WORKOUT STRATEGIES FOR DISTRESSED PROPERTIES
by
DEAN SPERANTSAS
C.
FINANCE, ECONOMICS; GEORGETOWN UNIVERSITY
WASHINGTON, D.C.
(1982)
B.S.,
Submitted to the Department of
Urban Studies and Planning
in partial fulfillment of
the requirements for the Degree of
Master of Science in Real Estate Development
at the
Center for Real Estate Development
Massachusetts Institute of Technology
September 1987
@
-
C. Dean Sperantsas -1987
The author hereby grants /to MIT
permission to reproduce and to distribute copies
thesis document in whq'le or/ in part
of this
Signature of the author
C.'Dean Sperantsas
Department of Urban Studies and Planning
July 31, 1987
Certified by
Lawrence S. Bacow
Associate Professor, Urban Studies and Planning
Thesis Supervisor
Accepted by
Michael Wheeler
Chairman
Interdepartmental Degree Progam - Real Estate Development
PAGE 1
RotCN
TABLE OF CONTENTS
PAGE
Abstract....................................................3
Acknowledgements............................................4
Chapter One: The Forces Which Created One of the Largest
Peacetime Losses of Capital in U.S. History..................5
Chapter Two:
Typology of Problems Facing Distressed
Properties.................................................21
Chapter Three: Principles of Restructuring Financing for
Distressed Properties......................................33
Chapter Four:
Principles of Marketing Distressed
Properties.................................................52
Chapter Five: Summary and Conclusion........................ 70
Bibliography...............................................74
Biographical Note..........................................78
PAGE 2
WORKOUT STRATEGIES FOR DISTRESSED PROPERTIES
by
C. Dean Sperantsas
Submitted to the School of Urban Studies and Planning
on July 31, 1987
in partial fulfillment of the requirements for the degree of
Master of Science in Real Estate Development
ABSTRACT
This thesis attempts to answer the question of
salvage distressed real estate properties?"
"How
to
the
conclusions:
arrives at the following
The thesis
the
to
traced
be
existence of distressed property loans can
development
estate
real
the
of
historical cyclicality
of highly-liquid, undermanaged and
industry; the entry
newly-deregulated financial institutions into the real estate
development industry; the artificial stimulus to investment
provided by the tax laws; and macroeconomic changes.
The problems faced by distressed properties are caused by a
lack of market demand due to forseeable circumstances such as
unsophisticated market analysis or inattention to demand, and
unforseeable changes in demand during the development period.
Alternatively, property distress may result from financial,
marketing or property management factors.
Financial restructuring of properties must secure adequate
time and money for a turnaround. Time is required for the
property to be absorbed by the market, to be renovated or
repositioned. Money buys time. The equity investor wields
property
distressed
power in
negotiating
significant
acquisition and refinancing due to his willingness to accept
risk. In exchange for investment of equity funds, the lender
may provide forbearances. Specialized mortgage instruments
such as the cash flow mortgage can be structured to suit the
particular needs of the distressed property.
Marketing strategies for distressed properties rely heavily
upon product repositioning; competitive pricing and broker
Property management works in tandem with the
relations.
marketing strategy in maintaining cash flow during the
recovery period and securing new tenants.
Thesis supervisor: Lawrence S. Bacow
Title: Associate Professor
Urban Studies and Planning
PAGE 3
ACKNOWLEDGEMENTS
Interviews were crucial to the completion of this thesis.
forthright
the
benefited from counsel and
The author
information provided by over 40 industry experts across the
While several of those interviewed will, at
United States.
their own request, remain anonymous, the author would like to
thank all those individuals who gave of their time and effort
to explore the under-researched area of workout properties.
like to thank Professor
The author would particularly
Lawrence Bacow, the thesis advisor. As a thesis workout
inception to
from
guided this project
specialist, he
completion.
PAGE 4
CHAPTER ONE
:
THE FORCES WHICH CREATED ONE
OF CAPITAL IN U.S.
OF THE LARGEST PEACETIME LOSSES
HISTORY
Why are real estate markets
with
vacant real
states,
estate
from Florida
shopping
The
projects of
to
report an oversupply of
every
California and
kind?
Why
Alaska to
do
Hawaii,
apartments, office buildings, retail
plazas, hotels
reasons are
across the United States replete
complex
and many
other types
and indicative
changes to which real estate
of the
of property?
tremendous
and real estate capital markets
have been subjected in recent years.
The scale of losses attributable to distressed real estate is
illustrated by the frailty of
a major source
The
of capital
Federal Savings
FSLIC") is on
negative net
and
the savings and loan industry,
for the real
Loan
Insurance Corporation
the verge of bankruptcy [1].
worth of $6
estate development.
("the
The
FSLIC has a
billion and loses $10
million per
PAGE 5
day.
Proposals for a recapitalization
of between $5 and $15
billion are currently before the Congress [2].
assumed control
of 44 savings
exceeding $49 billion
are
(3].
that savings
infusions
and loans
during
and loans, with
More than 450
technically insolvent.
Some industry
may require
coming years,
banks and savings
$10 billion
in real estate-related
total assets
savings and loans
experts estimate
$25 billion
in
Since 1982,
order
suffered from
ill-fated loans to the
traceable to real
(4].
reported over
losses (5].
problems are
in capital
to survive
and loans have
lender's loan
sectors.
The FSLIC has
Not
all of
estate.
Many
energy and agriculture
Yet, the total amount of non-performing, reposessed
or delinquent real estate loans
held by commercial banks and
savings and loans as of March 1986 exceeded $60 billion [6].
The
upheaval in
real
estate
can be
reasons: the historically cyclical
traced
to four
main
nature of the real estate
development industry;
the over-supply of capital
quality of management
expertise at newly-deregulated lending
institutions;
availability
property;
the
of tax
and
stimulus
to investment
deductions
economic
shifts,
for the
on
both
and uneven
offered
by
ownership of
a
regional
macroeconomic level.
Cyclical Nature of the Real Estate Development Industry
PAGE 6
the
real
and
The real estate industry has historically been plagued with a
real estate
United States
The
mentality.
and bust"
"boom
the world where the majority of
market is the only market in
building takes place in anticipation of future demand, rather
existing demand.
to fulfill
than
initiate
to
tend
more
demand
Circumstances
such
significantly during
often
to
referred
to
these lead
than
consumers
This
times
completion.
change
can
supply
phenomenon is
effect.
the "pipeline"
offer
to
project
times.
For
tend
long "lead"
feature
competitive
as
as
market
and
initiation
project
between
on the
space
to
of certain
Supply
developers
price,
Projects tend
[7].
regard
more price-elastic than demand.
in
change
proportionately
They
insufficient
with
projects
types of real estate is
a
estate.
of real
potential new projects.
competition from
a given
to a
certain type
for a
perceived demand
Developers respond
For
these
reasons, supply of real estate can exceed demand.
The result
of real
estate can
is
"overbuilt" markets.
take months, or
Excess supply
significant carrying costs on
absorbed,
developers
and
a market, imposing
years, to be absorbed by
vacancy rates
inititate new
owners.
go
down
projects.
As space is gradually
The
cycle of
attempting to return to equilibrium begins anew.
is an industry in continuous disequilibrum.
PAGE 7
increase,
and rents
[8]
markets
Real estate
WORKOUTS BY PROPERTY TYPE
FEDERAL ASSET DISPOSITION ASSOCIATION
$1,330,000
(152)
$1,200.000
$1,100,000
$1,C00,000
bi
-J
6).
4~O
I0
I-
$900,000
$800,000
$700,000
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
APTS FESID LAND OFFICE HOTEL INDUST RETAIL MXD OTHER
TYPE OF PROPERTY (NUMBER OF PROPERTIES)
Source:
as
of
Federal Asset
July
10,
Disposition Association,
1987.
Data
are
for
with a
those loans
"Participation Loans",
which
million
$2
of
amount
minimum prinicipal
the
in
or
receivership
in
institution
an
involve
ProgramSome
Consignment
Management
govenment's
to
attributable
be
may
loans
workout
lending
the
by
encountered
difficulties
institution rather than by the real estate.
single family homes,
"Residential" includes
condominiums, and Planned Unit Developments.
"Land" includes both improved and unimproved
land. "Office" includes rental office space and
includes
"Hotels"
condominiums.
office
shares and
space, time
conventional hotel
restaurants.
PAGE 8
DISTRIBJT1ON OF PROPERTIES BY STATE
rADA-JJLY 10, 1ES7
CAurON4 (1&7%)
oRm
(14.EX)
AMZNA (1.2)
TeNESSEE (2.S)
AJstG (2.0%)
FLoRDA (7A)
GE'RGA (4.3M)
(s.s
Oi1mAJ-CMA
,Sig&?~
TEAs
(31.1%)
PAGE 9
(11.4%)
LFCUuMA
Savings
and
Loan
Managers
Venture
into
Real
Estate
Development
cycles.
depositor's
the
Q") limited
savings and
of
measure
Federal government intervention
industry.
discipline to the
a
provided
system
financial
The
("Regulation
moved in seven-year
the real estate industry
Prior to 1980,
on
interest payable
rate of
loan accounts.
As interest
rates
rose, depositors withdrew their funds to place them in other,
higher-yielding financial
instruments ("disintermediation").
Disintermediation reduced funds
this
happened, lenders'
conservative.
The
available for lending.
underwriting
resulting
reduction in
credit would limit new development.
to
a reduction
pattern
has
in the
supply
Monetary Control
institutions
supply
of
by
space [9].
This
the deregulation
of
(Depository Institutions Deregulation
financial institutions
and
the
more
Reduced development lead
of excess
altered
been forever
criteria became
When
Act,
of every
"DIDMCA",
of 1980).
type (commercial
Financial
banks, savings
and
loan associations, insurance companies and pension funds) now
compete
savings.
for
difference
between their
income, (the
rise,
they
"spread").
must
earn
These institutions
operate
funds and
cost of
As the institutions'
higher
yields
PAGE 10
on
on
the
their interest
cost of funds
their
capital.
Frequently,
institutions
projects in
order to
investors
become equity
have
satisy their
need for
in
higher yields.
