thing – until you read it.