EDITOR’S NOTE: Interested in Buying Distressed Loans?
- Apr 29, 2009
By Keat Foong, Executive Editor Some multifamily developers are contemplating the purchase of distressed loans. This can be a back-door way to acquiring the underlying real estate. Stuart Salins, senior managing director at HFF, says that the level of interest in purchasing mortgages, both distressed and performing, is firm. So far, the vast bulk of distressed loan sales have been by the FDIC, he reports. The FDIC loans for sale however, have been “a mixed bag,” incorporating all kinds of debt and not just real estate ones. As in the commercial real estate property market, a disconnect remains between seller expectation and market reality in the distressed loan market, says Salins. “The Tsunami on distressed loan sales is yet to come,” he says. But he notes that the expectation is for the volume of non-performing loans sales to increase dramatically. “A lot of players are still on the sidelines.” Salins recently brokered, together with HFF Associate Director Thomas Gerfin, the $31 million sale of four performing first mortgages backed by commercial real state including multifamily. The buyers were two institutional investors. Salins explains that buyers of performing debt—as opposed to distressed ones—are not developers but financial institutions, insurance companies and other institutional investors. Developers and other multifamily operators usually do not bid on such performing assets, he notes. There is a flight to quality in the performing loans market, and the investors are interested in buying well-performing, low-leverage loans, he notes. As far as non-performing loans, on the other hand, there are two kinds of bidders: the end users, ie. developers and operators who want to use the debt as a way to get to the property, and higher-yielding note buyers, says Salins. As to this second group, the players have the infrastructure to manage the property if it should get to that point. “But if not, they are happy with the yield.”When developers purchase distressed non-performing debt, if the borrowers default, the debt holder can maneuver through the legal process to acquire the property, explains Salins. That is the back-door way to the property. As the commercial real estate market sours, and/or highly leveraged property owners cannot meet their debt obligations, more mortgages may become delinquent. We’ll wait to see if more of such multifamily-backed debt come onto the investment sales market.