Thus, deregulation contributed to a flood of capital into the
1980's, particularly into
industry in the early
real estate
As new capital competed for
the development of new property.
development projects in which
real estate
to invest, supply
of space inevitably outstripped demand.
One
of
the
more
notable
effects
unprecedented influx of capital
from
the savings
and loan
nation's housing
DIDMCA
was
the
into real estate development
industry ("thrifts")
traditional expertise of thrifts lay
the
of
production
[10].
The
in the the financing of
and
ownership.
Prior
to
1980, regulation and tax incentives combined to keep the vast
majority of
With the
thrift
the lucrative,
Thrifts
enjoyed
commercial banks due
conversion
corporations.
increasing
of
a
but risky,
competitive
to their ability to
requiring a downpayment.
the
residential mortgages.
elimination of these incentives,
ventured into
arena.
assets (loans) in
savings and loans
commercial lending
advantage
against
make loans without
Moreover, federal policy encouraged
mutual
This conversion
thrifts' capital.
savings
had
It
the
also
banks
into
stock
desired effect
had the
of
unintended
effect of massively increasing liquidity, because each dollar
of thrift capital could be leveraged into $30 of assets [11].
Additional
liquidity emanated
from the
PAGE 11
development of
the
Mortgage-backed securities allowed
mortgage-backed security.
their
existing
the
secondary
mortgages onto
single-family
of
portfolios
liquidate
to
opportunity
the
thrifts
market, thus making reserves available with which to fund new
in
aggressive
more
thrifts became
result,
a
As
loans.
pursuing deposits and lending to commercial projects [11).
from residential to commercial
Unfortunately, the transition
a concomitant increase in the
lending was not accompanied by
supply
of managerial
thrift
of
thousands
Managerial staff
institutions
fees generated by loan production.
for
the
country.
on the
basis of
across
be compensated
tended to
commercial
virtually overnight
occurred
The transition
lending.
expertise in
with
talent
Earnings and stock prices
of financial institutions were determined by their ability to
secure fees
from loan
commmitments.
observable measure of performance,
is much
more difficult
Further
exacerbating
While fees
provide an
the quality of loans made
for outside investors
was
the situation
the
to determine.
lack of
real
incentives on the part of depositors to contol the managerial
excesses
of
FSLIC-insured
highest yields
associations
Lenders
thrifts.
deposits allowed
without regard
negotiated
evaluated
tending to be
lack of
The
depositors to
to safety.
equity
properties
associated
risk
more willing to invest
PAGE 12
Savings
interests
with
an
seek out
in
ownership
with
the
and loan
projects.
mindset,
depositors' savings in
Management made decisions to commit funds to
risky projects.
often ill-conceived projects, with predictable results [12].
a source of reassurance for
When thrift managers reached for
decisions, in the sea
their ill-fated
of commercial lending
uncertainty, the appraisal industry was often there.
as
25%
of the
federally
3,200
As many
loan
and
insured savings
associations suffered from faulty appraisals between 1983 and
1985 [13].
The appraisal
industry tolerated imprecise rules
governing the valuation of
competency level
out
of the
as "appraisers".
proposed projects and the varying
many thousands who
Cases
fraudulent appraisals lead to
involving
hold themselves
the preparation
of
a further erosion in appraisal
industry credibility.
Economic Recovery and Tax Act
The
Internal
Code
Revenue
non-economic stimulus
(ERTA)
has
to real
of 1981
historically
estate investment.
effectively subsidized financial returns
permitting
used
paper losses
to shelter
benefits
payments
were
made
ordinary
created
on
provided
from real
through
non-recourse
The code
from real estate by
estate investment
income from
other sources.
deductions
real
a
for
property
to be
Tax
interest
loans,
accelerated depreciation of buildings, and income tax credits
for investment
in certain
types of property.
PAGE 13
This subsidy
made many otherwise-marginal development projects attractive.
rules, another stimulus was added
As investors exploited the
for supply to outpace demand (14].
Sponsors of
exploit the increased tax
syndicators") quickly organized to
benefits
offered
by
ERTA
to over
$10 billion
the limited
would acquire a property
limited
subsidy, the
prices for
tax
estate
real
The
most popular
benefits from ownership of real
allows complete
to the partners.
The syndicator
and distribute the benefits through
partnership
vehicle.
syndicator was
With the
able to offer
real property.
benefits and
[15].
partnership, which
passthrough of tax benefits
the
The
$1.5 billion in placements in
in 1984
vehicle for distributing tax
property is
1981.
in
syndication industry grew from
1979
("real estate
limited partnerships
real estate
marginal, on a
driven by
the ability
this
eyed these
which might
pre-tax basis.
to sell the
of
often unheard-of
Builders and lenders
initiated projects
have been
use
The
otherwise
market became
product rather
than the
user's demand for occupancy.
Macroeconomic and Regional Shifts
Real estate has been affected
to
forsee,
economies.
in both
Inflation,
the
by changes that were difficult
macro
economy and
which had
PAGE 14
ravaged the
some
regional
United States
economy during recent years, was being treated as a permanent
element of
that
the U.S.
economy.
inflation would
In
continue.
expectation was
net terms,
real estate
The benefit
benefit from unanticipated inflation.
tends to
Many real estate executives reasoned
the value of property.
the value of their
that increases in
unabated,
along with
inflation.
estate loans would be supported
values.
which increase
to increases in rents
estate is due
to real
The general
Moreover, future
property would proceed
They
reasoned that
real
by increasing rents and high
principal
and interest
payments
would be made in less-expensive, inflation-ravaged dollars.
As
supply expanded,
Certain
demand
regions have
nationally
actually experienced
reduction in demand for real estate.
for space was most prevalent
gas
or
suffering
economies.
from
The
economic
office sector
assembly-oriented
shift.
for office
The
deflation and
a
The reduction in demand
downturns
in
undiversified
benefited from a
manufacturing
plants
early 1980's.
space has
unforseen
quickly.
in regions dependent on oil and
buildings in the 1970's and
demand
grew less
reflected a
reduction in
rapid shift
to
office
Reduced growth in
slowdown in
demand
left
this
projects
wanting for tenants.
The number
were it not
of distressed
properties would be
for a reduction in nominal
PAGE 15
much greater,
interest rates.
The
gone from
rate has
prime lending
percent in
of 21
a peak
January of 1981 to 8.25 percent in July of 1987 [16].
Summary
The multi-billion dollar loss of capital facing United States
lending
institutions
was
brought about
cyclicality of
the U.S. real
highly-liquid,
undermanaged
industry;
the
incentives;
who
assumption
losses.
the
is that
Banks and
a small
insolvency.
real
to
loans
investment
shifts.
price?
the
and
financial
entry of
into
the
by
tax
offered
As
supply of
are unable to
The
historial
dangerously
real
pay their
simplistic
institutions absorb
all
It is society which ultimately pays for massive loan
losses.
only
savings
demand and projects
pays
the
estate industry; the
and macro-economic
estate exceeds
debts,
stimulus
by
fraction
Insolvency
resulting
creates
absorb losses
of their
assets
in the
in
hands of
large,
burdens
ongoing
and
depositors, investors and employees.
PAGE 16
risks
representing
before they
banks and thrifts leave
Insolvent
estate projects
agencies,
thrifts can
reach
their failed
government insurance
taxpayer
for
subsidy.
thousands
of
to exercise
projects also tends
of real estate
The failure
downward pressure on property values in the localities of the
stigma
to the
in an area lends a
An unsuccessful project
failed projects.
neighborhood.
The failed
project can
also
taint the market for similar properties.
strategies for salvaging distressed
This thesis will explore
properties.
with
The
industry
immediate
typology
developed.
salvaging
experts
cause
of
methodology followed
of
to
particular
determine
the
properties.
A
is
distressed
properties
thesis describes
a range of
strategies for
financial,
marketing
properties
how
attempt
interviews
affecting
property management
determine
an
failure of
problems
The
in
includes
employing
Case histories are
skills.
distressed
properties are
and
analysed to
created
and
how
stategies can be implemented.
For the reader's
convenience, the male pronoun
will be used
throughout the thesis to indicate both male and female gender
PAGE 17
of the subject.
investor in
to
not have
The thesis adopts the perspective of the new
distressed properties.
been
instrumental in
distressed property.
related
to
the
case
The investor
the
is assumed
development of
the
The names of the participants and facts
studies
have
requested by those involved.
PAGE 18
been
changed,
where
FOOTNOTES TO CHAPTER ONE
[1) "How the White House Lost Its Big Bank Battle", The New
York Times, July 12, 1987
[2] "How the White House Lost Its Big Bank Battle", The New
York Times, July 12, 1987
[3] "The Wright Man to See", Newsweek, June 29 1987
[4] "The Wright Man to See", Newsweek, June 29 1987
[5]"Empty Buildings: Severe Deflation Hits Commercial
Properties in Many Areas of the United States", Wall Street
Journal, September 4, 1986
[6]"Empty Buildings: Severe Deflation Hits Commercial
Properties in Many Areas of the United States", Wall Street
Journal, September 4, 1986
[7] "Market Analysis for Real Estate (Lecture Notes)",
graduate level course offered by Professor William Wheaton,
Center for Real Estate Development, M.I.T.
[8] "Real Estate Market Outlook", Lecture delivered by John
McMahan, McMahan Associates, San Francisco, California,
Center for Real Estate Development, M.I.T.
[9] "The Return of the Grave Dancer", Samuel Zell, Real
Estate Issues, Fall/Winter 1984
[10] "Empty Buildings: Severe Deflation Hits Commercial
Properties in Many Areas of the United States", Wall Street
Journal, September 4, 1986
[11] "The Return of the Grave Dancer", Samuel Zell, Real
Estate Issues, Fall/Winter 1984
[12] "Loose Lending: Texas Savings and Loan Disasters are
blamed, in part, on freewheeling style", Wall Street Journal,
July 13, 1987
[13] Only three percent of the 300,000 people reviewing
property values for financial institutions are accredited by
the Society of Real Estate Appraisers or the American
Institute of Real Estate Appraisers. "Malpractise in Real
Estate", Forbes, June 29, 1987.
PAGE 19
[14] "The Return of the Grave Dancer", Samuel Zell, Real
Estate Issues, Fall/Winter 1984
[15] "Real Estate Syndicator's Shift", Profile of Arthur J.
