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By all accounts, 2009 was supposed to be the Year of Distress. Yet the tsunami everyone anticipated was more of a drizzle. Why did nothing happen?

There was blood in the streets last year. More than 130 banks failed in 2009. Fundamentals, from effective rents to occupancy levels, declined to record lows. There were fewer sources of debt all around. A number of large multifamily owners—including Fairfield Residential, Babcock and Brown, and Bethany Holding Group—went under. And a wave of loan defaults had vulture funds salivating as they hunted for easy prey at wholesale discounts.

Yet, despite the fact that a new opportunity fund seemed to close every week in ’09, the pace of distressed acquisitions was slow, to say the least. Distressed sales only accounted for about 15 percent of the overall multifamily sales volume through November 2009, according to New York-based market research firm Real Capital Analytics (RCA). And while the volume of distressed apartments decreased in September due to increasing resolutions, it climbed again in October and November, reaching $27.9 billion in total, according to RCA.

While the pace of distressed acquisitions is expected to pick up in the coming years, “it won’t be the bloodbath that a lot of people expect,” says Linwood Thompson, managing director of Encino, Calif.-based Marcus & Millichap. “The amount of money being raised for distressed asset purchases is going to be a lot harder to place than most people think.”

Take Alliance Residential. From the start of 2008 to November 2009, the Phoenix-based company had underwritten more than $4 billion of potential distressed transactions—but only closed on $100 million. “The level of distress is certainly as much if not greater than we ever thought it would be,” says Jay Hiemenz, CFO of Alliance. “But the level of dispositions are not.”

Or how about Bainbridge Cos., an apartment owner with 8,188 units based in Wellington, Fla.? In early 2009, the firm announced that it had launched Bainbridge Distressed Property Services, which could, among other things, acquire distressed properties from owners and lenders. Bainbridge had commitments from a handful of institutional investors interested in a distressed platform but hadn’t done many deals. In recent months, the company has entered the home stretch on a few transactions. Still, none have closed. “On the deals that were really far down the road, we found during due diligence that there were a lot more structural type of problems on the older deals in great locations,” says Rick Giles, Bainbridge’s managing partner of acquisitions and dispositions.

The experiences of Alliance and Bainbridge were not uncommon in 2009. Most of the opportunity funds raised in 2008 and 2009 were expecting returns of around 25 percent. But as more buyers entered the market chasing the same few opportunities, those return expectations fell fast. And now, investors and fund managers are looking back and wondering if “wait and see” was the right approach or if they missed the time to strike.

Gridlock

Most industry observers headed into 2009 believing there would be terrific buying opportunities. “[They thought it would be] like during the RTC [Resolution Trust Corp.] days,” says Eric Bolton, CEO of Mid-America Apartment Communities, a Memphis, Tenn.-based REIT with 42,252 units. “So a lot of funds were put together and a lot of platforms were created to go out and buy these deals. I think we’ve all been a little bit surprised that we haven’t seen the level of deal flow that we would have liked to have seen.”

Others had the same experience. “We’ve tried [to buy distressed assets], and we’ve looked at a lot of REO loans and any other paper that’s been shopped,” says Robert Lee, senior vice president of JRK Birchmont Advisors, a company with 38,000 units in 26 states. “Frankly, we haven’t seen a lot of investment opportunities.”

A lot of hungry buyers and brokers point to the banks and, more specifically, their prolific extend-and-pretend policies, which seemingly delay the inevitable, as the culprit for this distressed logjam. “People are finding that lenders extend loans rather than recognize losses,” says Steve Bram, a co-founder and president of George Smith Partners, a Los Angeles-based lender. “The government and lenders did not feel pressured to pay off loans that were upside down or headed to foreclosure. So, they just allowed them to sit in limbo.”

When banks did put assets on the market, many bidders felt strongly that they were not at distressed pricing. “We’ve seen a lot of deals where the lenders will come out and test the market,” says Jerry Dunn, CEO of A10 Capital, a lender based in Boise, Idaho.

