An Analytical Walk Down Commercial Real Estate Main Street
Fort Collins CO 10-26-09 (by Steve Kawulok, Sperry Van Ness / The Group Commercial LLC)
Many investors are interested in taking advantage of distress commercial loan situations. Theoretically, if one can purchase an existing note at a discounted price, there should be a decent return on investment. To play out this investment requires the note-purchaser to perfect ownership of the commercial asset through a foreclosure action and then sell off the asset which collateralized the loan.
We are starting to see how this might play out with the release of some information by the FDIC regarding the failed New Frontier Bank of Greeley. Two auctions of various portfolios of loans have been conducted. Reported average sale prices were 25 cents on the dollar for the September 3rd auction, and 38 cents on the dollar for the September 17th auction of these notes. These notes were sold in various tranches, which bundled together performing and non-performing notes.
Let’s use the 38 cents on the dollar average to analyze the potential returns. It might cost the investor another 12 cents to perfect title, pay attorneys, and then to ultimately dispose of the underlying property. That brings the “investment” to 50 cents on the dollar of the original loan amount.
Real Capital Analytics recently reported that the first “recovery” averages were being reported on resolved loan sales from across the country. They stated that on these assets, the recovery rate averaged 60 cents on the dollar. Let’s relate this national average figure with the recent New Frontier Bank loan sales. The investor’s real cost, then, is assumed to be approximately 50 cents, and their return could then be calculated at the 60 cents on the dollar level. That equates to a return on investment of 20%. Not bad in today’s world of one to two percent returns on money market accounts, and nine percent returns (capitalization rate) on stable investment real estate properties.
This theoretical spread of 20% is more than twice that of an investment in stable real estate properties. Of course, risk levels are very high. With certain properties a 60 cents on the dollar selling price is not even likely. For example, we are now getting some evidence of development land selling for 30 cents on the dollar, (if it sells at all). Competent advisors must perform critical analysis of any investment if you jump into this game.
Remember that we are only talking averages here. Of the packaged loans that were auctioned, some went as low as 13 cents on the dollar, or as high as 80 cents on the dollar. A spread might be higher on a specific purchase.
Gamblers win big sometimes, but the odds aren’t always with them!
Tags: Commercial Real Estate, commercial real estate return on investment, Distressed Commercial Real Estate, Distressed Commercial Real Estate Loans, Greeley CO commercial real estate, new frontier bank loan sales, northern Colorado commercial real estate, Packaged Loans