Working at Workouts: Commercial Real Estate Debt in Distress Case Solution
Since the financial system started weaken in 2007; the owners of the commercial assets faced the dilemma of growing the vacancies and lowering the rents. The strong link among the retail market and real estate leasing have contributed to the loan defaults. The economic crisis and severe settlement rules have also led to a drop in the rental income and sales, leading towards the credit delays. Drive Property Solutions was focused on overcoming the non-performing debt figures, which was caused by the default of borrowers. North-winds Community Crossing was listed in the defaulters, because of high volume of debt obligations and fewer receipts of rentals. From the year 2008 to 2010; the rate of vacancy in the real properties increased from 6.6% to 7%; whereas, the quoted rentals rates were reduced from 16.3% to 14.37%. Because of the strict immigration laws in Georgia and collapse in the construction industry; the tenants have greatly suffered from a reduction in their sales and profit returns. Among the option of foreclosure, receivership, discounted payoff and past due principle and interest; the most feasible and viable option is receivership because the core purpose of receivership, was to overcome the losses under the terms of borrower instead of the lender,which would help the company in handling the additional cost related to the debt as well as an effective management of the receipts of cash flow under the high-generated value.
Drive Property Solutions is one of the leading and valuable special servicing-firms is engaged in resolving distressed debt in commercial real estate debt. The proficiency and competency of the company in resolving the nonperforming commercial debt estate debt, stemmed from its expertise and knowledge in the receivership and foreclosure etc.
The case sets out to investigate the drawbacks of holding debt under the adverse conditions of economy and its impact on the maturity period. In the wake of the default’s event; the level of rentals was reduced because of the properties’ devaluation in 2008’s global crises. Drive Property Solutions was focused on overcoming the non-performing debt figures, which were being caused by the default of borrowers. North-winds Community Crossing was listed in the defaulters because of high volume of debt obligations and fewer receipts of rentals.
Burton Properties, LLC, was formed by Michael Burton in early 2003, in order to operate a convenience store in Atlanta. After spending four years in operating the store; Michael built the reasonable portfolio of same projects but with changed paths. Despite of the reason that he had no longer any interest in operating the retail outlet;he came to realize the value of the real estate holdings as the inflationary hedge for his retirement fund.
Additionally, some of the real estate-holdings were sold by Burton, with the help of Jonathan Stewart, and he used the proceeds in order to purchase North-winds Community Crossing, which he believed tended to generate steady cash-flows for the period of time-and required far less day-to-day management. Referring to the table 3 provided in the case; it can be seen that many properties in his company were underperforming. Furthermore, the table shows that Burton has 8409 dollars in credit card debt and 3301 dollars of cash in assets, providing a strong basis that he is not financially stable.
In 2010, a Chicago based special servicing firm – Drive Property Solutions-entered into partnership with Sniper Capital, for the purpose of winning the FDIC auction of the distressed debt. The defaulted mortgage note on North-winds Community Crossing was included in the auction, which was a retail strip in Georgia that was defaulted since November 2009. The asset manager at the company – Sam Schey, is concerned about deciding the ways of maximizing the recoveries from the nonperforming loan.
Reason for default
There were many economic, financing and other factors due to which the loan was in default. As the economy of the country started to weaken in the latter half of the year 2007; the rents had to be lowered by the commercial property owners in order to avoid the vacancies. From the year 2008 to 2010; the rate of vacancy in the real properties increased from 6.6% to 7%; whereas, the quoted-rentals rates were reduced from 16.3% to 14.37%.
In addition to this; the cash flows of the property seemed to be tied to the community’s success. Because of the sticker immigration laws in Georgia and collapse in construction industry; the tenants have greatly suffered a reduction in their sales and profit returns. As a result of which, Michael Burton allowed his tenants to pay far less as compared to their contracted rents. This in turn led to being unable to meet the obligations his loan due to which the loan defaulted.
Furthermore, the initial construction cost was the considerable problem which required enormous amount of money through debt. Thus most of the high debt properties were defaulted with the expected event, because of the over payment of debt in higher rate of interest. Despite the fact that the loan was being secured by Burton and was based on successful real estate venture in prior years as well as his strong relationship with the Colonial National Bank; the loan underwriting agreement was loose, which led to the default. Furthermore, another reason of the default was the relationship between the property rentals and retail market. The strict rules of immigration and the decline in the economy have contributed to the decline in rental income and tenancy sales, which in turn led to the default.
Benefits and Costs:
Drive Property Solutions could use the power of having rights of foreclosing the property and taking the ownership, which in turn would allow the company to take ownership of less than two months. Additionally, the viable option is the appointment of receivership, which is executable within the matters of days, following the filing. At the time of issuance of loan with recourse;there is supposed to be an additional value to the company hidden among other assets of Burton and Schey was not agreed in ruling out that option either.
In Georgia, the judge has the power or right to appoint the choice receiver. There is no guarantee about who would get the appointment. This is considered the wild card situation. The local judge is accountable to register the expert property manager, but can also appoint the Friends of the Court who could be combative, incompetent as well as having an adverse impact on the performance of the property…………………
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