Distressed Situations Could be Widespread in Multifamily, Says Consultant

By Keat Foong, Executive Editor Greenwood Village, Co.—Distressed properties will become more widespread in the next three to five years, says the founder of a consulting firm that was recently launched to specialize in resolving such assets. Caldera Asset Management, based in Colorado and Atlanta, has teamed with RAM Partners, an Accredited Management Organization, to…

By Keat Foong, Executive Editor Greenwood Village, Co.—Distressed properties will become more widespread in the next three to five years, says the founder of a consulting firm that was recently launched to specialize in resolving such assets. Caldera Asset Management, based in Colorado and Atlanta, has teamed with RAM Partners, an Accredited Management Organization, to provide lenders, equity investors, lawyers and other entities with services to solve distressed multifamily asset issues. “There is about $18 billion worth of apartments under some stage of distress now,” says Michael Kelly, president and co-founder of Caldera Asset Management. “In the next two years, this number could be substantially higher as loans come due.” Kelly says distressed situations could arise today as a result of two situations. Properties with loans maturing cannot obtain the refinancing that they need. Or, the properties could have been purchased as value-added plays in the mid-2000s at the height of the market based on aggressive assumptions of higher income that have not materialized. These properties now have difficulty meeting their debt obligations. Kelly advises that in many cases, it will not help for the investors or owners to “push the issue to another day” as the downturn could be in the “early part of the curve.” In some situations, he says, it is better to sell and take the losses because certain submarkets will continue to see declining rent rolls.“We recommend to our clients, ‘Get ahead of the curve.’ Address the problem aggressively versus sitting back and hoping for the best,” he says. Kelly says a lot of the value-added players at the height of the market were short-term equity investors who do not have the deep pockets in the event the properties meet cash shortfalls. “There are many entities that cannot survive the issues in the market for the next few years,” he comments. “When rents were not growing, they were undercapitalized. Now, with falling rents, they are even more undercapitalized.” He also noted that many limited partners may have concerns about the motivations of the general partner now that the GP’s ownership in the partnerships has evaporated with the fall in value. Most GPs will stay in the deal to manage the property, but Kelly asks whether they will give the properties the attention they need from the point of view of preserving value.  Kelly says that a lot of REITs, pension funds as well as private players are affected by distressed properties as they backed a lot of the value-add funds that invested in the properties in past years. 

You May Also Like