Distressed debt is what you should buy

November 04, 2010 06:00PM

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Last year at this time, only a few financial institutions were willing to sell distressed real estate commercial debt. Today, many of these banks have seen sizable increases in profitability, allowing for them to recognize losses on distressed debt.

For example, the largest banks in the country, which include Bank of America, Citicorp, JPMorgan Chase, Wells Fargo and U.S. Bank, have reported record profits; subsequently, the effect of selling a debt at a loss is hardly recognized on their balance sheets.

In other instances, many banks that are listed on the troubled bank list of the Federal Deposit Insurance Corporation have been required by the FDIC and other regulators to shore up their balance sheets by the sale of distressed debt. Suddenly, the major asset class being offered for sale by national and local investment sales brokers is distressed debt.

Appearing on my television show this week, Peter Haupsburg, chairman and CEO at Eastern Consolidated, said “the volume of sales of distressed properties]has increased 10-fold. In many instances the banks are selling debt at par or even at a premium.”

Jeffrey Baker, executive managing director at Savills US, who represented DekaBank for the UCC foreclosure sale for the equity collateral, securing the $60 million mezzanine debt on the W New York Hotel Union Square, said: “We had little difficulty in attracting a purchase to buy the debt at par. “

Robert Knakal, chairman of Massey Knakal Realty Services, representing a money-center bank on the sale of debt on vacant land on the Upper East Side said, “we had a sealed bid with more than 50 bidders and sold the property at par.”

Haupsburg added that last year no one really had an interest in buying debt on vacant land; today land in Manhattan is a preferred asset. Many investors are ready to build rentals and even condominium developments. Land prices have increased from below $100 a buildable foot in Manhattan to near $500.

Last month, Toll Brothers, the nation’s leading builder of luxury homes, announced the purchase of 132 East 65th Street. The company purchased the note on the vacant land from Ark Real Estate Partners and bought the deed from developer Trevor Davis. Toll plans to build a 15-story building with roughly 25 apartments. Sales are expected to commence next summer. Toll paid $26.4 million for the 55,000 square feet of development rights which amounts to $479 per square foot.

Rick Hartman, the company’s regional president in charge of the Metro NY urban market, said his company is “actively looking for additional opportunities in the Metro New York City urban market. With our capital, our ability to move quickly, and the brand we are building in New York City, we are a logical call for distressed owners, banks and others looking to get out from under distressed projects.”

Lenders have retained a number of investment firms to sell senior and junior secured mortgage loans on vacant land for development.
This week, TerraCRG has been retained by a local bank to conduct the sale of three non-performing first mortgage loans with a current balance in excess of $40 million. The loans are secured by three large waterfront residential development sites in the Mill Basin, Gerritsen Beach and Sheepshead Bay sections of Brooklyn.

Nevertheless, few lenders who are selling distressed debt are interested in providing seller financing on the note. A few local lenders like Signature Bank and M&T Bank have expressed interest to finance notes. These and other financial institutions are offering loans of up to 60 percent of the price paid for the debt, an escrow of six to 12 months of interest, personal guarantees as well as origination fees.

Michael Stoler is a columnist for The Real Deal and host of real estate programs “The Stoler Report” and “Building New York” on CUNY TV and on WEGTV in East Hampton. His radio show, “The Michael Stoler Real Estate Report,” airs on 1010 WINS on Saturdays and Sundays. Stoler is a director at Madison Realty Capital as well as an adjunct professor at NYU Real Estate Institute, and a former contributing editor and columnist for the New York Sun.