Distressed Commercial Real Estate Workouts Opportunities Transcript

[dp] Distressed Commercial Real Estate Workouts and Opportunities Brecht Palombo & Bob Thomas PODCAST TRANSCRIPT www.distressedpro.com 1 of 9 Wednesday, January 6, 2010 | distressedpro.com

Brecht Palombo: Okay everybody this is Brecht Palombo with Distressed  Pro and The Bank Prospector and today I am very excited to have Bob  Thomas on the line. Bob has owned a company called Turnstone Property  since 1997 and he is very well know in the greater Boston area and beyond  for doing a number of different sorts of deals in this area and we have him  on the line today because what we are going to talk about it what he has  been doing since we have seen a shiE in the market here and what his  company has been up to so the first thing I want to just go right at it, what  have you been working on out there Bob? Bob Thomas: Hi Brecht, glad to be here, I have been working recently on  workouts and consulKng relaKng to commercial real estate loans in Florida  recently. Brecht Palombo: Okay, everybody is excited about working with the banks  right now and I know banks are, they are moving through an awful lot of  stuff so I thought having you on the line today where you have been out  there doing all sorts of loan consulKng and workout that you have been  doing maybe tell us a liMle bit about, well first, what kind of assets have  you been working on in Florida? Bob Thomas: The gamet, everything from failed subdivisions to industrial  to condo conversions that did not work out, office buildings, the whole  gamet. Brecht Palombo: Okay, that is good; it sort of gives us a nice base to see  where you are coming from. So why don’t you tell us, what is it that you  see as sort of the biggest problem or the biggest challenge out there on  the market right now? Bob Thomas: The challenge is see and keeps coming back over and over is  a detachment by lenders from the underlying bricks and mortar collateral  and I think this is really at the root of the current situaKon. UlKmately the  value of these loans comes down to the quality and the characterisKcs and  the performance of the collateral and the loans were oEen made on faulty  assumpKons about the performance or the potenKal of the quality of the  real estate, and in the most egregious cases loans were made on property  which the lender may have never actually physically inspected. Brecht Palombo: Wow, and so these are real problems you are seeing out  there in the market. 2 of 9 Wednesday, January 6, 2010 | distressedpro.com

Bob Thomas: Well sure, and it is not always the case of the market shiE is  the main thing that has happened but yeah, there is a detachment or there  has been a detachment from, by lenders for the collateral. Brecht Palombo: Okay, then tell us a liMle bit about your company has  been up to since the shiE in the market and sort of how you are addressing  that problem or that challenge? Bob Thomas: Well through Turnstone ProperKes affiliate special assets  advisors, we have been focusing more on debt and asset management the  recent work in Miami and less given the environment on development, we  have a great team with experience that spans back from the last situaKon  in the late 80’s and early 90’s and all the way through the current situaKon  and experience in both banking and real estate. In addiKon to working with  lenders we have been talking to private equity funds and other investors  about evaluaKng loan pools and individual assets. Brecht Palombo: So I guess a liMle bit, you talked a liMle bit about who  your clients are but why are banks looking at outside consultants like you? Bob Thomas: Yeah, well the truth is many banks are not hiring outside  consultants and are opKng to use in‐house resources and oEen this  involves having loan officers handling workouts. SomeKmes their own or  their colleagues loans which does present a conflict. Brecht Palombo: What do you mean by that? Bob Thomas: Well, handling workouts implies a criKcism of the loan, so  even though the goal is not to place blame an insider might feel  uncomfortable or unable to say the tough things and make the tough calls  on a loan that he may have made or a colleague or even his boss may have  made so the primary reason to bring in an outsider is that consultants can  say things that insiders have a harder Kme saying. Brecht Palombo: Right. Bob Thomas: Also of course the skill set is different, underwriKng loans,  managing the relaKonship with the borrower; this is all different from deal  with a loan that is broken. So it requires a change of perspecKve and it  requires different strategies. 3 of 9 Wednesday, January 6, 2010 | distressedpro.com

