The Real Deal New York

Churchill Real Estate’s distressed debt fund eyes “crack” in NY market

The fund is targeting condo and retail properties in Manhattan and parts of Brooklyn
By Keith Larsen | February 05, 2019 11:00AM

Churchill Real Estate Holding’s Justin Ehrlich with vultures flying at a half finished condo project in New York City (Credit: Getty Images and Pixabay)

When the U.S. real estate market collapsed in 2009, banks and lenders were left scrambling to find buyers for their loans that borrowers had defaulted on. Debt funds and vulture funds were able to scoop up some of those bad loans for pennies on the dollar.

Now, Churchill Real Estate Holdings says a version of that story could begin to play out in New York.

In response, the New York-based firm has been trying to raise a $200 million distressed debt fund that will focus on a variety of real estate assets in Manhattan, from failed condo projects to struggling retail properties. Some of the fund may also target parts of Brooklyn.

Called Churchill Real Estate Fund, it has raised $30 million since its April launch and has begun soliciting outside investors, said Churchill co-founder Justin Ehrlich.

Last year was one of the worst in a decade for Manhattan’s housing market, according to a recent report from Douglas Elliman. Sales of condos and co-ops saw the largest year-over-year decline since the financial crisis, falling 14.2 percent to 10,229. It also marked the fourth sales decline in five years. At the same time, co-op and condo inventory keeps rising in the city, increasing a combined 11.8 percent in 2018 from the same period the year before.

The city’s condo market already slowed down in the past year, Ehrlich said, who co-founded the firm in 2014 with Sorabh Maheshwari.

“There is just crickets,” Ehrlich said. “There is no activity.”

The Churchill fund focuses on buying debt on real estate properties valued at under $100 million. It buys loans from banks and non-bank lenders seeking to shed these nonperforming loans or those in the process of foreclosure.

“Bank regulators frown on non-performing loans,” said Ralph Serrano, managing partner of Miami-based Safe Harbor Equity, a real estate investment firm that focuses on distressed debt.

Serrano said he is seeing more distressed loans and foreclosures in South Florida’s market.

Highlighting this point, in 2018 new foreclosure lawsuits jumped 14 percent in South Florida to 9,905, according to Attom Data Solutions, a sign that more homes could be foreclosed upon this year.

Serrano said rising interest rates could be one of the reasons for the increasing amount of stressed loans, along with banks’ desire to get rid of underperforming or past-due loans.

“There is always some distress in the market, there is always a segment where they are not paying in a timely manner,” Serrano said.

Churchill, an alternative real estate investment platform offering short term debt products and equity to institutional and private clients, isn’t the first to identify a shift in the market and launch a distressed debt fund.

Other companies have launched distressed debt funds amid a sluggish condo market in New York, where resale prices for new condo units have dropped significantly.

Last year, Maverick Real Estate Partners closed a $200 million fund that targets defaulted commercial mortgages in New York. Madison Realty Capital has also been buying up distressed debt for troubled properties in Brooklyn.

Among the loans Churchill has bought through the debt fund has been residential and retail project in Soho whose owner defaulted on the mortgage.

Some of the troubled loans belonged to foreign developers who purchased residential real estate at the height of the market a few years ago, only to be sidelined by an influx of new inventory and the city’s cumbersome regulatory process, which delayed project approvals. Ehrlich says with new condo projects set to be completed in 2019, he’s ready to capitalize on more opportunities.

“For the condo market, it’s the perfect storm,” Ehrlich said. “It’s very difficult to get a mortgage and there is enormous amount of inventory.”