Halleran, Chairman, Winthrop Financial, The New York Times,
June 25, 1987
[16] Federal Reserve Board Bulletin
PAGE 20
CHAPTER
TWO:
OF
FACING
DiZ4AZIEDU
("workout") is a property
which is in
TYPOLOGY
PROBLEMS
PROPERTIES
A distressed property
default on the
is
terms of the loan which
frequently occassioned
it secures.
nonpayment
by
Default
of principal
and
interest.
use its lien against a property
Upon default, the lender may
to
about
bring
compliance.
property for sale to the public.
purchase the
property.
for
haven
lender.
debtors, in
Bankruptcy
that
may
offering
of
the
the foreclosure sale
other lenders, more junior liens
are eliminated.
the property
contractual
The lender may bid for and
If proceeds of
are insufficient to satisfy
against
an
in
results
Foreclosure
of
lack
for
foreclosure
be
it
Bankruptcy offers
forestalls action
used to
stay
a
by
a
the
foreclosure.
Alternatively, a borrower may voluntarily offer to the lender
or a
third party a
deed in lieu of
PAGE 21
foreclosure, forfeiting
the rights of ownership.
Workouts
either
result
[1]
a
when
property
suffers
from
insufficient demand or when reasons unrelated to demand bring
about property distress.
I.Market Demand
result from forseeable circumstances
Insufficient demand may
such as inadequate market analysis during project planning or
from an
optimism; or
excessive
the development
market during
inappropriate
process [2].
manifested
often
is
orientation
design, poor
in the
unforseeable change
Lack
symptoms
such
in
of market
location, or
choice of
as
pricing
above what the market will bear.
Market studies
with significant shortcomings are
often used
property.
Distressed
the decision
to justify
properties often
to
economy.
on supply or demand,
resulting in a
adequately
analysis as though they
areas
forecasts,
and long-term economic
on real estate.
consider
Local market
trendline
rely upon
the existence of short-
cycles and their effect
fail
Market studies
They
analysis.
which ignore
need.
lack a proven market
frequently focus either
one-sided
to develop a
Trendline forecasts
the structure
are often
of
the
treated in
local
market
were independent of the metropolitan
PAGE 22
area
which
of
they
is
consideration
are
given to
an
integral
the
analyzing
supply,
by
of the project and its
through spatial preference studies.
competitors by consumers
In
of location
importance
failing to study potential acceptance
Inadequate
part.
is
consideration
rarely
given
to
competition from potential, as-yet unannounced projects [3].
Errors
procedural
of a
analyses.
Such errors
nature are
common in
also
include inadequate
market
consideration of
potential competition from subleases; inadequate scope of the
study; and
use of
erroneous information, such
as employing
"asking" rather than "taking" rents, use of gross rather than
net absorption or use of poor comparables [4].
The developer
market
and (or)
demand.
project
is often
the lender
may choose
Excessive optimism
related to
of
the
to disregard
sponsors of
their fee-based
a
compensation.
Executives often have strong incentives to initiate a project
regardless
of demand.
When the
developer earns
develop and the
lender earns a fee to lend,
incentive
restraint,
for
particularly
a fee
to
there is little
when
the
true
underlying capital risk is being borne by a federal insurance
agency.
Real
estate
adverse
projects
changes
in the
may
suffer
also
market
during
PAGE 23
from
unforseeable
the long
lag
time
between
project
changes, such
with an
real
as the closing
macroeconomic factors
the
of oil
price
Changes
product.
reduce the demand
in
lifestyle
affected
the Central and South
demand for
affected the
or
The drop in
real
demand for
estate in Texas, Louisianna, Oklahoma and Colorado.
recessions in
for a
patterns
reduce demand for space.
significantly
a town
military base in
of a
undiversified economy, may
estate
Demographic
completion.
and
initiation
Economic
American economies have
Florida.
condominiums in South
In
"steady state" circumstances, an appreciating dollar leads to
a marginal
reduction in
demand for
real estate
in markets
dependent upon foreign investment (5).
II.
Other Factors
Distressed properties
also result from
financial, marketing
and property management considerations.
Financing
Insufficient demand or other
the
need
to draw
upon
adverse circumstances result in
capital
to survive
an
adjustment
period, until the property can become self-sustaining.
buys time.
of
time
Insufficient
Money
If capital is not available, the project runs out
and
the
property
capitalization
is
becomes
distressed
symptomatic
PAGE 24
of
[6].
distressed
underlying a
structure
The financial
properties.
or improvement in markets
often implicitly assumes stability
over time.
Contingencies are frequently not
structuring
financing.
access
Lenders may
estate development
interest
payment
reserve,
deficits
during
the
market
absorption
such as
operating
and
costs
marketing
a
related to
"Soft" costs
project.
cover
the project.
naively underfund costs legitimately
the real
have
approving
institution
to adequately fund
may fail
construction loan
do not
which to
resources with
financial
The
contingencies.
anticipated in
frequently
Developers
capital
to adequate
project
may
period
be
underfunded, in the name of "conservative" underwriting [7].
Lack of
and
developer procedures
the project
developer and
may
lender loan practices
thoroughness or negligence in
to
agree
environmental
property are
fund
a
approvals
may
the institution,
expose
The lender
to additional risks.
loan
before
necessary
in hand or before
have been
fail to
verify that construction
municipal
and
develop
the
to legally
all appropriate consultant's
reviewed.
submitted and
studies
all
the
lender may
The
is proceeding on
time and
within budget prior to disbursement of funds [8].
may be jeopardized by cost
A real estate development project
overruns.
Project
complexity
may exceed
construction monitoring capability.
PAGE 25
the
developer's
Costs may exceed budget
for such reasons as a work stoppage by labor unions, problems
relating to
soil conditions,
orders, an
significant change
increase in construction loan interest charges due to rise in
a contractor's inability to perform
market interest rates or
Delays in project completion due
for the agreed-upon price.
to
securing of
reasons
approvals,
may also
approvals
capital
exhaust
can result
environmental
in delays
result in the imposition of
permits or
resources.
of several
other
Securing
months and
of
can
additional carrying costs on the
project [9).
Some distressed properties result from
part of one
or more of the parties involved
A banker may
accept bribes
decision
lend on
to
construction
project.
revenues
fraud or theft on the
a
project.
loan proceeds
A dishonest
from the
in exchange for
for
in the project.
influencing the
A developer
purposes
property owner
property, leaving
employ
unrelated to
may remove
the
operating
inadequate funds
which to meet debt service obligations [10].
PAGE 26
may
with
Rockridge Avenue/
.left
wale...
I AuI.T IT PN EPAc.
PAGE 27
Doty
Marketing and Property Management
may not
The developer
experience or may be
negligent with respect to accomplishing
tasks.
crucial development
staff or
requisite skills,
have the
from a
property may suffer
The
poor marketing effort during the market absorption period due
to
inappropriate market
marketing
channels.
positioning
Property
or
inadequate use
management
may
not
of
be
responsive to tenant needs [11).
Occassionally,
encountered
unrelated
properties become
by the
to the
lender and
entangled in
become workouts
property itself.
from an inability or unwillingness
The institution may
commitment due
the loan
causes
the
The workout
of the lender to perform.
to capital, corporate, merger,
acquistion or
Multiple
to
come to
property may become distressed
lending institutions involved
enter into
a
halt.
include an
balance sheet.
resulting
in
foreclosure
which
the
due to borrower violations of
insufficient current
The owner may
a dispute
Alternatively,
agency restrictions in the credit agreement.
may
may result
renege on its
participation may
job
for reasons
commit to a loan and then
regulatory problems.
in
difficulties
Such violations
ratio on
the borrower
cross-collateralize property,
when
some
PAGE 28
properties
encounter
Tax reform may make investors indifferent to a
difficulties.
resulting in the creation of
related
credit.
jeopardizing developer
project,
to the
property.
problems
Borrower
distressed property need not be
Analysis of
such "workouts"
is
to lack
of
outside the scope of this thesis [12].
Summary
Distressed
market
properties come
demand
space
for the
existence due
into
with
problems associated
or
financing, marketing or property management.
can
A distinction
creation of
be
those that not forseeable.
We
underlying
which are
distressed properties
for which some degree
forces
made between
the
forseeable and
are more able to manage risks
However,
of advance knowledge exists.
real estate development is characterized by long "lead" times
complexity of construction, reliance
for completion,
performance of diverse parties
all
real
"Force
estate-related
Majeure" risks
on the
and other uncertainties.
risks
such as
are
advance.
in
knowable
Not
war, extraordinarily
severe
weather, economic shifts and labor stoppages provide examples
of
changes
that
circumstances,
are
not
these risks
number of
workouts in the
amount of
risk is
forseeable.
In
always lead
will
"steady-state"
to a
real estate industry.
inherent in
the real
PAGE 29
certain
A certain
estate development
account for the
helps to
process and
above-average returns
generated by real estate development.
by the existence
Finally, workouts
are seldom brought about
of a single risk.
Real estate casualties tend to result from
the
convergence of
analysis
of
a number
workout
circumstances tend
of correlated
situations
reveals
to converge in undermining
risks.
Careful
that
several
the property,
with a particular circumstance often acting as catalyst [13].
PAGE 30
NOTES ON CHAPTER TWO
[1] "The Workout Game: Managing Non-Performing Real Estate
Assets", Stuart M. Bloch, Esq., Executive Enterprises
Publications Co., New York, N.Y.
[2] Interview with Larry Levey, Chief Financial Officer, Hall
Interview
Financial Group, Inc.,Dallas, Texas., July 1987.
with Jim Bertelsen, Asset Disposition Group, Continental
Interview with Jack
Illinois National Bank, June 1987.
Sangunett, President, Sangunett and Associates, Alexandria,
Virginia, June 1987
[3] "Market Analysis for Real Estate (Lecture Notes)",
graduate level course offered by Professor William Wheaton,
Center for Real Estate Development, M.I.T.
[4] Interview with Richard Scott, Principal, Aldrich, Eastman
Some of the criticisms leveled
and Waltch, July 1987.
against market studies may also be leveled against real
estate appraisals.
