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Distressed Real Estate Investments

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Opportunities for Investment

• Buy From The Distressed Owner• Buy The (Distressed) Loan• Buy At The Foreclosure Sale/Auction• Buy Out Of Bankruptcy• Buy From The Take-Back Lender

(REO)• Buy a Strategic Investment Piece

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4 Keys to Success#1 – Money

Liquidity Rules Leverage Is Tough (See #2)

#2 – Speed and Agility First On The Scene Sets The

Terms If The Market Is Allowed To

React, It May Set A Higher Price

Flexibility On Deal Terms Will Set You Apart From The Pack.

Expect To Uncover Issues – This Is Not Your Usual Diligence

Have A Deal Team In Place Before The Deal Hits, Including LP, Accountants And Diligence Experts

#3 – Vision Have A Plan Of Attack On Day

1 Have A Plan For After You Buy

The Asset Understand The Risks Build The “What Ifs” Into Your

Pricing

#4 – Intestinal Fortitude At Some Point You Must

Accept The Risk In Exchange For The Upside

There Will Be Surprises Be Prepared To Pay To Make

Problems Go Away

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Project Status from 10,000 Feet

• Why Is The Project Distressed?– Is The Loan In Default?– Is Ownership Broke/Illiquid?– Is Ownership Infighting?– Tenant Issues?– Contractor Default?

• What Are The Immediate Needs?– Fresh Capital?– Leadership/Sponsorship?– Tenants?– Time?

• Who is the Real Problem?– The Borrower?– The Lender?– The Tenants?– The Community?– The Market?

• Where is the Leverage Point?– Does The Lender Want Out?– Who Do You “Know”?– Who Is The Squeaky Wheel?- What Can You Do?

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Timing Your Investment

• Pre-Default

• Mid-Default

• Post-Workout

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Why Is Timing Important

• Often Sets Pricing Parameters• Impacts Diligence Requirements• Mitigates/Heightens Risk• Impacts Deal Leverage• Sets Roadmap• Timing Concerns May Be Driving

The Decision to Sell

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Our Totally Unscientific Timeline

Pro

bab

le D

isc

ou

nt

to F

MV

Deal Life of the Distressed Loan

50%

Pre - Default Period Default Period Post - Workout

Lender Grows Tired /

Worried About Asset

Formal Default and

Demand

Borrower Fights Back – Part 1( Forbearance )

Borrower Capitulates and

Foreclosure Filed

Lender Threatens

Default

Borrower Fights Back – Part 2( BK ? Defense ? Counterclaim ?)

Borrower Fights Back – Part 3( White Knight ? Last Ditch ?)

Borrower Capitulates ( again ) ( Deed in Lieu ? Judgment ?)

Lender Becomesthe Owner

At this point , discount can

go up or down based upon lender investment ,

lender fatigue , market

conditions , etc .

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Pre-Default Investment

Pros

+ More Deliberate Pace (Maybe)+ Friendlier Investment+ More Organized Transaction+ Better Diligence+ More Cooperative Parties+ Less Desperation+ Capital Needs Better Defined

Cons

- Market Likely To Set Price

- Multiple Bidder/Auction- Lower Risk = Lower Return

- Harder Deal To Find- If A Loan, You May End Up As The Lender For The Term Of The Loan

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Post-Default Investment

Pros

+ Tumult = More Opportunity

+ Uncertainty = Discount

+ Desperation = Decision

Cons

- Risk of Unresolved Matters- Frenetic Pace (Usually)- Unknown/Unlimited Capital - Multiple Warring Factions- Multiple Front War- Litigation Usually a Must- Have To Be The Bad Guy

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Post-Workout

Pros

+ Title Has Been Cleaned+ Property May Be Stabilized+ Lender May Be Fatigued+ Future Capital More Defined+ More Like a Normal Deal+ Easier to Leverage

Cons

- Market Probably Sets Price

- Lender Basis May Be High

- Lender May Capture Upside

- Market May Have Turned- Broker Usually Involved

Soliciting Multiple Bidders

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Diligence Issues

• Bring Down New Title• Review Survey• Lease Review (If Possible) – No Estoppels• Review Loan Documents (Front to Back)• Review Loan File (Every Piece of Paper)• Diligence Title to Loan and Loan Documents• Diligence Borrower Players• Get To Borrower (If Possible)

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Business Issues

• Verify Amount Owed/Value• Identify Immediate Capital Needs• Develop Litigation

Budget/Strategy• Establish Pricing• Develop “Exit Plan” Going In• Identify Other Major Players In The

Deal Who May Be Friends/Foes

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Legal Issues

• Perform Customary Legal RE Diligence• Examine Litigation Status• Prepare Acquisition Documentation• Obtain Reps and Warranties from

Seller• Identify Seller Recourse Issues• Determine Bankruptcy Risk• Evaluate Perfection/Enforcement

Issues

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Common Roadblocks• Unknown Defenses to

Enforcement Lender Liability Issues Issues of Proof/Local Law Gaps In Servicing

• Bankruptcy Delay And Additional Expense Court of Equity – New Problems and Constituencies Auction Environment

• Third Parties Mechanic’s Lien Claimants Taxes/Utilities Tenants Internal Seller Politics

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Doomsday Scenarios• Title/Perfection Issues

Borrower Wins When Defending Your Actions The Lender Didn’t Own What You Bought Fatal Documentation Flaws

• Litigation Risks Serial Litigation Delays Wipeout Upside Judge Employs “Equity” To Limit Enforcement

• Loan to Own Fails You Become The Lender and Borrower Reinstates

Loan Auction Environment/Requirements Pay You Off

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Your Tool Box – Part 1

• Mortgage Foreclosure/Deed of Trust Sale Wipes Out The Borrower and Most Junior Lien Creditors Statutory Action Insurable Through Title Insurance Preserve Deficiency Claims Against

Borrower/Guarantor Auction Environment

• Deeds-In-Lieu of Foreclosure Gets Rid Of The Borrower, But Not Juniors May Continue With Foreclosure In Most States Waive Deficiency Claims Against Borrower/Guarantor

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Your Tool Box – Part 2

• Bankruptcy Remedies Section 363 “Lien Clearing” Sales Stalking Horse Bids Relief From Automatic Stay

• Receiverships Gets Control Of The Property Starts Stabilization Which Should Be Recoverable Prevents Further Deterioration Disarms Borrower – Takes Away Their War Chest May Get Better After The Fact Diligence

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Your Tool Box – Part 3

• UCC Remedies If Collateral Is “Personal Property” (i.e. Mezz

Collateral) Shorter Time Frame

• Other Actions Mechanic’s Lien Priority Contests Guarantor Lawsuit Veil-Piercing Actions Forbearance Agreements Consent Foreclosure (Some Jurisdictions) Power of Sale Without Foreclosure (Some

Jurisdictions)

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Advanced Distressed Investing

• Designation Rights in Bankruptcy• Broken Condo Deals• Broken TIC Deals• Vacant Land Banking• Buying Bankruptcy Claims Classes• Preferred Equity Positions• Taking the Borrower’s Position• Buying Minority Equity Positions