Cracking the Vault: Challenges & Obstacles in Acquisition of Banks’ Real Estate Assets by Jon Winick, President, Clark Street Capital. Presented at GreenPearl Events' Distressed Real Estate Summit Chicago on May 13, 2010.
Banks and CRE:
The Road Ahead
Our two primary businesses
Portfolio Management Solutions
Clark Street Capital professionally and quickly assess a bank loan
portfolio, (construct asset summary reports, provide loan valuation, site
inspections, title searches, etc) , and provide the management, officers
and the board with a path, template or strategy to resolve their situation.
The “BAN” Loan Sale Platform
Clark Street has a successful “high touch” group that markets
individual, pools and portfolios of whole loans to national clientele of
vetted, discreet and institutional buyer group.
Where are we?
The Bid/Ask spread is basically b/w those who
believe the chart above and those who don’t!
Financing on CRE
• CMBS is coming back: B of A, Goldman, Chase, Citibank, Deutsche Bank, RBS are
entering the market
• Loans north of $10MM, $20MM + preferred
• 10 year terms
• 30 year amorts
• Rates in the 6% range
• Fees ½ to 1%
• LTVs 70-75%
• Life companies, banks have picked up activity
• Regional bank real estate lenders (Key Bank, 5/3) have cut back
• Most banks scared to lend
• The big question: who will refinance the $1.8 trillion in bank loans that will come
due over the next few years?
What Can We Expect?
Real Capital Analytics completed a study of defaulted commercial mortgages that
were liquidated in 2009. The data set included nearly 300 defaulted commercial
mortgages with an outstanding balance totaling over $5.6 billion. Here are some of
Of the $5.6 billion in liquidated loans, the gross proceeds recovered by the lenders
totaled $3.3 billion, which equals an overall weighted average Recovery Rate (RR) of
59% and an overall mean RR of 64%, before costs and fees
Recovery rates differ substantially between A&D (acquisition and development)
loans and loans made for the acquisition or refinancing of existing properties. Prior
to fees, the mean recovery rate was 67% for existing properties, 56% for A&D.
Recovery rates dropped in the fourth quarter versus the first three quarters. Q4’09
recovery rates dropped to 59% from a 65% average through Q1-Q3 ’09
“Throughout most of 2009, lenders were generally liquidating loans without
incurring losses significantly beyond what they had already written down. Buyers
targeting these opportunities have been frustrated at the lack of distressed sales and
the reluctance of lenders to sell troubled assets. Thus, the increased liquidations
and lower RR experienced in Q4 could be a signal that lenders are now more serious
and realistic about resolving their commercial mortgage loans."
Top Ten Worst CRE Lending Practices
1. Unclear sources and uses of proceeds.
2. Relationship loans that didn’t pencil out.
3. An inability to properly assess the total cost of a project.
4. Poor appraisals and appraisal review.
5. A heavy concentration amongst a few large relationships.
6. A severe concentration in acquisition and development loans in transitional sub-
markets, in which the recession halted growth projections.
7. An excess of interest-only construction loans at high leverages.
8. Inadequate resources to service the portfolio.
9. Imprudent loans to shareholders and directors.
10. Poor information on property occupancy and cash flow.
The Regulators on CRE
• Pay close attention to the October 2009 Policy Statement on Prudent Commercial
Loan Workouts. The examiners are following this document very closely.
• Workouts are a preferred resolution than a foreclosure.
• According to the regulators, a preferred resolution on a non-performing CRE loan
was a split into both an A and a B loan. The A loan debt services at a 1.05X and is
classified as performing, while the B loan becomes the problem asset.
• So far, few banks have tried the A/B structures. According to a prominent
regulatory attorney, unless the loan documents allow a split, the A/B structure is
impractical as it requires borrower consent and knowledge of the bank’s
impairments. Borrowers will often expect something in return.
• The OCC is picking up the ball again on CRE. Expect hard limits on CRE.
FDIC’s Resolutions on Assets
1) Sell the bank with the assets assumed with an 80/20% loss share
Under a “loss-share” the bank pays a slight discount for the assets (usually
around 10%) and shares with the FDIC on the losses up to a threshold. We
expect the FDIC to move towards less generous arrangement and allow
negotiations on the size of the tranche.
2) Structured sales
Earlier this year, the FDIC announced the winner of a $1.02 billion structured
“sale” to Colony Capital. In a structured “sale,” the FDIC sells a 40% equity stake
in a limited liability company to an investor. FDIC provides attractive financing
(in this case, $233 million). Investor manages, services, and disposes of the
assets. 44 cents on the dollar was the value of the winning bid, but we believe
the financing added approximately 5-10% to the disposition price.
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