[5] Interview with Jack Sangunett, President, Sangunett and
Interview with
Associates, Alexandria, Virginia, June 1987.
N.Y.
York,
New
Jim Bulloch, Vice President, Citibank,
Senior
President,
Vice
Arellano,
R.
Interview with Eduardo
in
investment
foreign
Much
1987.
June
Fl.,
Corp., Miami,
a
"safe
secure
to
desire
a
by
motivated
is
property
U.S. real
haven" for foreign capital and is not exclusively influenced
by currency fluctuations.
[6] The relationship between "working out" a distressed
property, money and time is explored in more depth in Chapter
Three, herein.
[7] Interview with Jack Sangunett, President, Sangunett and
Associates, Alexandria, Virginia, June 1987.
[8] Interview with Mark Jennings, Workout Loan Specialist
Oldstone Bank, Oldstone Development Corporation, Providence,
R.I., June 1987. See also the "Outlet Mall Case Study",
herein.
[9] Interview with Jack Sangunett, President, Sangunett and
Interview with
Associates, Alexandria, Virginia, June 1987.
Andrew Siwulec, Senior Vice President, York Associates
Bethesda, MD., July, 1987. Interview with Mark Jennings,
Workout Loan Specialist, Oldstone Development Corporation,
PAGE 31
Providence, R.I., June 1987.
Study", herein.
See also the "Outlet Mall Case
[10] "The Workout Game: Managing Non-Performing Real Estate
Assets", Stuart M. Bloch, Esq., Executive Enterprises
Publications Co., New York, N.Y.
[11] Interview with Eduardo R. Arellano, Vice President,
Senior Corp., Miami, Fl., June 1987. See also case study,
"Miami Vice: Repositioning and Competitive Pricing in the
Miami For-Sale Housing Market", Chapter Four, herein.
(12] Interview with Jack Sangunett, President, Sangunett
See the
and Associates, Alexandria, Virginia, June 1987.
the
in
thesis
this
by
adopted
definition of "workout"
introduction to Chapter Two.
[13] "The Workout Game: Managing Non-Performing Real Estate
Assets", Stuart M. Bloch, Esq., Executive Enterprises
Publications Co., New York, N.Y.
PAGE 32
CHAPTER THREE :
PRINCIPLES
OF
FOR
FINANCING
RESTRUCTURING
DISTRESSED
PROPERTIES
Distressed
property
a
elements: time; money; and skill.
combination of three basic
The objective of
involve
strategies
turnaround
the refinancing strategy is
to secure time
and money for the property.
Time
Time is required in order for
the
market.
Time
is also
the property to be absorbed by
needed in
The
property.
reposition
the
distressed
property transactions
order to
renovate or
in
structuring
objective
is to
secure the
maximum
amount of time within which to add value, at the lowest cost.
In this sense, financial
resembles a
the longer
structuring for distressed property
real estate option
the investor can
contract.
At a
given cost,
control the property,
PAGE 33
the more
likely he
profit due
is to
be vindicated
in his
appreciation.
to property
belief that
The
he will
workout investor
seeks to harness the power of time [1].
Money
buys
deficits
time.
over
Money
the
is
market
required
to
absorption
fund
operating
period,
capital
improvements and to pay for marketing costs.
The
workout investor's
funds with which
additional
income
challenge
to secure
to buy time and salvage
funding must
from the
is
be secured
property with
the property.
in spite
which to
additional
The
of a
lack of
make debt
service
payments in the traditional manner.
Money
The incremental costs and
distessed
distressed
properties
property
expenses associated with salvaging
must
be
financing.
anticipated
Distressed
in
structuring
properties
may
require additional capital for renovation, operating deficits
and marketing costs [2].
The
need
for additional
improvements
to
the property
is
common in workouts.
Distressed properties frequently require
renovation in order
to satisfy a new market
properties on
the verge
of foreclosure
PAGE 34
[3].
have been
Owners of
known to
substitute or
massively
materials in
delete
tenant
improvement allowances
Costly
other purposes.
loans to
their
funds from
to
Unscrupulous borrowers
avoid the loss of their property [4].
divert
an effort
order to
required in
may be
attract tenants [5].
tenants
A property
with
few
substantial
cash
resources
well-correlated.
order
to
in
A
cover
demand
operating
the point
a space by signing a lease and
the property and actually begins
the point where he occupies
rent.
exists between
time lag
where a tenant agrees to rent
to pay
nevertheless
Occupancy of a property and operating expenses are
expenses.
not
will
Real estate taxes,
insurance, maintenance and
other fixed expenses comprise a large share of total property
expenses for
operating
many properties
and must
be funded
regardless of the total occupancy level of the property [6].
Loss of
tenants ("shakeout"),
absorption period.
properties during the market
existing
tenants
tends
period and contribute to
lost
due to
in distressed
tends to occur
to prolong
the
market
operating deficits.
dissatisfaction with
The loss of
absorption
Tenants may be
the distressed
property.
Tenants may be evicted due to the their loss of discipline in
meeting lease obligations [6].
Distressed
properties
demand
PAGE 35
extraordinary
marketing
expenditures in order to overcome a tainted reputation in the
marketplace.
Marketing, promotional
personnel costs
and property management
are high for distressed
properties relative
to other properties [6].
Funding for the extraordinary
is
secured from
loans,
a
a
combination of
purchase
mortgages.
needs of a distressed property
money
equity funds,
mortgage,
senior
unsecured
and
junior
Equity funds represent the most "patient" capital
in the
financial structure.
equity
is not
accompanied
In contrast with
by a
legal
debt, common
obligation to
make
current interest payments.
Equity
The new
in
equity investor wields significant
loan
restructuring
willingness
to invest
negotiations.
his capital
lender's troubled property
tool.
his
The
The
debt
investment,
the
to
risk.
Equity
lender
emanates from
protects debt
by
investment of equity allows the
New
restructured.
be
the
represents a powerful negotiating
accept
standing first at risk.
investor's
toward resurrecting
equity investor's bargaining power
willingness to
existing
bargaining power
owns
the
new
Without
property.
equity
Without
new
equity, the lender's loan on the property effectively becomes
the equity:
it
earns
no current interest
PAGE 36
and is
the first
capital at risk.
that
experience
a
construction
result
market, prices
The investor
with
markets
reduction
in
with
supply
would increase
will
reduced
offered on
would stand
the
to gain.
tax benefits associated
deductions and
deductible against future income
Should
being
and he
will also benefit from
supply
excess
construction.
in less
interest payment
time to contribute
The investor is motivated by
toward the property's recovery.
anticipation
lender
to secure
form of capital and
forebearances in the
an
is
objective
investor's negotiating
The
net operating
losses
("NOL carryforwards").
While the lender wishes to minimize a reduction in the amount
owed on
the loan
(the "writedown"),
not all financial.
public
relations motivations
The lender may
loan
The lender
so
as to
a
be
may have regulatory, legal or
in
permitted
concluding a
He
to
transaction.
income from the
classify
the loan
as
a
The lender may seek to sell the property
specified
requirements.
motivations are
seek to bring about interest
"performing" asset.
within
lender
time
so
as
may seek to salvage
to
satisfy
regulatory
a distressed property
so as to avoid the glare of negative publicity [7].
Both the lender
to
whether their
and the investor must render
respective
anticipated
PAGE 37
a judgement as
rewards from
the
property
will
justify
their
patience
and
investment
of
capital over the holding period [8].
Debt
The
second source
existing lender.
of funds
The
for the
workout effort
is the
loan funds into
lender may inject new
the property.
The property gains time to recover by shifting
existing loan
repayment obligations from the
Existing
future.
quasi-equity
loan
debt
capital.
terms including
is
converted
The
lender may
the
term,
present to the
into
more
patient,
restructure existing
amortization and
interest
payments.
The
owed.
lender will
He
resist reductions
will seek
to structure
in the
a transaction
allow him to recover his investment.
must
be
recovery.
extended
to
principal amount
which will
The loan repayment term
provide adequate
time
for
property
The investor will therefor seek to avoid mortgages
with a relatively short term, such as bullet loans.
may be extended
of achievement
for a fixed period or can
The term
become a function
of certain property performance
levels, such
as a minimum loan-to-value ratio [9].
The investor seeks to restructure loan payment obligations to
coincide with
realistic expectations of the
PAGE 38
property income
stream
amortization of
debt
current
reserves
equity
income,
payment
interest
current
If
project
exceed
obligations
small impact on
principal have a relatively
payments.
to
as
Concessions
default.
avoid
thereby
and
will
eventually vanish.
The
("pledge rate")
interest rate
need not be the same.
The
coupon rate
and current
pledge rate can exceed the coupon
The difference between the stated rate of interest and
rate.
payment
interest
current
accrued.
or "coupon")
"pay rate"
(the
is
Reasonable care must be taken to avoid an excess of
interest accruals over project equity.
The
viability
potential
of the
in
increases
Rate
obligations.
interest rate
not be
must
project
variable
sensitivity may
burdens with a joint
interest
threatened
rate
be minimized
by
payment
by sharing
venture partner; hedging
capital costs in the interest rate futures market; or setting
lower
and
obligations
upper
variable
boundaries on
("floors" and "caps")
interest
payment
[10].
Other Loan Provisions
other
issues likely
participation
to arise
or conversion
in loan
rights and
negotiations include
personal liability.
In exchange for concessions, the lender may request the right
PAGE 39
amount, if any.
the
right
sale above
the mortgage
Alternatively, the lender may
seek to have
in the
to participate
to convert
proceeds of
his
secured,
in
debt interest
the
property into an equity postion.
Personal liability
and cross-collateralization for
properties
distressed
Occassionally,
guarantees
are
may
avoided
be
by
offered
loans on
investors.
on
potential
property operating deficits, up to a specified amount [11].
The challenge facing the workout investor is to determine the
degree of reward which he must secure in order to justify his
investment
in the
risky
project.
The
investor must
also
assess what concessions he can secure from the lender.
ALTERNATIVE MORTGAGE INSTRUMENTS
By
combining
the
above
degrees
instruments can be structured so
of
freedom,
mortgage
as to answer the particular
needs of a distressed property.
Cash Flow Mortgage
The objective of the cash
default for non-payment of
flow mortgage is to avoid borrower
interest.
