The Real Deal Webcast: Hunting for a silver lining among distressed assets

In a Webcast interview last month, The Real Deal’s Jill Gardiner spoke to David Schechtman, head of the turnaround group at Eastern Consolidated, about the opportunities the market downturn has created for distressed asset funds.

Schechtman said that while distressed purchases are on the rise and funds are looking for deals, the real fury in the field will likely not start until 2009. He also discussed which sectors of the market are most ripe for distressed asset deals and how the funds are raising capital in this financially anemic environment.

Log on to www.therealdeal.com to see the full interview and to access the archives. Every week, The Real Deal posts a new edition of the Webcast, which features exclusive interviews with industry insiders.

The Real Deal: We know that there are a lot of distressed asset funds and vulture funds. Tell us what kind of activity you’re seeing.

David Schechtman: There’s definitely increased sales volume, both for real estate that’s in distress for various reasons, and for mortgages, and that includes first mortgages and other levels of the capital stack. There’s definitely increased traffic in that sense, but I don’t think it’s at the levels at which many of these funds had hoped that it would be at this point. I think that 2009 is when we expect the real fury to begin.

TRD: So which sectors of the New York market do you expect to be most ripe for those opportunities?

DS: Well, I think at the moment, without a doubt, there’s opportunity to be had in buying the mortgages that are either in technical default or may still be current in paying from some of the lenders on development sites. Certainly in the boroughs, Brooklyn and some in Manhattan. These mortgages, whether they’re paying or not, banks recognize that now may be a good time to mitigate loss and let the new buyer or the new holder of the note fight through what likely will be a foreclosure, in many instances, or a restructuring of the loan. So the hottest sector at the moment for distressed is probably construction.

TRD: Talk a little bit about who exactly is setting up these funds. Are they organizations like Durst, are they high-net-worth individuals?

DS: Well, it runs the gamut. You have high-net-worth individuals who’ve been in real estate for many years. Some of these high-net-worth individuals and family offices have stayed out of real estate or the competitive bidding that has really … dominated the landscape in purchasing assets. Some of them are now back in full force, excited to take the opportunity, because it requires a ton of equity these days.

TRD: What about the private equity firms? How are they raising capital in this kind of environment, given the fact that there’s a freeze on lending and just a freeze on that type of activity?

DS: Private equity firms, a lot of them had money that was already committed, and a lot of them had an eye toward this down market. These are some very savvy folks. You’re talking about some of the captains of the financial and real estate industry. And these folks anticipated, when the market was at or close to its zenith, that eventually it would fall. So a lot of this has been in the planning for a while and they’re now poised to strike. Some of the funds are partially funded, they’re looking really toward 2009, and some of them are having difficulty raising the money that they expected to have and some of them likely will not be able to put out the money.

TRD: And can you be more specific about the deals that you’re working on, even if you can’t give us the addresses of buildings in distress?

DS: We can talk in broad strokes. There is a building in the West 30s in Manhattan, it’s 100,000 square feet, it’s vacant, you have a borrower who had a very aggressive first mortgage two years ago. That borrower vacated the building with an eye toward converting this building for another use, from commercial to hotel or residential. That borrower has really met with the market and figured out that it’s taken a lot longer and cost a lot more money. That bank is quietly allowing us and has called on us to bring in five or six people to give them an idea of what they would purchase that loan for.

TRD: Is there kind of a competitive bidding process right now behind the scenes for some of this debt?

DS: I’d say speed and availability of cash take absolute precedence. You may see a penultimate offer being accepted, sometimes a second-highest offer, because there’s certainty of execution.

Compiled by Sara Polsky