In many cases, it was the underlying loan being sold, not the asset itself, that was the culprit. “Right now, the banks and special servicers are inundated with problem situations—and note sales are the easiest way to dispose of assets,” says Dale Conder, COO and chief risk officer with A10 Capital.

The equity and mezzanine debt in these distressed deals also played a role in preventing their sales. “It’s so complicated to unwind these assets given equity,” says Lili F. Dunn, senior vice president of investments at AvalonBay Communities, a REIT with 50,114 units based in Alexandria, Va. “There are many complicated layers of equity and financing. You have to get consent from several investors that have conflicting investment objectives. It’s very difficult to get everybody to agree.”

With this sort of leeway, a lot of owners felt no rush to sell. “If the market isn’t liquid, most people hold tight,” says Chad Christensen, president and a co-founder of Cottonwood Capital, a Salt Lake City-based real estate investment and asset management company with approximately 6,000 units. “If the bank is not forcing them to panic, they’re not panicking.”

Buyer Beware

To a certain degree, stagnated buyers are right to accuse banks of dipping their toes into the sales market. But in some instances, the people who were looking to scoop up the distressed apartment buildings were just as culpable as the sellers and banks.

“Brokers say they have 30 or 40 offers on a single deal,” says Mike Kelly, president and co-founder of Greenwood Village, Colo.-based Caldera Asset Management, a turnaround management and restructuring consulting company specializing in multifamily loans. “That’s true. But if you boil it down, there are only a handful of guys who can and will step up and close those deals at those prices. A lot of people are putting offers out there to stay busy, get a feel for the market, and keep their bonuses going.”

Even if a buyer wanted to move, sometimes it’s challenging to get equity to follow in lockstep. A number of buyers report that they were in the final stretches of recent deals before their equity backed out. That, though, doesn’t surprise Pat Barber, president and CEO of Encore Enterprises, a Dallas-based commercial real estate firm with 436 units.

“You have investors with high expectations for equity,” Barber says. “Up until a few months ago, they didn’t really get comfortable with the deals. Now, with markets thawing out, there are more lenders. On our first couple of deals, we were lucky to have three, four, or five lenders. Now we’re getting anywhere from 15 to 20 lenders bidding on our business.”

But Barber admits that, upon closer inspection, he’ll continue to pass on some deals. That’s not surprising, considering a lot of the distressed properties hitting the market have been fractured condos or lower-grade apartment complexes with dozens of problems, such as deferred maintenance issues or a degraded renter roll. “You may be able to buy [a property] for $5,000 or $10,000 a unit, and it seems like a great deal, but maybe the buyer didn’t put money in it, or you have a ton of down units, including some with mold damage and things of that nature,” says Lee of JRK. “Those properties are 50 percent to 60 percent occupied, and they stay like that unless you invest a lot into it.”

When these assets do come out on the market, Barber says the pricing isn’t exactly distressed. And that leaves buyers still searching for the bargain-basement deals that they anticipated in early 2009. [For more on when distressed deal flow might ramp up, see “Hedging Their Bets.”]

“We’re seeing brokerage groups say if you can get to this number, you can do a preemptive buy,” Barber says. “But we’re just not finding that those numbers really work.” — Les Shaver and Jerry Ascierto

What Will the Money Do?

The offers—and cash—are out there, but that may cause problems for asset valuations and cap rates.

Over the past year, antsy investors have lined up to strike on what they believed would be an avalanche of distressed properties. And while the volume of distressed multifamily assets reported more than tripled from 2008 to 2009, the wave that was expected hasn’t materialized. And some industry executives wonder how investors will react.

“Some of these funds and some of this money were probably put out there based on buying opportunities that are not going to be as attractive as originally hoped,” says Eric Bolton, CEO of Mid-America Apartment Communities, a Memphis, Tenn.-based REIT with 42,252 units. “It’s going to be an interesting sort of scenario to watch unfold. Will they give the money back and fold up shop or will they proceed and deploy anyway based on very aggressive underwriting expectations and hope that they can get there? We’ll see.”

