Commercial Real Estate Finance

When a property requires additional investment, but is not worth the debt to which it is already tied, a lender with an appetite for assets and patient money stands to gain significantly.

These days, some of the best deals in the commercial real estate world can be found in the shower of recent foreclosures. Multifamily, retail, and hotel properties are sometimes available for pennies on the dollar as a result of poorly timed, over-leveraged financing from their original acquisition. Thanks to the high potential for default, those who provided the original debt for the property are the ones who stand to gain the most.

This begs the question: Is the economic climate of 2012 just right for predatory hard money lenders?

Unlike banks, private equity firms like the ever-hungry Blackstone (BX) don’t always see a downside in foreclosure; they can often find long-term value in the underlying collateral of their note. I’d be the first one in line at the foreclosure proceedings if there was a possibility of picking up a property like the JW Marriot Summerlin Hotel–which Galante Holdings, Inc. stands to gain as a result of a $160 million loan default.

As a junior lender, Galante Holdings tried to buy the loan for $84.5 million as an equity participant, which would have positioned them pretty comfortably in the 548-room JW Marriott (which was appraised at$98.4 million). Not surprisingly, the senior lender is fighting Galente Holdings in an attempt to protect the value of its own investment.

Situations where lenders’ senior position enables them to stake a claim in–or take back–mismanaged or poorly leveraged assets may allow for a huge discount in the marketplace. Senior lenders can pick up commercial real estate for a fraction of the initial cost when the property and/or business is perceived as underwater.

Historically, most lenders have acted more passively, interested in stopping the bleeding of capital rather than in ownership of a property. It’s likely that lenders with such a mindset will face even steeper losses, as when Taubman Centers, Inc. (TCO) returned The Pier Shops in Atlantic City, NJ in a foreclosure sale.

But lenders must evolve to survive in 2012, which means recognizing a well-positioned asset in a growth market. Consider the W Hotel and Condos in downtown Atlanta, which were taken back by their senior lender in 2010. In 2011, we saw many similar cases, with properties like the M Resort, the Palms, and the Hard Rock Casino returned to their senior debt-holders.

As margins get tighter and the future remains unclear, I think we’ll see more lenders eyeing the properties themselves as the potential payoff.

#CRE #finance

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