Browse Tag: Real estate owned

The REO Schedule: Too Much Information Is Never Enough

Finance

The underwriting of commercial real estate loans is part art and part science. When approaching the bank for the capital your transaction needs, it’s important to be able to see the process from all sides. Underwriters will tell you: what gets the benefit of the doubt in underwriting decisions is detail – the more you provide to the lender, the happier and more agreeable that lender will likely be.

The borrower’s property portfolio — the list of property owned by a borrowing entity, also known as a REO schedule, is the “other half” of the one-two punch along with the balance sheet/personal financial statement. These deliverables are the minimum a loan discussion requires. But what belongs on the REO schedule?

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An experienced underwriter will be able to tell at a glance of the REO schedule what he or she is dealing with: is the borrowing entity a big corporate firm?  An individual?  A majority partnership LLC held n a minority partnership LLC all in turn held by a full corporation?  What the balance sheet doesn’t tell by itself the REO schedule will address and fill in the gaps.

Typically an REO schedule contains property facts and figures and the lender will have a form available.  But the fact is that many forms can be inadequate for the task at hand: demonstrating what the balance sheet and personal financial statement alone can’t.  Since a borrower isn’t there just to fill out forms, but instead to have a discussion about a financing, it’s essential to pay attention to what is and isn’t on the given form, and to make every effort to put what should reasonably be on that form into the hands of the lender.

The basics – property name, address, type, today’s loan balance, market value, monthly expenses and monthly income – are the bare minimum and space for these are found on REO schedule forms almost every time.  But this isn’t a detail level that gives the underwriter what is needed.    Consider adding more in the form of monthly operating expenses, the borrowing entity’s date of acquisition and percentage of ownership, names of existing lenders and other critical information.

Format For The Win

Make sure there are sufficient columns and that column headings are well-defined, leaving no chance to confuse monthly averages vs. annual totals.  Aiming to include 10-12 properties on a legal-sized sheet is a good benchmark when working in Excel, so set your type size to 11 points, limit your columns to A through Q and set a page scale of around 70%.

Photo credit: Hard Hat Stickers

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Distressed Office Property: What Does The Market Look Like?

Geographic center of the contiguous United Sta...

With five years of job numbers trouble and economic sluggishness, it’s no surprise that in markets everywhere  – primary, secondary, and tertiary –  plenty of office properties find themselves in the “wrong hands”.   Yet the bargain-hunter market in office properties has been characterized as a lot of money chasing a little product.  Which national trend actually prevails — a wave of distressed sales or a pick-your-shots character to most markets in troubled office property?

The case for more opportunity

Office properties have the greatest national volume of distressed loans.   According to Real Capital Analytics, one fourth of the current volume of distressed properties are office, coming to about $42 billion in troubled lending.  Sorting markets by total volume, some of the highest levels of distress include loans in default or held as REO, in Las Vegas, Manhattan, Phoenix, Chicago and Los Angeles.

Of course, primary markets aren’t the only source of distressed office space.  And in a general trend, property values have risen in the past year, meaning more sell-side pressure than would exist at a bottom.  As institutional sellers cautiously poke their heads up into the weather, REO departments and capital sources such as private equity firms are finding each other in ever-growing numbers:

Although pricing rose during the last two years, there is still a lot of opportunity out there, notes Joshua Zegen, managing member and co-founder of Madison Realty Capital in Manhattan. The private equity firm has been a large acquirer of distressed debt in recent years, and the company is continuing to pursue that strategy. Since 2010, Madison Realty Capital has closed on about $300 million of distressed debt transactions, mainly from banks and special servicers.

“The regulatory pressures are creating more momentum for loan sales,” says Zegen. Changes, such as the proposed Basel III, which will require banks to post more equity against sub and non-performing loans, is forcing banks to make strategic decisions to sell versus hold non-performing debt.

In addition, property values have moved off the bottom, which has created more flexibility to sell non-performing loans for those institutions that didn’t want to sell at the low point in the cycle, he adds.

For example, Madison Realty has been very active buying busted condo deals in the New York area. The investment firm has been able to buy the distressed assets and use its real estate expertise to complete the conversions and reposition the properties as rental units. “When the markets rebounded a bit, that was a great strategy, because the banks did not have to take the steep losses that they would have expected to take in 2009 and 2010,” notes Zegen.

The case for less

On the flipside, there’s an institutional bias to this market.  Unlike with the multifamily sector, investors tend to be more institutional and as such  have managed their portfolios more conservatively, allowing for more downside risk.   The presence of a “story” building or a “one-off” owner is far less common in this marketplace, and the chances are great that a distressed office property is being held off the market until values or cap rates move exactly where a master formula wants them.

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