Dallas/Fort Worth Distressed Asset Sales Continue Despite Liquidity Surge

Although CRE debt liquidity has  improved , existing commercial real estate loans continue to go into default, enter the Special Servicing phase or, are being posted for foreclosure altogether. The likely scenario now unfolding is Borrowers have just flat run out of cash to pay debt service and/or Lenders have grown impatient with lengthy debt restructuring negotiations.

Foreclosure postings in the DFW area are getting higher profile based on statements made last week by George Roddy, CEO of Addison, Texas based Foreclosure Listing Service following an announcement that Irish Anglo Bank had posted Turtle Creek Village and Office Complex. Apparently workout negotiations with pension fund advisor Common Fund were unsuccessful.  The premier Oak Lawn property was posted for a early April foreclosure. Anglo Irish Bank also posted a premier land tract in Dallas’ Uptown area along with a separate tract near Northpark Mall.

While the quality and size of assets seem to be increasing, the overall volume of properties headed to foreclosure has remained fairly stable according to Roddy albeit 340 Commercial Properties are posted in April. This is a positive sign that indeed, 2011 may be providing the footing everyone has been looking for in terms of a recovery for commercial real estate in the DFW Metroplex.

DFW is not the only Southwest market where large commercial loans are in default.  The Broadmoor Office Complex in Austin with its $78m loan balance entered Special Servicing status in mid-January.  There will continue to be defaults throughout the major Texas markets on overleveraged properties.

Transaction volumes are increasing especially in core assets and multi-family. However, not every sale transaction is optically clear. For example, when a Bank or Special Servicer wants to clear an asset off their books, they may very well sell the existing mortgage or offer a discounted payoff (“DPO”) that most of the time requires new debt and equity capital to execute such a payoff. These note sales and DPO are often not recorded through a transfer of title so they don’t necessarily show up in transaction sales statistics. Bottom-line, there are probably a lot more deals happening than meet the eye.

With Banks now pushing back on “extending & pretending“, more Note and Asset sales appear to be hitting the market. This is a welcome relief for those of us who have been waiting the past three or more years for assets to begin the process of clearing the market.

The situation at the Special Servicer’s , those entities which oversee the massive amount of defaulted securitized “conduit” debt, has not been as forthcoming with respect to Note and Asset sales.  Although the conduit default rate is high there is an ever increasing amount of maturing debt that can only be financed at lower leverage so the probability of continued defaults is a certainty.  According to Trepp, there were over $85 billion of CMBS loans in Special Servicing at the end of February, a drop of almost $3.2 billion partially due to efforts by Special Servicers to quickly dispose of small loans via auctions, note and asset sales.  Surprisingly, a substantial amount of these assets are still sitting in a state of limbo.

Another solution to moving/speeding up the disposition process might very well be that Special Servicer’s market distressed assets by taking back seller notes in order to maximize the asset value which effectively repatriates the current debt.  This is the equivalent of taking a bad debt and turning it into a new good loan by selling the property to a new owner subject to favorable financing terms. Perhaps this methodology will pry loose some of the log jam at the Special Servicers albeit at the risk of the new owner possibly over paying for an asset in return for favorable financing terms.

Regardless of whether or not asset sales are optically clear or exactly how transactions are beginning to clear the market, there are just simply more transactions happening throughout North Texas region. New construction is way down in every property type which is further nurturing the property markets toward solid equilibrium. CRE debt and equity are re-entering the marketplace at a reasonable pace notwithstanding cautious underwriting. For the time being, capital providers ARE NOT underpricing risk which is the natural governance that assures only the deals that should get done, are getting done.

Posted on by admin in CREF, Distressed asset sales 2 Comments

Mortgage Bankers Association (MBA) Conference (Part 2)

by Todd McNeill, Senior Director

There is no question the past few years in the commercial real estate financing world have not been pleasant.  At the recent Commercial Real Estate Finance Conference (CREF), sponsored by the Mortgage Bankers Association (MBA) the common feeling from industry insiders was “cautious optimism” as discussed in Part 1 of our review of the future of the commercial real estate finance industry.  Some facets of the business have already shown growth while others are moving a bit slower but nonetheless in a positive direction.

Moving From Bottom


The commercial real estate markets just came through the worst economic crisis since the Great Depression.  A crash and burn like this is not something that an industry can bounce back from overnight.  However, commercial real estate insiders appear to be seeing a light at the end of the tunnel, especially since attendance and enthusiasm were higher than in previous years, and there appears to be good reason for the upbeat attitude.