PAGE 40
The property pays debt
to
equivalent
service
the pledge rate accrues
amount.
Thus,
the
increase
from
year
assure
flow
against the principal
amount
actually
may
amortization").
("negative
year
arranged.
The cash
property may be divided ("stripped")
so as to
flow priorities may be
Alternative cash
flow from the
principal
loan
to
Cash
The difference between available
mortgages have no pay rate.
cash flow and
flow.
cash
available
out of
cash return
investor a
lender and
both the
available cash flow.
An
accrual-basis
equivalent to the
income
borrower
may
fully
full pledge rate in
tax liability,
interest income (12)
if the
deduct
interest
computing his federal
lender recognizes
equivalent
[13).
Accrual Mortgage
The accrual mortgage
differs from the cash
that the accrual mortgage features
fixed
payment
interest
only
The
obligation.
if cash
flow
is
flow mortgage in
a coupon rate, creating a
cash
flow
mortgage
pays
available from
operations
is similar to
an accrual
[14).
Zero Coupon Mortgage
The Zero-Coupon
mortgage ("zero")
PAGE 41
mortgage, with a pay rate of
zero.
accrues and is compounded over time.
All interest on the zero
The lender may demand a
premium over current market rates on a zero to compensate for
additional risk.
Participation in the proceeds of sale above
the mortgage amount may be demanded, particularly if the zero
is subordinated to a more senior mortgage [14].
Participating Mortgage
The Participating Mortgage offers the borrower a below-market
rate of
interest in exchange
income and
for a percentage
(or) proceeds of
sale above the
of operating
mortgage amount
("residual value").
The benefits
of the
tend
in
to
be
participating mortgage to
the
form
of
short-term
participating mortgage becomes much
borrower over time.
equivalent
origination.
to
At
market
the borrower
cash-flow.
The
less advantageous to the
some point, interest payments become
rates
at
the
time
of
mortgage
Beyond this point, the project must make market
interest payments in addition to being obliged to surrender a
percentage of the residual [14].
Wrap-around Mortgage
The wrap-around mortgage is added to the existing mortgage on
PAGE 42
the property.
rate which is
typically features a pledge
It
above the pledge rate on the existing mortgage and allows the
borrower
to realize
property.
service
additional
The lender
between the
The wrap-around
funds by
profits from
the difference
existing mortgage
mortgage satisfies
borrowing on
and the
the
in debt
wraparound.
the borrowers'
need for
additional financing and debt service relief [15].
Fixed and Variable-Rate Mortgages
The above
fixed-
or floating-rate
staggered,
upward
mortgage instruments
beginning as
over time.
determined by a
the
interest
can be structured
instruments.
The
pay rate
may be
low
and gradually
moving
as zero
Floating-rate interest
variety of indices.
rate
is
as either
to
be
The
payments can
be
intervals at which
adjusted
and
the
maximum
adjustment in the rate between intervals and over the life of
the loan are negotiable [15).
A mortgage which
combines features of the
may be employed with
descriptions are
above instruments
distressed properties.
While the above
be illustrative,
new instruments
meant to
are continually devised [16).
PAGE 43
The
optimize
investor will
value from
by
the transaction
placing project benefits in the hands of those who value them
most.
Parties
different yet
to
distressed
property
complimentary needs.
of value
For example,
whose returns
against
their
market), and
(book vs.
pension funds
Parties may
differ with
tend to
risk preference.
to assets
be attracted
correlate positively with inflation,
inflation-sensitive
therefor interested in
have
tax exposure, cost of funds,
respect to their federal income
measure
transactions
liabilities.
to match
They
are
extending variable-rate mortgages and
in real estate equity investments [17].
Salvaging the Midland, TX Office Building
The financial
office
restructuring of a distressed
building
strategy
for
in
downtown
providing
Midland,
both
50,000 sq.
TX.
adequate
ft.
illustrates
capital
market absorption
to
a
fund
period and
operating deficits
during the
time for recovery.
The total project cost was $6,000,000 and
the developer secured $5,000,000
an occupancy
from
a
level below
mismatch
of
in takeout financing.
50 percent, the
revenues
and
With
property suffered
expenses.
The
lender
foreclosed when the developer became unable to fund operating
deficits and capital costs.
The workout investor developed a
PAGE 44
strategy for
The
new
"patient" capital to
adding new
capital
structure
succeded
in
the property.
fixed
minimizing
payments over the property holding period [19].
The
determined
investor
sound.
fundamentally
markets.
The
deficits
of
period.
he was
$1,500,000
concerned about
the
funds
long-term
property was projected to
over
was
over a
in
the
capital
generate cumulative
seven-
year
holding
How could the property be saved ?
In analysing
the acquisition,
increases in
increased
property
increases were
market
of
availability
future
that
However,
itself
property
the
that
rental
improvement or
decision
to invest
market improvement.
Leases on
income would
occupancy
assumed to
the workout
inflation.
upon value,
not on
are "Triple
only due
upgrading.
such other
The
Expenses were
the building
occur
and property
occur for
investor assumed
to
No
factors as
investor based
his
expectations as
to
assumed to remain stable.
Net", calling
passthrough of expense increases to the tenant.
for full
Debt service
payments on the existing first mortgage had to continue.
Capital Structure
The investor agreed
for
the
project.
to provide $500,000 in
This
amount
PAGE 45
new equity funds
represented
the
total
investment to
be made by
be used
were to
These funds
the equity investor.
The
deficits.
project operating
to cover
lender initially requested that these funds be applied toward
principal amortization.
request.
into
The
The investor staunchly resisted this
investor insisted
salvaging
the
that new funds
distressed property,
might enable the lender to
be injected
which
ultimately
achieve a return of capital.
The
first mortgage continued to be fully serviced.
The lender agreed to fund a second mortgage of up to $500,000
above
the investors'
basis.
toward
The
investment
second mortgage
tenant
leased.
equity
improvements
Interest
would
proceeds
on
be
on a
were
space which
paid
on
non-recourse
to be
had
the
applied
not
funds
been
actually
disbursed.
Additionally, the lender agreed to make an amount of $750,000
available
improvements
for
on
further
an
operating
unsecured
unsecured loan was accrued.
amortization
on
these
deficits
basis.
and
Interest
capital
on
the
Interest payments and principal
funds
would
be
deferred
for
a
twenty-year term.
Recapitalization
All debt on the property would
become due and payable at the
PAGE 46
loan will be the sum of the
amount of the new first mortgage
loan, the $500,000 second
$5,000,000 existing first mortgage
on the
The new loan would be fully amortized over 29
$750,000 loan.
maximum annual
years, with
and accrued interest
and the principal
be
The principal
recapitalized with a new loan from the lender.
mortage loan
would
property
The
term.
twenty-year
the
of
end
to exceed
interest payments not
$549,000 per year.
The structure allowed the loan on the Midland office building
to
a
become
again
once
The lender avoided having
interest income.
loan loss reserves to allow
in
the abilities
willingness to
of
prospect
investor.
Should even a
cover projected
period.
loan
in
deficits
the property.
The
for
the
existed
property
marketplace, the
during
the market
absorption
the availability of permanent
future.
the
the lender's
Adequate funds are available
The structure assured
proceeds
Confidence
marginal improvement in the general
would generate enormous gains.
to
gains
future
the local
in
to increase his
key to
disburse further funds on
significant
generating
by
for a loan writeoff.
investor was
of the
levels occur
rent
asset
performing
The
structure
eliminated
concerns relating to interest rate risk upon refinancing.
guaranteeing
future,
risk.
a maximum
the investor
Caution was
service payment
annual debt
hedged
taken
against
by the
PAGE 47
By
in the
future interest
rate
to assure
that
investor
of the
reasonable expectations
not exceed
loan obligations did
and other
accrued interest
value.
future property
The
investor always asks whether anticipated appreciation will be
repay
to
property
the
for
adequate
accrued
plus
loans
interest.
Summary
three basic elements: time,
combination of
The
financial structure
salvage the property.
Money
time.
buys
marketing costs
investors
have
lender
the
of
not
property.
Mortgage
to
to
the
Equity
negotiate
investors'
While the investor maitains the
becoming
property, the lender is the
due
operating
expenses.
bargaining power
willingness to accept risk.
flexibility
the property.
fund
to
required
and renovation
significant
from
to
renovation and
perform product
is
Money
deficits,
forbearances
with which
resources
achieve market absorption of
repostioning and
seeks to
workout investor seeks to harness
The
so as to
of time
the power
a
money and skill.
distressed property
money
time and
adequate
provide
of a
involve
strategies
turnaround
property
Distressed
an owner
of
the
distressed
de facto owner of the distressed
instruments can be structured
to answer
the specific needs of distressed properties.
The
investor
seeks
to
structure
PAGE 48
an
agreement
which
is
predicated upon current revenue
and expense figures (value),
rather than expectations of future performance [19].
There are threee
transaction.
the
parties
investor
determinants of the capital
structure of a
chapter has addressed the
preferences of
This
involved
must also
markets into the
and
the type
incorporate
analysis.
of
transaction.
the status
In a volatile
of the
capital
world, no optimal
capital structure for distressed properties exists.
monitor equity and
debt pricing in the capital
One must
markets on a
daily basis to determine the best course of action (20].
PAGE 49
The
NOTES ON CHAPTER THREE
[1] Interview with Richard Scott, Principal, Aldrich,
Eastman and Waltch, July 1987
[2] "The Grave Dancer", Samuel Zell, Real Estate Review
[3] See "Product Repositioning", Chapter Four, herein.
[4] "The Grave Dancer", Samuel Zell, Real Estate Review
[5] "The Workout Game: Managing Non-Performing Real Estate
Assets", Stuart M. Bloch, Esq., Executive Enterprises
Publications Co., New York, N.Y.
[6] "The Grave Dancer", Samuel Zell, Real Estate Review
[7] Interview with Jim Bulloch, Vice President, Citibank
N.A., New York, N.Y.