Brecht Palombo: Right, so tell me a liMle bit about, or tell us a liMle bit  about what you are consulKng on exactly and sort of what, the mechanics  a liMle bit about what you have been doing? Bob Thomas: At the moments we are doing workouts on a por]olio of  nonperforming loans as I said for a Miami based bank for the same back  we recently completed an assignment evaluaKng collateral underlying  performing loans. Brecht Palombo: And so what is that, what does that, can you talk a liMle  bit about what work consists of just for anybody who is not in that same  space that you are in? Brecht Palombo: Sure, sure, well the reason to evaluate performing loans  is that because the environment has changed so dramaKcally over the last  year and a half, two years, property which may have had certain potenKal,  certain value may not any longer have that potenKal or value so the job  entailed in evaluaKon of the collateral is to understand, does the original  evaluaKon, does the original game plan for the property, if there was a  project involved sKll make sense in the current environment. And the goal  there is to get ahead of the curve, for the bank to be able to get ahead of  the curve and understand which loans are at risk and to be proacKve and  working out soluKons because the longer problems go unnoKced the  worse they can become.  Brecht Palombo: So you might get a stack, I am sorry to interrupt you but I  just want to… Bob Thomas: No, go ahead. Brecht Palombo: want to make sure I get an understanding of it, so you  might get a stack of currently performing construcKon or commercial notes  that for one reason or another the lender thinks, gees we ought to be  keeping our eye on this and then you will sort of pour through the notes to  get an understanding of what the collateral is, visit the collateral or the  property I should say and this sort of thing, is that.. Bob Thomas: Exactly, this is, in the case of that assignment it was taking a  hard look at the physical asset so to give you and example, a borrower  purchases a mulK‐family property with the intent of converKng it to  condominiums. Brecht Palombo: So who did not? 4 of 9 Wednesday, January 6, 2010 | distressedpro.com

Bob Thomas: Well and then so maybe we, maybe we go and take a look at  it, maybe this is a really great property and it is really condo quality and  maybe it does not make sense right now but maybe the thing sKll has an  inherent value and maybe that might be a possibility in the future, on the  other hand it might be that that only made sense in a very frothy  environment when a diﬀerent type of asset at a lower grade of asset could  be successfully converted to condominiums and maybe even occupancy as  a rental has not been so good and maybe the property itself has lost value  over Kme. Brecht Palombo: Right, and that example that you give with the condos,  maybe you even help the bank to avoid making any further disbursements  on a project that is really never going to come to pass or should not come  to pass. Bob Thomas: Well there is a broad array of strategies and tools that can be  used and the goal of course is to maximize recovery for the bank or in case  of performing loans to ward oﬀ any future problems. There might be a  need to rebalance to loan to value outside addiKonal equity may be  required, there may be a possibility of restructuring the loan, there are any  number of strategies that can be employed. Brecht Palombo: So that is performing loans let us talk about what  everybody is talking about out there right now and that is nonperforming  loans and I have got to assume that you are seeing stacks of those right  now, what is your strategy there? Bob Thomas: Well it is really, these tools I have just described possibly  looking to inject more equity into the deal, possibly restructuring the debt  in a way that allows it to perform over the near term, again the goal is  always to maximize recovery for the lender and that may mean recovery  now or the potenKal for future recovery. Brecht Palombo: Okay, well Bob in addiKon to the banks, is there anyone  else who ought to be looking at the sort of services that you are talking  about? Bob Thomas: Well yes, for our non‐lender clients, buyers of distressed  assets who are oEen not themselves real estate professionals we can  provide real estate experKse. A reality based bricks and mortar assessment  of the collateral that is underlying the notes. And on the other side for  those that are selling notes, banks selling notes, or other lenders selling  5 of 9 Wednesday, January 6, 2010 | distressedpro.com

notes, especially notes that are Ked to complicated development deals, we  found we are able to provide a clear summary for the market of what  exactly is being sold, so that is, what is the land, what are the permits for,  how long do the permits last, what kind of construcKon has been done,  they types of things a developer or an investor needs to know in order to  make a decision about that acquisiKon. Brecht Palombo: Well where are some of the current opportuniKes if we  could shiE for just a minute, where are some of the current opportuniKes  for investors would you say? Bob Thomas: Yeah, there are a lot of investors out there wanKng to take  advantage of the current situaKon and I do think that amidst the wreckage,  there are some good opportuniKes. Especially in the hardest hit places like  south Florida where clearing prices are being reached for distressed assets.  I am finding many investors are looking for the perfect deal. High return,  low risk and from what I have seen, perfect deals are very rare, the market  is just too efficient for that and investors I think who are probably going to  be successful are making deals that may look risky now, they have issues,  that is why there are in distress but in the future I think these deals will,  the right ones will seem to have been steals. Brecht Palombo: And so what other opportuniKes, we talked about some  of it but what else do you see out there as opportuniKes for investors and  what type of person or what type of investments do you see that folks  should be looking to capitalize on right now? Bob Thomas: Yeah, well I menKoned that I think there are very few perfect  deals and I think the opportunity broadly is for the entrepreneurial  investor who is a problem solver, who is willing to take on an asset that has  something wrong, something that needs fixing and take on that challenge. Brecht Palombo: And I presume just from the sort of work that you are  doing that you are kind of gebng a first look at these sorts of  opportuniKes? Bob Thomas: Yes, yes there is, I mean I am gebng an inside look at the,  some specific examples but one only need drive around some major  American ciKes and you can see the types of deals that did not work out. Brecht Palombo: Well is that not the truth. Right, now looking at these  opportuniKes, what are some of the pi]alls that you would say they should  avoid or they can look out for? 6 of 9 Wednesday, January 6, 2010 | distressedpro.com