Some industry observers believe that these groups have shifted their focus to non-distressed apartments or, at least, properties that are being peddled by motivated sellers.

“There’s no product, so the money that is out there is chasing the very small amount of product in any class,” says Mike Kelly, president and co-founder of Greenwood Village, Colo.-based Caldera Asset Management, a turnaround management and restructuring consulting firm specializing in multifamily loans. “There’s no product in the system. If you look from the Class A to C product, there is very little coming through the system from the servicers or lenders. So whatever money is out there right now is chasing the same deals. It’s driving up prices, which is a false positive.”

Market watchers have seen this affect cap rates, too. Kelly thinks the phenomenon has pulled rates down 25 to 50 basis points in some markets.

Lili F. Dunn, senior vice president of investments at AvalonBay Communities, a REIT with 50,114 units based in Alexandria, Va., thinks cap rates have moved down 25 to 50 basis points in good markets. “We’re seeing an unusually high number of offers for well-located core and core-plus assets,” she says. — Les Shaver

Hedging Their Bets

Eager investors are eyeing the next three years with anticipation, but if they reach out to grab the falling knife at the wrong time, they may get cut. 

As the industry enters 2010, the question is: When will all of those distressed assets emerge from limbo? Better yet, when will the peak of opportunity (or the pit of despair, depending on your point of view) reach its zenith?

“You can’t time an absolute bottom, and people who try are going to miss the opportunities,” says Dan Fasulo, managing director of New York-based Real Capital Analytics. “We’re still in the early innings of the distress cycle—a lot of opportunity-focused investors will be disappointed.”

For the past year, several factors have kept the floodgates of distress closed—from the availability of capital from government institutions to the “extend-and-pretend” dynamic that has dominated lender activity. “The issue right now is one of valuation. There are a lot of properties that continue to cash flow, but if you value it today, there would be a substantial discount,” says Craig Butchenhart, president of Minneapolis-based Northmarq Capital. “As long as a property continues to cash flow, the lenders will extend a year or two and hope that things get better.”

But that practice is ending. Several investors believe that the peak of opportunity is right around the corner. It’s just a question of simple math, they say. Five-year, aggressively underwritten CMBS loans done at the height of the market—from 2005 to 2007—should come due starting in 2010. “The next three years are going to be great,” says Eric Silverman, managing director of Boston-based equity investor Eastham Capital, which is raising a $50 million opportunity fund. “The loans coming due in 2010 and 2011 will have difficulty refinancing and will have to re-trade.”

A Different Floodgate

Where will all of these maturing CMBS deals find refinancing capital? Fannie Mae and Freddie Mac obviously continue to be active lenders in the space, but they’re generally only doing 70 percent LTV loans on higher-quality deals. And regional banks aren’t big on nonrecourse long-term loans. “Ultimately, there isn’t enough regional bank capacity to bail those guys out,” says Mike Kelly, president and co-founder of Greenwood Village, Colo.-based Caldera Asset Management. “If you look at the maturity schedules, there’s only so much time that people can delay the inevitable.”

Indeed, these are boom times for special servicers. Like many of its brethren, CWCapital Asset Management has been inundated with business—its portfolio of assets grew from $3 billion a year ago to $11 billion now. The division hired more than 40 people in the first half of 2009, a nearly 50 percent increase in staff, mostly in the distressed debt and REO groups. “I haven’t seen any kind of financing source enter the market on a broad basis,” says Brian Hanson, managing director of Washington D.C.-based CWCapital.

But just as lenders are extending loans based on sunny projections, many special servicers are now opting to asset-manage their way through the downturn, trying to stabilize or increase the NOI of an REO and wait a couple of years before selling. “I don’t think the wave is coming. I don’t believe that the maturity defaults are nearly as scary as we thought six months ago,” says David Rifkind, principal and managing director of Los Angeles-based George Smith Partners. “If the fundamentals and underwriting are there, extensions are granted fairly easily. The headlines we saw six months ago about the maturity tsunami—that’s all bullshit.”

