$307 Million In Distressed Assets Up for Bid

The Carlton Group, an international real estate banking firm based in New York, is selling approximately 66 nonperforming loan and REO assets worth $307 million on behalf of various CMBS trusts.

Forty-four percent of the assets totaling $136 million are retail and 29% worth $88 million are multifamily. Located in Texas, Florida, Michigan and California, the assets are being offered on a competitive, sealed-bid basis with bids due Feb. 25.

“The assets in this pool are very much in line with what’s happening across the board for the CMBS loans that special servicers handle. If you look across the country, I also think it’s reflective of the fact that retail properties are probably defaulting at a bit faster rate than multifamily,” said James Gosse, director of loan sales in the company’s Atlanta office. The pool includes a mix of assets located in states that have been hit hard by the economic crisis.

“There is an interesting mix geographically speaking,” he said. “We’ve got about 20% in Michigan where there is serious pain related to the auto industry. There’s quite a bit in Ohio, but you don’t hear about that state as much. There are assets in Florida and Arizona. Texas and New York are some of the stronger states. Maryland and Connecticut would still be considered strong.”

The multifamily assets range in size from 50- to 500-unit multifamily apartment complexes in addition to occupied and cash-flowing retail centers.

Over the past 12 months, the pain in the retail sector has made headlines, which hasn’t been helped by consumers tightening their belts and being uncertain about what is around the corner.

“Multifamily properties are having trouble in many cities because the inventory got so built up. Some of that was condo inventory that has been turned back to multifamily and it kind of trickles down in a painful way,” said Mr. Gosse.

A few of the assets securing the loans and REO, include a regional mall of nearly 500,000 square feet with a loan balance at the time of the foreclosure sale representing approximately $53 per square foot of the net rentable area, and a 365-unit, garden-style multifamily property which is now in REO form.

Also up for bid is a 108,576-square-foot portion of a multitenant community retail center, a 256-unit garden-style multifamily property, a 92,540-square-foot multitenant community retail center and a 204-unit garden-style apartment property.

When Carlton started the sale it had seven REO properties. Now there are nine. “One of the interesting ones is a 471,000-square-foot enclosed mall in Texas. Mixed bag. We also have a 348-unit garden-style multifamily property in Texas that is REO and a three-building office complex in Florida,” he said.

“You will find a nice mix of smaller multitenant retail centers anywhere form 10,000 or 20,000 feet up to 100,0000.”

There is the potential for more properties to go REO. Buyers of these loans are generally underwriting the collateral. They are expecting to take possession and finish the foreclosure. “There is always the exception that someone will work something out with the borrower, but these guys are underwriting as if they own the real estate.”

In a sale like this, the buyers are broken down into two groups. The first is the national bidder that focuses on one asset type or a handful of types and one strategy. This might be a multifamily buyer who owns property across the country or a retail developer who knows and has relationships in a handful of markets and can aggressively underwrite these properties.

The other side of that are the local players. These buyers know all the service providers in a local market and know exactly how much it will cost to make a repair on the property. They have quick access to current up-to-date information from the local broker.

“Servicers are very organized and methodical in their process. Basically, they are experts in these nonperforming loans and resolution. They have teams of asset managers that are running these things down the path. Frankly, a sale of assets like this is just one of the tools at their disposal for resolving these loans.”

This type of sale is cost-efficient because it allows the servicer to create a competitive environment. Bidders are able to look at individual assets.“You get to have a lot of people focus on your assets. It’s a great way to organize it all and have everyone come and bid aggressively. We are seeing this happening in a more global fashion. Astute servicers are putting more and more pools out there like this.”

Winning bidders are often the aggressive national people with domain expertise or the local players who know the property. “They watched it get built. They know it from the inside out. What we are encouraged by is the local interest in each market. There is no shortage of money chasing distressed transactions,” he adds.

The bid-ask gap has been fairly wide over the last 18 to 24 months. Carlton sees that shrinking appreciatively with more deals closing. “People are feeling a little bit more bullish about the economy. They want to do business and are focused on closing transactions.”