[8] "Structuring Complex Real Estate Transactions (Lecture
Notes)", graduate level course offered by Professor Lawrence
S. Bacow, Center for Real Estate Development, M.I.T.
[9] "The Return of the Grave Dancer", Samuel Zell, Real
Estate Issues, Fall/Winter 1984
[10] Interview with Richard Scott, Principal, Aldrich,
Eastman and Waltch, July 1987
[11]
"The Grave Dancer", Samuel Zell, Real Estate Review
[12] "Financing Real Estate Under Tax Reform", seminar
conducted at Center for Real Estate Development,
Massachusetts Institute of Technology, by Robert Nessen,
Attorney, Fine and Ambrogne, Boston, Mass.
[13] Interview with Andrew Siwulec, Senior Vice President
York Associates Bethesda, MD., July, 1987
[14] "Financing Real Estate Under Tax Reform", seminar
conducted at Center for Real Estate Development,
Massachusetts Institute of Technology, by Robert Nessen,
Attorney, Fine and Ambrogne, Boston, Mass.
[15 "Financing Real Estate Under Tax Reform", seminar
conducted at Center for Real Estate Development,
Massachusetts Institute of Technology, by Robert Nessen,
PAGE 50
Attorney, Fine and Ambrogne, Boston, Mass.
[16] "Hall American Center Associates (Corporate
Newsletter)", "Hall Olivetree Associates", Hall Financial
Group, Dallas, Texas, June 30, 1986
[17] Interview with Richard Scott, Principal, Aldrich,
Eastman and Waltch, July 1987
[18] Adapted from "The Grave Dancer",
Estate Review
[19]
Samuel Zell,
Real
"A chat with Michael Milken" Forbes, July 3, 1987
[20] "Structuring Complex Real Estate Transactions", graduate
level course offered by Professor Lawrence S. Bacow, Center
for Real Estate Development, M.I.T.
PAGE 51
CHAPTER FOUR :
MARKETING STRATEGIES FOR DISTRESSED PROPERTY
Marketing
efforts
for
intensive
than
marketing
strategy for
those
distressed
required of
properties
other
are
more
properties.
The
distressed properties
rests on
the
premise that the property has typically has become known as a
troubled property in
the marketplace.
Successful distressed
property marketing relies upon positioning of the property to
suit an identified market
need, competitive pricing and real
estate broker relations.
Product Repositioning
Real estate
products that
often require
orienting
repositioning.
the product
potential new users
held
be a
group of
accomplished by
have failed
Product
to address
to attract
repositioning entails
the needs
or to alter perceptions
existing users.
of a
group of
of the property
The repositioning
effectively re-manufacturing the
PAGE 52
a market
is
product to
Additionally, a property may adopt a new
serve a new market.
name so as to shed a negative market identity.
A comparative assessment must be
performed of the distressed
property
local
in
relation
to
the
configuration, amenities, and
be
compared
distressed
with
competitive -properties.
and
single
apartments compete.
residential
should
family
are
square
For
example,
be compared
homes,
The key elements in
space
Space
other property attributes must
apartment complexes
condominiums
marketplace.
against
against
which
selling or renting
footage
and
life-style.
Lifestyle is determined by the amenities and services offered
by
the residential
complex.
Lifestyle considerations
can
overcome price competition from other facilities [1].
Case Study: Is There a Doctor in the Area?:
Repositioning The Mid-Western Office Building
A professional office building
in suburban Chicago, Illinois
illustrates the need to reposition the distressed real estate
product to
meet a
new market.
construction loan
on a
post-War
building
office
developer's
concept
less-than-premium
suburb which
A
money-center bank
mid-size office building,
was
proposed
to
attract
in
the
tenants
first-class office
rents for
lacked virtually
any modern
PAGE 53
made a
the first
town.
by
The
asking
space in
a
office buildings.
The principal local employers were a university and hospital.
The
developer
proceeded
to' develop
the
project
without
sensitivity to the market, which did not feature an abundance
of potential users for conventional office space.
Results of
the leasing effort were disappointing.
Few tenants responded
to
unable
solicitations.
The property
service obligations and the
in salvaging
He
to
meet
A specialist
source of
with the
demand:
local university
A multi-million dollar refurbishment was performed
the
specialized
Floorplans
previously
subdivided
into
physicians' use.
and
debt
the alternatives.
previously unrecognized
professionals associated
hospital.
to meet
lender foreclosed.
distressed property assessed
identified a
medical
was
necessary
needs
designed
many
for
smaller
Plumbing was
individual
Success was achieved by
of
these
professionals.
large
offices
users
were
for
individual
extended to the
new offices
washbasins were
added
to
each.
remanufacturing the product to serve
a newly redefined market need.
The repositioned property was
fully leased.
Pricing
Competition becomes the key determinant in establishing rents
(or prices) for distressed properties.
indebtedness
are
relatively
determining pricing strategy.
minor
Unleased
PAGE 54
Project cost or total
considerations
in
or unsold space in a
represents inventory.
market
an
provide
declining
at current
property must be
structure of a distressed
for comparable properties.
lower than that prevailing
rents
stagnant or
the existing inventory
lease or sell
The rent
rates.
a
salvaging distressed property becomes the
market, the key to
ability to
In
inducement
inventory.
the
of
for sale
Lower
Reductions in price can bring about a significant increase in
demand [2].
A major
element of
tenants.
existing
crucial
effort
property.
In
to
Aggressive
maintain
rates may
an
be to
retain
be offered
in the
will
leasing effort
any
income
some cases, existing leases
from
stream
the
are destroyed and
lower rents offered in exchange for extending the lease term.
Offering of equity in the project to tenants may be warranted
in some circumstances [3].
Competitor's
competitive
cost basis is
costs are
a key
rent structure.
tenants.
If
an exisiting
lower than that of the
property, the competitor may
for
consideration in
If future
determining
competitor's
investor in distressed
potentially outbid the investor
competitors
can
build a
similar
product while incurring significantly lower costs of land and
construction, they will enjoy an advantage [4].
In structuring tenant inducements, the workout investor seeks
PAGE 55
need [5].
to fulfill an unmet market
the property's competitive position.
be utilized to increase
assist in meeting tenant
Creativity can
within
Tenant inducements may
For
budget.
project
example,
needs while staying
distressed
Texas
apartment complexes frequently offer travel and entertainment
renters.
inducements to
an
offering
of
disadvantage
Travel
have the
and entertainment
exhaustible,
inducement to the tenant to sign a lease.
one-time-only
Creative investors
in distressed Texas apartment complexes offer appliances such
fans.
as microwave ovens or
the advantage
of being
These permanent amenities enjoy
available as
to both
an inducement
current and future tenant prospects [6].
"Free
rent" periods
workout investors.
rent and
are
generally
avoided by
experienced
of free
The correlation between receipt
tenant default on lease
obligations is noticeable.
Preference is given to structuring leases with a below-market
net effective rent [7].
Case Study: Rocky Mountain High:
Altering Pricing Structure for the Denver Office Building
The case
illustrate
securing
the
office building
suburban Denver
of the
effectiveness
tenants.
The
250,000
of
competitive
square
PAGE 56
serves to
pricing
foot "Town
in
Square"
Pension Fund
the State Employees'
owned by
office building
was fully preleased upon construction in 1982 to creditworthy
regional recession
A
concerns.
petroleum
drop in oil prices.
brought on by the precipitous
consolidated
or
closed
tenants
expired,
was subsequently
As leases
new
in
offices
By 1986, the building lay entirely vacant.
locations.
The pension
fund implemented a competitive
to re-lease
the space.
pricing strategy
securing a
strategy focused on
The
major, anchor tenant who would add legitimacy to the building
A trained, full-time leasing agent
in the local marketplace.
was hired
building.
agent
The
company which
rental rate of
$24.00.
lease.
The
space in the
With comparable office
$18.50, the agent structured an
an initial
calling for
in a neighboring
two years until expiration and a
depressed market leasing for
ten-year
construction-services
occupied 125,000 square feet
building under a lease with
offer
a
identified
of the
on the leasing
to concentrate exclusively
of $17.00,
rental rate
rental rate
would "step-up"
on a
annually
beginning in year two, in increments of $1.00, until reaching
The insurance company would
$26.00 in 1996.
toward
the tenant's
lease with
momentum
existing lease
obligation.
the construction services firm
to the
leasing effort,
securing other users.
building over
Smaller
the course
pay $3 million
making a
Signing
a
added significant
simpler task
of
tenants were attracted to the
of the
PAGE 57
following nine
months, at
One
below-market rental rates.
was
half paid
with another
signed,
completely
succeeded
pricing
Competitive
on the
was
occupancy.
date of
tenants
in securing
in a
building
vacant
the lease
that
very day
on the
brokers
paid to
half of the lease commission
for
a
oil-dependent
depressed,
The leasing effort resulted in an occupancy level in
region.
excess of 90 percent.
Promotion
Marketers
rely
heavily
practises
in the
-rely on
often
A
buildings.
effort required
While traditional real
telemarketing
key
link
in
by
estate media
billboards, radio
signs, mail, newspapers,
and television advertisements,
promotional
direct-contact
extraordinary leasing
distressed properties.
campaigns employ
on
distressed property marketers
and
the
canvassing
promotional
competitive
effort
for
distressed properties is the real estate broker.
Securing the
brokerage community
estate
campaign.
A
(or "locator")
market niches.
of the
the focus
product at the point of
markets, prospective
broker
is
local real
marketing
fundamental marketing consideration is
"Who represents the
many
in the
the best people
support of
It
who
tenants work
tends to
PAGE 58
sale?" [8].
with a
In
real estate
specialize in
is imperative that the
that of
certain
leasing broker be
an
individual with
established
relationships with
quality
tenants [9].
Frequent contact and meetings with brokers allow the investor
to
maintain
his
Members
awareness.
property
the
at
forefront
of
broker
also respond
of the brokerage community
favorably to social events organized to increase awareness of
Frequent contact also yields an opportunity to
the property.
secure
market
competitive
marketing
intelligence
rent
results
objectives.
with
structure.
is
which
to
Continuous
important
in
maintain
monitoring
attaining
a
of
marketing
While brokers provide a valuable introduction to
prospective
tenants,
the
workout
investor
must
be
continuously, personally involved in the leasing process [9].
The workout
offering a
investor can gain increased
commission structure
The procuring broker may receive
cooperating broker
commissions is
order
contests
aimed at
leasing
campaigns
period.