Rifkind’s firm offers a lender services group, which advises lenders on maximizing the value of their distressed assets. And based on what he’s seen, the majority of lender sales are going to be driven by measured strategic decisions, not the panic dumping that opportunity funds assumed would occur. The quality assets will generate serious bids at a pretty high level, he says.

Sandy Pockets

Not all markets are created equal, though. Caldera’s Kelly points to the large number of units that recently came online in some markets as further proof that a wave of distress is coming. Consider Phoenix, where builders delivered about 5,000 units in 2009, adding 2 percent to the existing stock. That doesn’t bode well for a market that ended 2009 with a vacancy rate above 12 percent, according to Encino, Calif.-based Marcus & Milli-chap. “From a global view, the supply-and-demand balance of the apartment market looks good,” Kelly says. “But it’s all about submarkets: You start going down from 30,000 feet, and it’s a different story.”

In hard-hit states such as Florida, there’s no denying that more distress deals will take place in 2010. More than half of the deals that NAI Tampa Bay has processed since the beginning of 2009 have been distressed, a trend they see increasing this year. “The servicing industry is so overwhelmed right now that we’re seeing a dramatic slowdown in the pace of transactions,” says T. Sean Lance, president of the Troubled Asset Optimization group of NAI Tampa Bay. “But the banks are starting to get comfortable with where some of the values lie, and they’ll start disposing. The drip might turn into a faster drip, but it’s not going to be the tidal wave everyone is talking about.”

Big Fish in a Small Pool

The size of deals currently at play has also changed. The vast majority of the distressed acquisitions closed in 2009 were smaller (less than $20 million), but larger deals emerged in the fourth quarter. For instance, Apartment Realty Advisors (ARA) marketed an ING portfolio of 10 assets located mostly in Texas and received more than 200 offers on it. The assets were mostly Class B- and C-quality. “We are seeing people coming off the sidelines who were quiet six months ago; there’s been a real change in the number of offers we get on transactions now,” says Debbie Corson, who heads ARA’s Distressed Asset Solution Group. “These larger guys with equity are really coming out of the woodwork.”

Opportunity funds that hoarded cash for much of 2009 are starting to realize that the discounts won’t be as jaw dropping as they once believed and are starting to engage the market. Addison, Texas-based Behringer Harvard has been the most active buyer, closing deals in the $80 million to $90 million range. Chicago-based Equity Residential has also been active, recently paying $100 million for a 326-unit property in Arlington, Va. These acquisitions signal that it’s not just older assets that are hitting the distress auction block—larger deals constructed in the past 10 years are also at play, many of which have solid occupancy rates.

NAI Tampa Bay marketed a Class A REO asset of less than 100 units recently and received several full-price offers. “Six months ago, it wouldn’t have been the case, but now, people are starting to realize they’re missing the boat,” Lance says. “They’re willing to pay a little premium now as opposed to having to compete for deals when prices go up.”

The 12-property Bethany portfolio deal in Phoenix attracted 50-plus offers, though deals of that size were few and far between at the end of 2009. “There are only a handful of deals out there that the entire buying community looked at, so it’s sort of an artificial feeding frenzy,” Kelly says. “There’s not a giant, deep bench of qualified buyers. You’ve got a couple of REITs and a handful of high-net worth guys who can close deals.” [For more on the competition today, see “Playing the Field” on page 46.]

The distressed assets Caldera sees generally fit into two categories. The majority are Class C assets, but on the flip side is a growing number of construction loans going south. “We know the quality assets are there; it just takes time for them to come through the snake,” Kelly says. “It’s like what happened in ’07 and ’08 when it took so long for single-family homes to roll through the foreclosure process.”

RTC Redux?

When the Great Recession began, many expected a second coming of the Resolution Trust Corp., the government program of the 1990s that sold off troubled properties after the Savings & Loan scandal. Back then, the pace of dispositions was swift and orderly. But this cycle won’t behave like the last one. Why? For one, the assets of 20 years ago were facing severely overbuilt markets. Throughout the 1980s, developers delivered about 4 percent of the existing apartment stock annually. But from 2000 to 2009, only 1 percent of existing stock came online annually, according to Marcus & Millichap.

