Last month three of our colleagues attended the Distressed Debt Conference sponsored by CREFC at the New York Athletic Club. Since the topics of distressed debt and loan sales are frequently covered by CrunchedCredit, we thought an update on this conference was worth providing. For those of us not in the New York office, travelling to NYC is always an excellent opportunity to catch up with clients and colleagues. Given that we were talking about distressed debt and there is a lot more of it than there used to be, it was a welcomed change to see that the mood of the conference was very upbeat, and that there was general enthusiasm about the numerous opportunities available in the distressed debt market.
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