Reasons for Optimism


For now Private Lenders, Life Insurance Companies, Credit Companies and now, the return of some of the Securitized Lenders will be the primary sources of new real estate debt albeit some of the banks are starting to return to the market as well.  Construction loans are still challenging, however, banks are no longer avoiding the discussion although apartments and healthcare are the preferred commercial property types.  The securitization market also seems to have kicked back into gear and some of the tentative return by banks into the commercial real estate market may be due to the return of CMBS 2.0.

CMBS 2.0


The post-credit commercial, mortgage-backed securities, labeled by industry insiders “CMBS 2.0” will be a deciding factor in the question of whether CREF is moving forward when a huge chunk of money is set to be securitized over the next few months.  In addition, B-Piece investors are few and far between, and this type of investor will need to surface in order to keep the momentum going.  There is $6 billion in the pipeline which is expected to be securitized in the next few months.  This is one of the reason some insiders continue to urge caution.  Assuming the market absorbs this pipeline, about $40 to $50 billion of CMBS 2.0 is expected to be securitized in 2011.  This is almost double 2010 production but a shadow of the $313 billion securitized in 2007.

Reason for Caution


We are done with “Extend and Pretend” as banks have sufficient earnings to write down assets and move bad loans off their books.  With assets moving into the market to trade, this should create a reasonable pipeline of new acquisition opportunities and correspondingly, transactions for Lenders and Capital providers.

The massive Dodd Frank Wall Street Reform and Consumer Act provides some of the new “ground rules” for commercial real estate.  Lenders that are returning to the market are providing their own discipline standards to meet the intent of the Act without compromising the ability to securitize loans.  CMBS Lenders are already making transactions simpler with only six or seven investment branches (versus dozens in the heyday).  The adaptation of more standardized documents, increased diligence and less reliance on the rating agencies will be part of the game going forward.  Most importantly, the B-piece investor will have to maintain at least 5% of the risk in any new CMBS 2.0.  Finally, the new rules will give the senior A-piece investor a much bigger voice in selecting the Special Servicer as well as what happens to the loan(s) should a default occur.

Overall, commercial real estate finance appears to be recovering from the recent financial crisis, and this may be the perfect opportunity for new investors to seek new assets.  A slow movement toward recovery is occurring and industry insiders are seeing improvement in the marketplace.  The cautious optimism felt at the recent CREF Conference is an indication that commercial real estate finance is finally moving in an positive direction.

Posted on by admin in CMBS, CREF 4 Comments

Top 10 Takeaways From 2011 CREF Conference

by Scott Lynn, Director/Principal

10. Attendance and Enthusiasm were up fueled primarily by the return of the CMBS 2.0.

9. Last year’s job seekers got jobs at some of the 25+ CMBS Conduits that were trolling for business.  Expect $40 to $50 billion of 10 year fixed rate loans to close in 2011 based on 75% LTV/1.25x coverage under careful underwriting that focuses on the rent roll & durability of the income stream.

8. Of the 25 CMBS Lenders, probably no more than twelve are “for real” in terms of ability to fund on their own balance sheet.

7. CMBS 2.0 will be holding its breath as $6 billion is in the pipeline to be securitized during March and April.

6. The dirty little secret is the B Piece market is thin….maybe 3 to 5 real buyers.  Spreads will “have” to widen in order to deepen the bench of buyers.  Correspondingly, there will be upward pressure on rates to absorb the forthcoming product.

5. Extend & Pretend is likely over.  2011 will be the first real year for a variety of capital providers to jump in on good loans for Recaps, DPO’s and Note Sales.  This is the real finance/new deal opportunity for the next 36 months as new lenders seek assets with low basis.

4. Our conference efforts were focused on shaking the bushes for all the bridge capital sources that we could find. The “Lender de Jour” will be the capital providers that will finance these opportunities as assets are pushed off the books of Banks and Special Servicers.  The money is there at a weighted average cost of capital ranging from 7% to 14% depending on product type, leverage, sponsor quality and property cash flow.

3. The Life Company guys were all out in force when not on the golf course….of course.  Life Company money is the best money in the market today in terms of pricing but your deal is usually not attractive to them unless it is a core asset at under 60% LTV (on their appraisal).

2. Albeit few banks attend CREF (at least for the past three years) the ones that did seemed like shell shock was over. The banks are finally ready to talk about a new construction loan for a healthcare or an apartment deal.  They might even finance your distressed debt acquisition with plenty of equity and a strong sponsor.

1. Capital is reforming rapidly almost at a surprising rate.  Our friends are landing at great new places with big checkbooks.  The best line we heard was “If I say “No” to your deal this week, don’t count me out.  I may say “Yes” next week.”

Posted on by admin in CMBS, CREF 1 Comment
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