The
in excess of
a full commission, with the
broker
upon signing
cooperation.
brokers can
and
add
accelerate
the
of a
Payment of
of the
lease in
Sales and
a sense
workout investor may offer
for procurement
market norms.
receiving a half commission.
made promptly
to maximize
broker attention by
leasing
of urgency
market
absorption
rewards in exchange
qualified tenant prospect
requiring a
minimum amount of square feet within a set time period [9].
PAGE 59
to
A full-time
for the
leasing agent
Market absorption can be
prospective tenant identification.
significantly
professional
through
augmented
personnel in
facilitate
property can
intensive
management,
of
training
leasing and
selling
space and closing lease transactions
skills, such as showing
[10).
Case Study: "Doing Things Big":
Auctioning Texas Condominiums
The auction of a 220 unit condominium complex illustrates how
creative
approaches to
inactive market.
construction
of
the
"Las Brisas"
unforseeably
longer than anticipated.
units
could
and
"not
The
be
loan
during
complex
an
in
The regional
the
drop in oil prices.
market
Sales took
developer came to believe that
sold"
The developer
ineffectively.
savings
condominium
deteriorated
due to a
sales in
association funded the
The developer sold 160 units.
absorption period
the
can achieve
A savings and loan
Houston in 1985.
economy
promotion
foreclosed.
and
exhausted
A
promoted
the
units
his capital.
workout
specialist
The
was
brought in to implement a sales strategy.
The specialist
planned an
advertisement was
auction sale
for the
placed prominently in the
PAGE 60
units.
An
local newspaper
stating th e
the property,
address of
60 units
that "only"
remained and that all the units would be sold "this weekend".
Prospectiv e
asked to
purchasers were
year's tax r eturn.
previous
bring their
arrival, visitors were greeted with
Upon
informatio n indicating the limited number of available units.
They were
visitors
permitted
of a
in posession
to
qualifying
were
of 6.0
and no
immediately asked
to
percent, immediate
express
were
of
a
their
a below-market
qualification for
Credit agencies
closing costs.
and loan
site to process loan documents.
processors were available on
With a total
possession
in
Purchasers were offered
unit.
financing rate
Those
Only those
certain color
of a
pass
offer.
an
make
pass
preference of
financing
of various colors
issued entry passes
cost of sales equivalent to 4
percent of sales
proceeds, all 60 units were sold in one weekend, with another
90 "backup" contracts on hand.
promotion resulted
Direct, creative
sense of urgency.
Peer pressure
of many other interested
on-the-spot offers.
depressed real
in sales by
creating a
was created by the presence
buyers, compelling visitors to make
"Unsellable"
estate market was
single weekend.
PAGE 61
condominium inventory in a
sold in its entirety
in a
Case Study: Miami Vice:
In the
Repositioning and Competitive Pricing
Miami For-Sale Housing Market
Miami, Florida condominium complex illustrates
The case of a
how
combination
a
competitive
of
pricing
product
and
repositioning salvaged a foreclosed for-sale housing project.
developer constructed a 231
An inexperienced
unit, 20-story
condominium complex on Miami's prestigious Brickell Avenue in
construction loan from a
1975 with a
Trust.
Despite a healthy local housing market, the developer
sales.
failed to secure significant
holding
investor's analysis
thoughtfully conceived.
neither the
space nor
real estate marketing.
to other
properties on
outside workout
in bulk
property be sold
possible writedown for
in a
to recoup its investment?
when construction
An
units be marketed individually,
Or, could
Trust
propose a turnaround strategy for
Should the
purchaser, resulting
Estate Investment
complete.
85 percent
investor was brought in to
the property.
The project encountered
loan foreclosed
the construction
was approximately
Real
The
difficulties.
financial
The
Real Estate Investment
to one
the REIT?
allowing the REIT
[11]
revealed that
The
the product
was not
condominium development offered
the lifestyle crucial
Units tended
the market.
PAGE 62
to residential
to be small in relation
The swimming
pool had
been constructed near the street and lacked any privacy.
The
to serve the needs of 231
100 parking spaces were inadequate
Many condominium units had views on the parking lot.
owners.
built with an
tennis court had been
Characteristically, the
east/west orientation, in violation of the norms of the game.
similarly, units on upper
units priced
sales
Biscayne Bay
onto beautiful
exposure
on
occurred
has
less-desirable exposure.
With all
an inequality.
had created
the units
Pricing of
of
sides
floors with southern
first.
had sold
the
building
Few
with
comparison to
Prices were high in
comparables.
In repositioning the property, the workout specialist added a
between the swimming pool
landscaped buffer
and the street.
He erected a parking superstructure over the existing parking
lot.
He
added
a
new
orientation on top of
of the
tennis
court
north-south
a
with
the parking superstructure.
attactively landscaped tennis court
Placement
atop the parking
structure preserved space and simultaneously added attractive
views onto an amenity area for many condominium units.
New prices were established without relation to total project
cost
or
outstanding
modified to
inland views.
loan balance.
offer an incentive
The
Pricing
strategy
to purchasers of
incentive took the form of
PAGE 63
was
units with
a $20,000 (10
percent) price
inland- facing
differential between bay- and
units.
A previously-lacking
marketing effort.
lifestyle
feature
a
amenities
tended
added
to
the
An emphasis on recreation and the outdoors
life permitted the condominium to
offering
was
"club"
be marketed as a community
lifestyle.
The emphasis
were accentuated.
to de-emphasize
Recreational
the
small size
features
on the
of the
and
outdoors
condominium
units.
Initial
construction of
The refurbishment
the project
effort cost
$3 million.
proceeds exceeding $21 million,
of
$4 million.
Competitive
had cost
$14 million.
With
gross sale
the lender realized a profit
pricing
and a
remanufactured
product succeded in revitalizing the property.
Property Management
Property management efforts work in tandem with the marketing
repositioning strategy.
in
bringing
retention.
new
about
Clean,
tenants and
tenants preserves
Property
management is instrumental
additional
neat buidings
revenues
tenant
are important
in securing
tenants.
Maintaining
maintaining existing
property cash flow and
property additional time to recover.
PAGE 64
through
thereby offers the
The property manager in
tenant-relations campaign
the
maintain
initiate
to
property,
the
of
appeal
physical
to
serves
turnaround
property
a distressed
a
community acceptance
and to build
of the distressed property [12].
The
property
property
management
firm
operating expenses
assessments
Buildings
purchased
below-market
by
at
a
financing can
appeal
assessor to base the assessment
than
where
on the
original cost.
space in
a
occupancy
significant
reduce
real estate
appealing
concentrating
and
significantly
can
buildings.
of
discount
to the
tax
or
with
real estate
tax
on the purchase price rather
Property managers
facility is
occupied.
By
can control
concentrating
partial tenancy in certain parts of the property, other parts
can be closed, reducing occupancy costs [12].
A successful
property
property relies
management
strategy
on the choice of
for
distressed
quality property managers.
The investor's objective must be
to secure the best property
management
Professional,
staff
available.
aggressive,
market-oriented younger property management and leasing firms
with experience in workouts are the most appropriate [13].
Owner involvement
management
Distressed
effort
in monitoring and overseeing
should
property
be
continuous
turnarounds
PAGE 65
the property
and
require
intensive.
quality
Management requirements are typically
upper-mamagement time.
of
defects
physical
to
traceable
tenants.
eradicating possible problems with
distressed
property
can
demand
management
attention required
property
the
two
by
to
and
to
Management of a
times
three
the
property,
a conventional
over an extended time period [14).
The
open-ended
financial
construction.
completing a
most
the
construction
to
respect
accept
project.
an open-ended
to completion
property prior
completing
of the work involved in
construction executive
partially-constructed
agree
of
project is unpredictable and
experienced
predict
responsibility
The nature and degree
accept the
should not
distressed property
investor in
costly.
cannot
requirements
The
of construction.
accurately
of
a
lender
must
commitment
with
original
financial
Even the
Inspection of
to acquisition is advisable.
the
Developers may
go to great lengths to conceal omissions and substitutions of
materials [14].
The
combination of
appropriate for
to have
a distressed property.
a relatively short-term
the property.
can quickly
and leasing
a management
Once compensated
loose interest
in a
team is
agents tend
Leasing
interest in the
for securing a
tenant.
PAGE 66
By
most
tenant and
lease, they
combining the
gain
leasing and
Combining
cross-subsidization,
helping
to
Management
for
and leasing
compensation
when
more
firms
managing
fees
above-average
substanitial leasing
with
paid
meager
are
managers.
also permits
management
property
compensate
the property
of
perspective
the long-term
agents
functions, leasing
leasing
management and
property
commissions
management
often offered
distressed
fees.
incentive
properties,
results
for attaining
a
in
with
tenant
retention and leasing [15].
SUMMARY
Successful
distressed
positioning
of the
need, competitive
Property
property
property
marketing
to suit
works
in
tandem
upon
an identified
pricing and real estate
management
relies
market
broker relations.
with
marketing
in
achieving a property turnaround.
The
individual
organizational
investor
advantage
competitive properties.
and can
await the
make creative
approval of
in distressed
over
has
an
holders
of
properties
institutional
The individual can move more swiftly
decisions independently,
committee.
rather than
This flexibility
acts to
counteract the institutional advantage of capital [12].
PAGE 67
NOTES FOR CHAPTER FOUR
[1] "The Return of the Grave Dancer", Samuel Zell, Real
Estate Issues, Fall/Winter 1984
(2] Interview with Richard Scott, Principal, Aldrich,
Eastman and Waltch, July 1987
[3] "The Grave Dancer", Samuel Zell, Real Estate Review.
Interview with Duke Woodward, President, Wayne Duddlesten,
Inc., Houston, Texas, June 1987
[4] "The Return of the Grave Dancer",
Estate Issues, Fall/Winter 1984
Samuel Zell,
Real
[5] Interview with Richard Scott, Principal, Aldrich, Eastman
and Waltch, July 1987
[6] Interview with Larry Levey, Chief Financial Officer, Hall
Financial Group, Inc., Dallas, Texas, July 1987
[7] Interview with Duke Woodward, President, Wayne
Duddlesten, Inc., Houston, Texas, June 1987
[8] "Structuring Complex Real Estate Transactions", Arthur J.
