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Commercial Real Estate Debt in Distress – Tony Case Solution & Answer

Commercial Real Estate Debt in Distress – Tony Case Solution

EXECUTIVE SUMMARY

Schey was new in the commercial asset organization and before this, he was working in a commercial bank. At the bank, he was responsible for monitoring the regulatory policies and then pursued an MBA to-learn new skills and grow in his profession. He started learning more in the field of finance and real estate. The financial system weakened in 2007, and the head of the commercial asset faced the dilemma of lowering the rent and increasing the vacancies. The study discusses the effects of holding debts in the year 2007 and its outcomes at the time of maturity. Rentals decreased in the period of 2007-2008, because of the property devaluation.(SINGH, 2020).

Drive property solutions wanted to overcome the non-performing debt values that were occurring due borrowers’ default. The company was trying different techniques to find the importance of the debts and wanted to make any good return through the discounted value of the debt obligations. North winds Community Crossing was also in default because of its debt obligations and low rentals alongside the higher value of the interest in the year. The rate of vacancy increased from 6.60% to 7.00% and the rental rates reduced from 16.30% to 14.37%, from the period of 2008-2010. Tenants also incurred losses in their financials, because of lower sales in that time and due to this; the profit return was also very low. From the option of discounted payoff, foreclosure, interest, receivership and past-due principle; the best option was receivership. Its purpose is to find ways to overcome the losses by considering the requirement of the borrower instead of the lender. And the changes that happened instantly decreased the default and it also reduced the amount that was written in the agreement. An important borrower of NWCC was Burton’s property, and the loss was incurred by the business because of the lack of focus of the owner (INVESTOPEDIA, 2020).

BACKGROUND

Drive Property Solutions is engaged in resolving the distressed debt in commercial real estate debt. The study was conducted in order to find out the possible solutions for the ongoing issues.There were negative effects of holding the debts at that time when the economy had overall declined due to the global crisis occurred in 2008, which is also known the great financial crisis (KENTON, 2020). The financial crisis occurred in 2008 and it lasted for a year, coming to an end in 2009. Jobs and the prices of homes remained depressed after the recession. It was a long crisis that had lasted scaring effects over the economy, which existed even after the recession ended. In early 2003, Burton Properties, LLC, was formed by Michael Burton for operating a store in Atlanta. He worked in  this store in 4 hours after which he made a portfolio of the same project by using another way. He was taking these steps because he was no more interested in operating a retail outlet. Then he realized the importance of holding a real estate.

Investors were finding ways for maximizing their financial recovery. Commercial property was the best asset, investors looked for unique services in order to maximize their recoveries. Drive Property Solutions were providing important services in downtown Chicago. The primary function of the company was to resolve the distressed debt in the commercial real estate. Drive property solution had proficiency in resolving the nonperforming commercial real estate debts stemmed from the technical knowledge and giving an idea of foreclosure and receivership’s. (NGUYEN, 2019). There were many properties available in the organization which were underperforming, And Burton had $8409 in his credit card debt alongside $3301 cash as assets. These statistics translated the instability of his financial health and it was obvious that  he was not financially stable at that time period.

PROBLEM STATEMENT

Drive property solution is a Chicago based special servicing firm. In 2010 this company signed a partnership with Spinar Capital for winning the FDIC auction for the distressed debt,but the Global crisis had hit the economy and everything was getting worse, and then real estate as well as several other business were suffering from massive losses. North winds Community Crossing was a retail strip in Georgia which got defaulted in 2009. Sam Schey was the asset manager of the company and he had the responsibility of finding the best ways for the recovery of the financial loss incurrences.

ANALYSIS

Quantitative Analysis

The economy had started to lose its financial stability from the mid of 2007 because of the global crisis and the owners of the commercial property wanted to reduce the rents. The vacancy started to increase; whereas the rentals were getting declined in the period of 2008-2010. The rate of vacancy reached to 6.60% to 7.00%, and rentals were 16.30% to 14.37%. The cash flows of the property felt to be tied to the success of the community. Tenants were devastatingly affected bythe financial losses and reduction in their sales, adding much to their sorrows was a decline in the profit returns. After witnessing such destruction by the economic crises; Michael Burton gave some relaxation to the tenants because he had realized that the tenants were not able to pay the full amount of the rents,considering which he behaved politely with them & allowed them to pay lower rent. And this was the basic reason for the loan default, because people were not able to fulfill the obligations of their own loans.

High debt properties were defaulted and the reason behind this default was the higher interest rate and the over payment. Burton had secured the loans based on real estate venture in prior years as well as his strong relationship with the Colonial National Bank.However, the loan underwriting agreement was loose, which led to the default. Another big reason for default were the retail market and the property rentals, as their relationship turned out to be harmful to the economy. Rules of immigration and the financial crisis had caused a significant decline in the rental returns, which has caused further decline in the tenancy sales, serving as one more cause to the default. (CHEN, 2020)…………………..

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