Good reminder on Negotiating distressed assets – From Texas A&M Real Estate Conference

Summary of Key Insights:
Dr. Dotzour – What advice would you provide to investors on how to structure bids to help the commercial real estate market clear.
  • JT  – The FDIC is not driven by equity constraints. The perception that the FDIC should sell at a deep discount is wrong. The FDIC wants an orderly process of bank sales.
  • Jeff – The current FDIC sale process is the RTC liquidation. There won’t be something else. This ensures that there will be an orderly liquidation.
  • JT  – The FDIC is executing structured deals where it retains an oversight position but not a preferred position.
Dr. Dotzour – Will the threat of an overhang of supply from the FDIC keep normal sellers from placing their properties up for sale?
  • JT – This varies by market. Some areas of the country are good. Some are very bad. Areas like Atlanta, Florida and Phoenix are bad. Areas like Utah, Washington (north of Seattle) are not bad.
  • Tim – There are not a lot of good assets coming to the market but there is big demand. So there are many bidders for each deal. A lot of private money was raised but the deadline to deploy that capital is approaching at the end of this year.
Dr. Dotzour – Jeff, who are banks selling to and what are their goals and needs?
  • Jeff – A lot of capital has been raised and is burning a hole in investor pockets. Use the following etiquette when approaching a bank:
  • Don’t go to a bank saying you are there to help them. Banks can take care of themselves. Regions Bank is better capitalized now than pre-Lehman.
  • 75% of prospective buyers say “show me your list”. They won’t get a return call.
  • Be respectful in approaching a bank. This will keep the seller’s interest.
  • Be targeted and focused on what you are looking for. Identify specific property types and geographic areas of interest.
  • Investors shouldn’t target everybody. Understand who you are approaching. They may be tied up with equity issues and that will reduce the chance of success. Which banks have capital to absorb the loss on sale? They will be more willing to sell.
Dr. Dotzour – What does it take to close a deal?
  • Jeff – It takes 30-45 days to close. Have cash ready. It will help to have a track record of purchases so the seller can call a reference.
  • Tim – Target assets held by healthy banks. Don’t show up with $1 billion in cash and ask to see the list.
  • JT – Get in the queue. You can see listings available on
Dr. Dotzour – What is the timeline for closing a deal?
  • JT – residential sales are a cash close. There is little due diligence of the buyer.
  • Jeff – Timelines are tight in order to keep the #2 and #3 bidders interested in case the #1 bidder is not able to close.
  • Tim – CMBS is a different animal. Who is the controlling class of the CMBS? This changes as asset values fall and lower classes get wiped out. Special servicers typical have 10 to 15 properties assigned per property manager. Now they are operating with 50 to 100 properties per manager. There will be a lot of litigation to resolve CMBS.
  • Jeff – Banks with capital are trying to liquidate problem assets as soon as possible so they don’t get caught when the overhang comes to market. Banks will be the lender for those buying distressed assets from CMBS. Litigation in CMBS will start when the AAA class doesn’t get paid.
Dr. Dotzour – Investors are starting to refine their expected rate of return. What are your thoughts?
  • Tim – Sam Zell recently asked “since when was it our God given right to earn 20% returns?”. The historic return is 10%. We need to reset to this level. Mid-teen returns over the life of an asset is exceptional.
  • JT – We see investors tightening their returns into the teens. There are more players so it is important to be competitive.
  • Jeff – Approach it as looking for a deal, not a steal. Deals fly of shelves at mid to low teen returns.
Dr. Dotzour – It appears the fund raising window closed. Now there is too much money in there creating distressed buyers.
  • Tim – It is tough to raise a new discretionary pool of capital. If it is a quality investment, there is a lot of capital available. There is excitement about individual deals.
  • JT – In a healthy market there are good comparables. Now we have many types of conditions of sale so it is difficult for appraisers. Appraisers are working for banks so they may give high values. It is important for investors to give good instructions to an appraiser.
  • Jeff – Undercapitalized banks are managing to appraised values so they are not moving assets. It is difficult to buy from these assets. Regions is moving assets at market.
Dr. Dotzour – Where are we in the disposition process?
  • Jeff – Larger banks are in the 7thor 8thinning of raising capital and disposing of assets. They will provide capital to resolve other dispositions in the future.
Dr. Dotzour – For the students in our audience, what skills will be important for their success?
  • JT – Property management skills will be needed for workouts in the next few years. Know how to make money on an asset.
  • Jeff – Real estate valuation and underwriting. Knowledge of capital markets. A lot of underwriting will be needed to get through CMBS assets.
  • Tim – This is a property level market so know how an asset operations. Know the macro aspects of capital markets. Real estate is still a relationship business, every deal has a relationship attached.

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