Today’s culprit is unemployment. “This is not caused by overbuilding; it’s not a problem with the industry. As the economy strengthens, then the problems will go away rather quickly,” says Linwood Thompson, managing director of Marcus & Millichap.

Another major difference is the owners themselves: In the late ’80s, the industry was fragmented, with more smaller owners. Today, a larger percentage of units are owned by well-capitalized firms.

And the type of loans backing these properties is different today as well: 20 years ago, unwinding a balance-sheet loan was easy. CMBS-backed loans pose a more difficult knot to untangle. “It’s like taking a building down floor by floor,” Thompson says. “You’ve got a mezz lender, a CMBS loan with four stacks in it, some [of which] has been syndicated across 15 different investors. It’s more time consuming because nobody wants to get out of the way.”

Kicking the Can to 2012

By 2012, the multifamily sector should be in full recovery mode, but getting there is the hard part.

Most economists don’t see a return to significant job growth until the end of 2010. The 10-year Treasury rate is expected to rise in 2010, pushing up prices on fixed-rate debt. And rising concessions and vacancies will produce more negative NOI growth in most of 2010. “It’s going to be a slow, tough climb out of the recession,” Thompson says. “We’re still going to be bouncing around the bottom for another 12 to 18 months. But attitudes have already started to shift; people are less concerned about it getting substantially worse.”

Several factors complicate this forecast. Congress plans to debate the future of Fannie Mae and Freddie Mac in the spring, and any disruption in the flow of GSE funds could have serious ripple effects on the level of distress. “It’s a false sense of security that there’s an efficient market for multifamily,” Rifkind says. “How the GSEs operate going forward could upset the fragile efficiency of multifamily finance, which is holding the market together.”

One thing is certain: People are anxious on both sides of the coin—hungry investors on offense and struggling owners playing defense—to find a resolution. But when is anybody’s guess. — Jerry Ascierto

Stop the Bleeding

FDIC, IRS rules help industry ride out the storm.

The government has been busy. Last fall, the IRS announced a new rule allowing CMBS loans to be modified without massive tax implications. Around the same time, the FDIC clarified a rule that would allow banks to extend loans without requiring higher capital reserves. On the surface, the changes provide cover for assaulted owners, but finance experts say the impact of these rules is still unknown.

Both policies apply to performing loans that are hurt by either a weak local market or the lack of liquidity in the market. The FDIC’s policy clarification is also a signal that the government believes sunnier days are ahead and that waiting for the capital markets to pick up is a better bet than forcing foreclosures now.

“It was definitely a sigh of relief for the lending community,” says Dan Fasulo, managing director of New York-based Real Capital Analytics. “Just about every asset purchased over the last few years has broken loan-to-value (LTV) covenants, but it’s just a function of valuations falling.”

To some, the policy may prevent banks from originating more new loans. Like all lenders, banks recycle their cash: When loans get paid off, new loans are made with that capital. This FDIC policy, however, allows banks to tie up more of their capital into existing loans. “Their cash is just sitting there. The previous deals aren’t coming through the system, so banks don’t have the money to re-lend back into the system,” says Mike Kelly, president and co-founder of Greenwood Village, Colo.-based Caldera Asset Management.

The IRS’ new rule, meanwhile, allows servicers to modify and restructure securitized loans before they slip into default, all without incurring tax penalties. In the past, borrowers could only negotiate modifications once loans were transferred to a special servicer. But that was a catch-22: By waiting until default, it was already too late for a workout.

The rule doesn’t change how master servicers determine which loans can be modified, however. That information exists in contracts. “The servicing documents still rule,” says Brian Hanson, managing director of Washington, D.C.-based special servicer CWCapital Asset Management. “So it’s not an automatic wave into special servicing when [there are] issues.’” — Jerry Ascierto

Playing the Field

As the distressed landscape changes in coming years, more buyers—including the well-capitalized REITs—will be racing to close on the right deals.