Halleran Jr., Chairman, Winthrop Financial Associates,
Lectute at Center For Real Estate Development, M.I.T., Spring
1987
[9] Interview with Richard Scott, Principal, Aldrich, Eastman
and Waltch, July 1987
[10] Interview with Duke Woodward, President, Wayne
Duddlesten, Inc., Houston, Texas, June 1987
[11] Adapted from interview with Eduardo R. Arellano, Vice
President, Senior Corp., Miami, Fl., June 1987
[12] "The Return of the Grave Dancer", Samuel Zell, Real
Estate Issues, Fall/Winter 1984
[13) Interview with Richard Scott, Principal, Aldrich,
Eastman and Waltch, July 1987
[14] "The Return of the Grave Dancer", Samuel Zell, Real
Estate Issues, Fall/Winter 1984
[15]
Interview with Richard Scott, Principal, Aldrich,
PAGE 68
Eastman and Waltch, July 1987
PAGE 69
CHAPTER FIVE:
SUMMARY AND CONCLUSION
The multi-billion dollar loss of capital facing United States
lending
institutions was
about
brought
historical
by the
cyclicality of
the U.S. real
estate industry; the
highly-liquid,
under-managed
savings
and
into
loans
the
to investment
estate industry; the stimulus
commercial real
entry of
offered by tax incentives; and macro-economic shifts.
Distressed
into existence
come
properties
inadequate demand for the product
with
financing,
marketing
Inadequate demand may be
analysis, inattention
due
to
either
or due to risks associated
and
property
management.
traceable to unsophisticated market
to demand considerations, or
a change
in demand during the development period.
A distinction
can
be
made between
PAGE 70
forces
underlying
the
creation of
to manage
We are more able
are not forseeable.
those that
forseeable and
which are
distressed properties
In
risks for which we have some degree of advance knowledge.
"steady-state" circumstances, these risks will always lead to
a certain number of workouts in the real estate industry.
Real estate casualties tend
to result from the convergence
of a number of contributing reasons.
combination of
The
provide
and
deficits
repositioning
Money buys
renovation.
property and
operating
is needed for
Time
property.
tenant
such as
financing due to
with
property.
product
improvements and 'renovation.
in structuring
his willingness to assume risk
salvage the lender's
funds
It
time.
investor has negotiating leverage
The equity
to
repositioning of
associated
costs
seeks to
with which
resources
money
a
money and skill.
distressed property
of a
time and
adequate
salvage the
the
three basic elements: time,
financial structure
involve
strategies
turnaround
property
Distressed
in order to
Specialized mortgages answer
the particular needs of distressed properties.
In a volatile
world, no optimal capital structure for distressed properties
exists.
one must
monitor equity
and debt
pricing in
the
relies
upon
capital markets on a daily basis.
Successful
distressed
property
PAGE 71
marketing
property
of the
positioning
need, competitive
remanufacturing the
turnaround.
broker relations.
Property management
property.
reduces operating expenses.
and
property
increases tenant retention,
the property
of
successful
a
achieving
Property management
the image
improves
market
the marketplace essentially amounts
in
interact
marketing
an identified
pricing and real estate
Product repositioning in
to
to suit
the community
in
and
Property management is dependent
upon the selection of quality managers.
However, there is no
substitute for direct, continuous owner involvement.
The
individual
organizational
investor
advantage
competitive properties.
and can
institutional
over
an
holders
of
The individual can move more swiftly
committee.
approval of
has
properties
rather than
decisions independently,
make creative
await the
in distressed
This flexibility
acts to
counteract the institutional advantage of capital.
Ultimately,
from
workout strategies
strategies for
are not
well-managed development
properties: structuring financing
anticipated
radically different
property
operating
of successful
to realistically match the
income;
positioning
the
property in the market to serve an existing market need at an
achievable price; promoting the property aggressively through
marketing channels, particularly the brokerage community; and
employing professional,
motivated property
PAGE 72
management aimed
at tenant
involvement
effectively
service, all coordinated by
of
the
owner.
developed
The
initially
the intense, personal
property
must,
that
in
was
essence,
not
be
re-developed correctly by the workout specialist.
Many opportunities exist in
this sector for the disciplined,
skillful investor who allies himself with patient capital.
PAGE 73
BIBLIOGRAPHY
INTERVIEWS
Interview with Samuel Zell, Chairman, Equity Financial and
Management Company, Chicago, Illinois, June 1987
Interview with Sandy Shkolnik, Vice President, Equity
Financial and Management Company, Chicago, Illinois, June
1987
Interview with Larry Levey, Chief Financial Officer, Hall
Financial Group, Inc.,Dallas, Texas., July 1987
Interview with Eduardo R. Arellano, Vice President,
Senior Corp., Miami, Fl., June 1987
Interview with Jim Bertelsen, Asset Disposition Group,
Continental Illinois National Bank, June 1987
Interview with Teri Dunham, Editor, Value Retail News,
July, 1987
Interview with Nicholas Katsoulis, Vice President, Chemical
Bank Real Estate Group, July 1987
Interview with Daria Plasitella, Chemical Bank Real Estate
Group, New York, July 1987
Interview with Emanuel Sperantsas, President, Cosdem
Investments, New York, July 1987
Interview with Jennifer Bergen, Chemical Bank Real
Estate Group, June 1987
Interview with Jack B. Sangunett, President, Sangunett and
Associates, Alexandria, Virginia, June 1987
Interview with Robert Nessen, Attorney, Fine and Ambrogne,
Boston, Massachusetts, June 1987
Interview with Duke Woodward, Wayne Duddlesten Inc.,
Houston, Texas, June 1987
Interview with Marc A. Louargand, Visiting Associate
Professor, Urban Studies and Planning, Center for Real Estate
Development, Massachusetts Institute of Technology, July 1987
PAGE 74
Interview with Andy Siwulec, Senior Vice President
York Associates, Bethesda, MD., July, 1987
Interview with Mark Jennings, Workout Loan Specialist
Oldstone Bank, Oldstone Development Corporation, Providence,
R.I., June 1987
Interview with Richard Scott, Principal, Aldrich, Eastman and
Waltch, July 1987
Interview with John Chapman, International Council of
Shopping Centers, June 1987
Interview with Warden Rinehard, President, First State
Savings and Loan Association of Orlando, Orlando, FL., June
1987
Interview with Steve Carp, President, New England
Development, June 1987
Interview with Ed Morris III, Bank of Boston, Boston,
Massachusetts.
Interview with Michael Buckley, President, Halcyon Ltd,
Hartford, Connecticut.
Interview with Jim Bulloch, Vice President, Citibank N.A.,
New York, N.Y.
Anonymous Interviewee, Real Estate Workout Specialist, June
1987
Interview with Bob Irvin, Chief Executive Officer, Collier
Financial Holding Company, Naples, Florida, July 1987
Interview with Val W. Ballard, Senior Financial Analyst,
Federal Asset Disposition Association, Washington, D.C.
LITERATURE
"The Wrap-Around Mortgage...Friend or UFO", Francis P.
Gunning, Real Estate Review
"Empty Buildings: Severe Deflation Hits Commercial Properties
in Many Areas of the United States", Wall Street Journal,
September 4, 1986
"The Grave Dancer", Samuel Zell, Real Estate Review
"The Return of the Grave Dancer", Samuel Zell, Real Estate
PAGE 75
Issues, Fall/Winter 1984
"Hall American Center Associates (Corporate Newsletter)",
"Hall Olivetree Associates", Hall Financial Group, Dallas,
Texas, June 30, 1986
"I Hope I Never See Another Boom", Interview with Kenneth
Schnitzer, Forbes, September 23, 1985
"Troubled Properties For Some Are Opportunities for Others",
Wall Street Journal, April 8, 1987
"Real Estate Syndicator's Shift", Profile of Arthur J.
Halleran, Chairman, Winthrop Financial, The New York Times,
June 25,
1987
"How the White House Lost Its Big Bank Battle", The New York
Times, July 12,
1987
"Pru Sells Joint Ventures to Boost Real Estate Portfolio",
U.S. Real Estate Week, July 6, 1987
"Loose Lending: Texas Savings and Loan Disasters are blamed,
in part, on Freewheeling Style", Wall Street Journal, July
13, 1987
"A chat with Michael Milken" Forbes, July 3, 1987
"Troubled Real Estate: The Federal Government's Solution",
James D. Noteware, The Journal of Real Estate Development,
Spring.1987
"The Wright Man to See", Newsweek, June 29,
1987
"Malpractise in Real Estate", Forbes, June 29, 1985
LECTURES AND SEMINARS
"Financing Real Estate Under Tax Reform", seminar conducted
at Center for Real Estate Development, Massachusetts
Institute of Technology, by Robert Nessen, Attorney, Fine and
Ambrogne, Boston, Mass.
"Real Estate Market Outlook", John McMahan, McMahan
Associates, San Francisco, California, Lecture at Center for
Real Estate Development, M.I.T., Fall, 1987
"Market Analysis for Real Estate (Lecture Notes)", graduate
level course offered by Professor William Wheaton, Center for
Real Estate Development, M.I.T.
PAGE 76
"Structuring Complex Real Estate Transactions (Lecture
Notes)", graduate level course offered by Professor Lawrence
S. Bacow, Center for Real Estate Development, M.I.T.
"Structuring Complex Real Estate Transactions", Arthur J.
Halleran, Chairman, Winthrop Financial Associates, Lecture
Series delivered at Center for Real Estate Development,
M.I.T.
TEXTS
"The Workout Game: Managing Non-Performing Real Estate
Assets", Stuart M. Bloch, Esq., Executive Enterprises
Publications Co., New York.
PAGE 77
BIOGRAPHICAL NOTE
(Dean) Sperantsas, attended Georgetown
The author, Costas
D.C., graduating with honors in
Washington,
in
University
Upon graduation, he was
Finance and Economics in 1982.
employed by the New York investment banking firm of Morgan
Stanley & Co., in the real estate division. He later was
engaged in multifamily and industrial development in Florida.
He has published articles on real estate topics in English
and Greek.
The author intends to devote time, as
out distressed properties.
PAGE 78
principal, to working