Bob Thomas: Yeah, well in the case of residenKal deals, it is possible to  pick up blocks of condominiums for example at very low numbers, well  below replacement. Issues are related to homeowner associaKon solvency  issues, there may be a majority of people in the building who are in  ﬁnancial trouble who may even be in foreclosure and the quesKon is, who  is going to pay the condo fees and who is going to keep the lights on and  there are also issues related to construcKonal liability if you buy enough  units, the investor may take on the liability of the original developer.  Overall it is the issue of, that I would say of pricing and I guess that is true  in any market. I think pricing is Kght and will be Kght because there is  enough money out there looking to get involved. So the challenge is  pricing the asset relaKve to a holding period that might be required and on  incomplete projects, I think there is a good opportunity in incomplete  projects because many people who do not want to take on that risk but  the challenge there is gebng the project at a price where it can be  completed at a value that makes sense relaKve to new construcKon that is  being sold at substanKal discounts. Brecht Palombo: Right, so what would you say if you are just going to, if  you had a barometer out there, what is your feeling on just sort of the  state of the market today? Bob Thomas: Yeah, well what I would say is probably not anything new,  this has all been reported and speculated about in the papers but the  residenKal market seems to be on its way at least to working out its  problems whereas the commercial market seems to be just at the  beginning of the process. Brecht Palombo: Sure. Bob Thomas: We have heard this before that the property downtown,  suburban property elsewhere bought at low cap rates, very low cap rates,  highly leveraged now seeing declining occupancy in rents resulKng in a  drop in value, equity is wiped out, in some cases mezzanine ﬁnancing  wiped out. These fundamental problems have generally not yet been  worked out as banks have been able to extend maturity dates and have  been able to ignore loan to value covenants so the result is a growing  number of owners who are hanging on to their property but no longer  have equity in it and this will eventually shake out but the situaKon of  course varies geographically, this said in south Florida I think they are  probably a liMle further on in working out the issues because the situaKon  there is just so much worse. 7 of 9 Wednesday, January 6, 2010 | distressedpro.com

Brecht Palombo: Right, so lets talk about the shaking out, if you, and I am  going to ask you to look in your crystal ball there and maybe if you could  tell us what you see out there and what kind of Kmeline maybe 12 or 18 or  24 month, what does the future hold from your perspecKve? Bob Thomas: Well, there has to be the shakeout of commercial real estate  and that is probably given maturity dates we know are out there in 2010,  11, and 12 that is probably when that begins to happen and I do think  there will be conKnued opportuniKes in other areas, residenKal, hospitality  although I think the compeKKon for these assets will grow over Kme. Brecht Palombo: Okay, well that is awesome Bob, I want to thank you for  coming on the call today and for talking through all the stuﬀ for me and I  know there is a lot of people who are visiKng the site who are engaged in  their own shiE and sort of trying to get their arms around how to tackle  the new environment that we are in. I do not know if there is anything that  you would have that you would say to those folks? Bob Thomas: Well thank you for the interview and I want to congratulate  you on your terriﬁc new website, it is very good at laying out which banks  are dealing with what troubled assets and you are able to, there, get a lot  of informaKon that is otherwise not found in one place so nice job on that. Brecht Palombo: Okay, well I appreciate that Bob and that is it, that is the  end of our call and I thank you so much for being on here today and I know  you and I will see each other out there in the market as we are bouncing  around in some of these deals but it was awesome having you on. Bob Thomas: All right Brecht thanks a lot, see you then. Brecht Palombo: Thanks a lot Bob. 8 of 9 Wednesday, January 6, 2010 | distressedpro.com

distressedpro.com is the home to BankProspector BankProspector is an online database of the REO and distressed mortgage details for more than 8,000 banks nation wide. Members use it to ﬁnd bank contacts, bank owned property and distressed loan opportunities. 9 of 9 Wednesday, January 6, 2010 | distressedpro.com

Distressed Commercial Real Estate Workouts Opportunities Transcript

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Distressed Commercial Real Estate Workouts Opportunities Transcript — Document Transcript

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