Bill Shippen has done a lot of distressed deals in his career—and this cycle is no different. While he’s characterized the current sales environment as “vapor lock,” the principal of the Atlanta office of Chicago-based brokerage firm Apartment Realty Advisors (ARA) has completed five sales (roughly 600 units) and talked with countless bidders since the beginning of 2009. And things are starting to pick up.

“We are getting tons of offers on properties,” Shippen says. “We’re getting twice as many offers on properties that we’re listing than we got two years ago. We feel like there’s more equity chasing those deals than there has been in this cycle.”

And things could get even crazier if more distressed assets shake loose. “I think the competition will be intense once things start hitting the street,” says Robert E. Hart, CEO and president of KW Multifamily Management Group, a Beverly Hills, Calif.-based apartment owner with 10,000 units in the U.S. “There will be a few players to take it down. There’s a huge desire on the sidelines to get stuff.”

The people looking for these quality deals come in all shapes and sizes. But as more properties become distressed over the next few years, the composition of those buyers could change. And, if some of the early pioneers reap rewards with their purchases, they can expect a lot more competition as more distressed apartments hit the market.

The Current Bidders

If you have been selling apartment properties during the past five years, you may not recognize the people bidding on assets today. On distressed deals, Shippen says only about 50 percent of the current bidders were active in the last real estate cycle. The other half either hasn’t been bidding for deals in awhile or has stuck with retail and office investments.

“It’s a lot of new people. A lot of those people were players back in the early ’90s,” Shippen says. “They’re coming back in. They bought in 1992 to 1995, hung out, sold in 2001 and 2004, and have been sitting on the sidelines. Now they’re ready to do it again.”

The other new faces that Shippen sees come from the remaining commercial real estate sectors. They actually see more potential in multifamily distress than the battered retail and hospitality markets. “We’re seeing folks who have raised money for the office sector beginning to look at multifamily because they can get 65 percent to 70 percent financed,” says Al Pace, president and CEO of Pacific Property Co., a Palo Alto, Calif.-based apartment owner that’s purchased 16,770 apartment units since 1999. “You will see these distressed players move into multifamily because it has cash flow.”

In addition to being new to the multifamily sector, these groups also share a common thread—they’re private. “I think that there are a lot of private funds out there; it seems that everybody has got a joint venture these days,” says Eric Bolton, CEO of Mid-America Apartment Communities, a Memphis, Tenn.-based REIT with 42,252 units.

The reason for the private interest is easier to understand. High-net worth individuals don’t have to get an investment board to sign on their deals. They can take chances pursuing risky distressed deals. “Private capital and high-net worth individuals are the most active,” says Joe Leon, a partner at Hendricks & Partners, a broker based in Phoenix. “Family trusts and high-net worth buyers are nimble and can be more aggressive. That’s a big issue with a bank or a seller that’s motivated to get a transaction closed.”

The smaller, private buyers also have significant local market knowledge, which can make them more comfortable. “The buyers have typically been someone who is local, and they know what’s viable and what’s not,” says Dale Conder, COO and chief risk officer with A10 Capital, a lender based in Boise, Idaho.

These buyers may also be content with lower-grade deals in tougher neighborhoods, which is a lot of what’s coming on the market right now. “Every city has buyers that will buy more challenged deals with all cash,” says Mike Kelly, president and co-founder of Greenwood Village, Colo.-based Caldera Asset Management, a turnaround management and restructuring consulting company specializing in multifamily loans. “They know they can manage this rough clientele for x per door. That will be a local guy who has local management [expertise] and is not afraid of the submarket and economic risk.”

Competition on the Way

While the private buyers are often the first to bid on distress assets, many people predict they won’t be alone for much longer. “Generally, the private buyers are the first to buy and sell,” says Lili F. Dunn, senior vice president of investments at AvalonBay Communities, a REIT with 50,114 units based in Alexandria, Va. “They also represent the majority of the buyers. They usually have more of a tolerance for risk. They may be the first to buy and the first to sell. Until recently, most of the buyers have been small, private buyers or regional companies.”

