4A — September 11 - 24, 2020 — M id A tlantic Real Estate Journal
www.marej.com
M id A tlantic R eal E state J ournal
By Jeff Hubbard, A&G Real Estate Partners Certainty in an uncertain world: Structured CRE sales give lenders real-time data
he COVID-19 crisis is triggering major ques- tions about the value of assets in just about every sector of real estate. Take a newly built student- housing complex near the cam- pus of a state university. The appraised value of that building was derived from the pre-pan- demic assumption that it would be part of a fully functional college town—a place where students would be crowding into classrooms, sports venues, bars, restaurants and the like for most of the year. How do you put a number on the value of that building in a T
world of social-distancing and draconian capacity restrictions or outright shutdowns? Lend- ers face similar conundrums with respect to the value of certain malls, office buildings, hotels, movie theaters and the like. Adding urgency to the situ- ation: the rising tide of com- mercial mortgage defaults, bankruptcies and foreclosures – a trend likely to accelerate for the foreseeable future. The challenges and uncer- tainties of today clearly are significant. However, there is a way for lenders to gain a remarkable degree of pricing
transparency: engaging in a structured sale process. Whether conducted in or out of court, structured sales can be an effective workout solution. They offer lenders protections that are particularly important in today’s volatile real estate marketplace. Continuing Demand for Real Estate Assets With respect to the recovery, another factor that bodes well for secured creditors is the strong demand for certain dis- tressed real estate assets, both in and out of court. The Black- stone Group, Starwood Capital Group and others reportedly
have raised hundreds of bil- lions of dollars in “dry powder” for opportunistic acquisitions, and plenty of smaller investors are scouting for deals as well. These transactions, when they occur in a structured process, are competitive whether in or out of bankruptcy court. Part of the reason: Bidders agree to the sale terms (in- cluding due diligence items like rent rolls, environmental reports, preliminary title com- mitments and management agreements) up front, as op- posed to post-contract. Espe- cially in a time of uncertainty, handling due diligence in this
way gives bidders a higher degree of confidence; it’s a step that bolsters the likelihood of achieving maximum pricing. The level playing field among bidders (they have all agreed to the same terms as set forth by the seller) accelerates the process, which otherwise could grind to a halt over terms down the line. Generally, structured sales result in all-cash offers within 60 to 75 days. While they give sellers control over the process and timing (and, through professional market- ing, bring all logical bidders to the table), they also yield something that is critically important today: real-time data about what properties are ac- tually worth in the disrupted marketplace. In a Section 363 sale, more- over, the secured creditor en- joys an additional layer of pro- tection: the right to wholly or partially cancel that borrower’s debt in exchange for those as- sets—no cash required—in a credit bid. Acting as a qualified bidder in this way enables lend- ers to provide price support for structured deals even as they avoid the potential costs (in both time and money) that are so often associated with com- mercial foreclosures. That’s no small point when you consider that many com- mercial properties may require adaptive reuse to be viable moving forward. Taking these properties back, in other words, can be a risky proposition. Con- sider a conventional process in which a commercial real estate broker sells a hard-hit regional mall on behalf of the lender. Even before COVID-19, many regional malls were ghost towns. Now, it’s even less vi - able to move forward with such assets as 100 percent retail, and so the likeliest scenario is one in which the buyer makes the bid contingent on the ap- proval of new, non-retail uses. Ultimately, that means the lender could face a situation in which a thwarted buyer sends an email along the lines of, “Un- fortunately, our adaptive use strategy has hit a roadblock: The city will not allow me to make this a data-center and industrial development. I’m discounting my price by $10 million.” In taking such properties back amid such contingencies, lenders effectively become buy- ers’ development partners—not continued on page 16A
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