Pat Barber, president and CEO of Encore Enterprises, a Dallas-based commercial real estate firm with 436 units, knows the institutions will eventually be players in the distressed (or, at least, discounted) space. That’s why he’s trying to make his move now.

“In the early stages, there’s always a lot of private money,” Barber says. “Then the institutional capital will come in when there’s a lot of money transacted on the private side.” [For more on Barber’s strategy, see “Barber’s Shop” at right.]

Dunn already sees this trend taking place, even if it’s not in the purely distressed space. “Now, many investors seem to be taking an entrepreneurial approach. Some were outside of real estate, such as foreign buyers looking for relatively stable investments,” she says. “Recently, we’ve seen REITs and other traditional buyers re-emerge into the market.”

So far, AvalonBay and Mid-America are among the few REITs to actually close deals this year. Avalon isn’t specifically looking for distress, but for value-added deals where it can improve fundamentals and NOI. Regardless, the consensus seems to be that these large firms will eventually get their pick of deals.

“I think the REITs will have advantages because they have better access to capital,” says Paula Poskon, a senior research analyst with Milwaukee-based wealth management and private equity firm Robert W. Baird. “If Mid-America decides to buy something in San Antonio, they have enough flexibility to go in with an all-cash offer, buy something, and refinance it later. If they came across a portfolio, they could do an equity offering, and it would be very well-received. Any REIT that thought they had a growth opportunity could tap into the public markets and it would be well-received.”

Others think REITs could be focused on bigger moves than just buying one-off deals. “We could see the acquisition of entire companies,” says Nicholas Michael Ingle, director of capital markets for Hendricks & Partners. “Developers get bought. There’s an opportunity for deal making, but people haven’t gotten their head around it yet. That’s where I would see the institutions get an upper hand on the private guys.”

But Ingle doesn’t expect all institutions to become suitors for distressed apartments or their notes. Right now, life companies and pension funds are more focused on selling. “They’re pretty scared and burnt from losing so much money over the past five years,” he says. — Les Shaver

Barber’s Shop

For a year, Pat Barber watched and learned. Now, he’s ready for a buying spree.

Pat Barber, president and CEO of Encore Enterprises, a Dallas-based real estate firm with 436 units, has been busy the past year. He’s looked at $2.2 billion worth of Class A property in various commercial sectors, about 25 percent of which was multifamily. In February, he plans to close his first deal—a 504-unit, 452,000-square-foot project in Dallas. Some people might think that’s a low success rate. But Barber says that’s all part of his plan.

“We wanted to watch before we started striking to make sure we wouldn’t leave money on the table,” Barber says. “During the first six months, we were monitoring, underwriting, and bidding. We wanted to find where the strike would be. We’ve used this year to get ourselves positioned. We were willing and ready to buy the asset but weren’t ready to stretch.”

Now, he wants to get serious. “We started recalibrating and then started making the final call for offers,” he says. “A few months ago, that’s when we decided it was a good time, and we needed to move in and become very active.”

So far, he’s bought two properties, including a 500-unit apartment in Dallas and a retail property in Cincinnati. He wants to buy more because he’s afraid institutional buyers will become active and begin muscling smaller players out of the market. “That’s why we’re transacting now,” he says. “We think that institutions will come in and change the market.”

Barber has also learned to be cognizant of what sellers want. In a distressed situation, they’d often like to off-load the asset as soon as possible, so they’d like earnest money up front and certainty of closing.

“We realized in getting these deals done that certainty of close goes a long way,” Barber says. “People are choosing us for the certainty. We’re willing to put significant dollars in to go hard quickly, close quickly, and give sellers confidence. We’ve found that this is a good way to obtain contracts on properties that fit within the criteria of what we would be looking for.” — Les Shaver

Seven Steps to Managing Maturities

With values dropping as much as 40 percent in some markets, owners are anxiously eying their maturing loans. Here is a step-by-step strategy to position yourself for relief, according to servicers, asset managers, and workout specialists.

Step 1: Know Your Options.

First, search for replacement financing. Refinancing capital is available, most notably from Fannie Mae, Freddie Mac, and the Federal Housing Administration, but local banks and even life insurance companies may offer decently-priced loans as well. Examine rates, loan-to-value (LTV) ratios, and amortization periods across all avenues to help you determine your best options.

Step 2: Map It Out.

Next, get a handle on your loan maturity schedule. Start by mapping out all of the loans that will mature in the next two years, and do some underwriting exercises on what that loan would look like if you refinanced at today’s rates and terms. “If you have any maturities due within the next 24 months, I would be underwriting what my options are now,” says David Rifkind, principal and managing director of Los Angeles-based George Smith Partners.

Step 3: Keep Up the Upkeep.

Keep the property well-maintained. Lenders are much less likely to work with a borrower if his/her property has significant deferred maintenance. And lenders are taking a much closer look at the state of the property—as well as the owner’s role—than ever before. And lenders know that a property’s appearance could mirror the borrower’s financial health. “We’re going to look carefully at how the property has been run, what role the borrower played in that, and what they’ve done to help or hinder the situation,” says Brian Hanson, managing director of Washington, D.C.-based special servicer CWCapital Asset Management.

Step 4: Start the Dialogue.

Conversations with your lender should start a year out from a loan’s maturity. “If you have maturing debt in 2010, and you haven’t [talked to] your lender, you’ve made a mistake,” says David Cardwell, vice president of capital markets at the Washington, D.C.-based National Multi Housing Council. Meanwhile, if your fundamentals deteriorate and you find yourself facing default, communicate early and often with your lender or servicer. Lenders want to see that you’ve done all you can to find a solution.

Step 5: Be Brutally Honest.

Face the hard realities confronting your properties and don’t sugarcoat the problems. While hoping against hope can lift your spirits, it could also sink your prospects of getting an amendment or extension. “Be frank and honest about what’s going on and your expectations,” says T. Sean Lance, president of the Troubled Asset Optimization group of NAI Tampa Bay. “By sticking your head in the sand, you’re delaying the inevitable.” What’s more, lenders look hard at a borrower’s financial strength in determining the best candidates for relief, so you’re not helping yourself by glossing over the negative aspects of your balance sheet.

Step 6: Have a Plan.

Don’t look to the lender to tell you what to do. “It’s a disaster to go to a special servicer and say, ‘What are my options?’” Rifkind says. “Make sure you map out a plan so that you can come up with a modification that [works].” Borrowers looking for relief must come to the table with a well-conceived plan for the property and the way forward. This is true for both balance sheet and CMBS loans.

Step 7: Renew Your Commitment.

Step up with an equity infusion, and servicers and lenders will be much more inclined to do a workout with you. “If we’re going to do a workout, we want there to be a renewed financial commitment,” Hanson says. That commitment can take many forms, from a paying-down-the-loan to requiring additional reserves. The same holds true for agency loans. Take Freddie Mac, which is extending maturities, providing market refi terms, and even lowering the balance of existing loans to help keep defaults down, says Daryl Hall, head of the multifamily asset management division of McLean, Va.-based Freddie Mac. — Jerry Ascierto

[15 BRIGHT IDEAS]

Buy distressed sellers, not distressed property.

Provide surety by co-investing with equity partners.

When working with a bank, figure out their motivation first. If they want to finance, the rates will be favorable.

Get repeat business from institutional sellers by providing certainty of execution.

Find a way to differentiate yourself from other buyers.

The faster you can close a deal (by the end of a quarter), the better your chances to nab the asset.

Avoid deferring maintenance at all costs. Banks don’t like seeing properties in duress.

Keep in mind that lenders find parting with higher-end deals less palpable, especially if they have to take a big haircut to make the trade.

Gain a bidding table advantage with all-cash transactions.

Move quickly on due diligence and closings.

Finance with the agencies, taking advantage of the positive leverage between cap and interest rates.

Look for distress deals where the FDIC is involved. — Les Shaver and Jerry Ascierto