Deals percolating for distressed real estate debt - San Francisco Business Times:

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But at least in the Bay deals thus far have been few andfar between. “Ther has not been a tremendous volume of debtdealzs happening, but there will be,” said Tim Ballard, chiefd investment officer for . “A lot of lenders have been unwilling to take the They have been unwilling to facethe music. And until they are forceds to, they will be unwilling to do Meanwhile, opportunistic investors are on the prowlo for performing notes that lenders are willinhg to unload at a discount often 30 percent ormore — or distressesd loans that create opportunities to gain possession of propertyt through foreclosure.
Local investors active in the debt area includeSan Francisco-basee Divco West, which has forme a joint venture with Loancore; Rockwood Buchanan Street Partners; and . San Francisco debt dealws hitting the market have mostlhy focused on properties ownes by two highly leveraged local the and David Chooof . Last year, hit the marketf with a $163 million Lembi 1 Portfolio A-note, a loan on a 24-building a piece of which was bought byLos Angeles-based . , the lendee on David Choo’s multi-parcel developmenf site at First andMission streets, has sold some of that debt to Waltomn Street.
Meanwhile, investors are expecting lenders will be increasingly desperate to cleart their books oftroubled loans. Ballard said Buchanahn Street Partners is monitoringa $3 billionj pipeline of potential debt deals, with some $150 million in debt on San Franciscol buildings. He declined to identify the properties involved but said at least one is a California Streeftoffice building. Matt Field, a managing director at , said his compangy is looking atdebt deals, “bu t they are few and far between in the inner Bay Area.
” He said most lenderx are focusing on their most distressed and those have mostly been mostly in othe parts of the “I don’t think it’s a lack of it’s more of a lack of said Field. He said TMG looked at the Choo debt on Firsty and Mission streets but itwas “hard to price,” givenb the lack of transactions over the last 12 months and the fact that the area is in the midst of the Transbay Terminal So for now, the gap between buyerzs and sellers of debt is still wide, accordingb to industry sources.
Chris Seyfarth, a partner with ’s transaction real estat division, said a 20 percentage point differenc exists between what buyers think distressedd debt is worth and what the lendersx are willing to part withit for. But that gap will closd as banks come under increasingg pressure to move bad loans offtheir books. “Thered are not at the moment a lot of deals goingh on relative to the size ofthe problem,” said “What investors want to pay is not what sellers want to sell for. The botto m line for the banks isthat it’s realluy the only way out in terms of reducingf their exposure.
They are going to have to move them off theit balance sheet one way or He said investors across the country are raising money to be in optimakl position when banks start feeling pressure to sell debt atsteel discount. “I’m not sure banks have the luxury of sittingon non-performinfg loans,” said Seyfarth. “Theuy are like a cancefr that continues toget worse, and the only way to cure this cancetr is to get rid of it and move it off your balancew sheets.” Part of the trouble is that theres have been so few transactions of any kind in the last year as leasinhg and building sales have dried up, according to TMG’sa Field.
Until commercial leasing and office salespick up, it will be tough to get a handlwe on what the debt or the underlyingy asset is worth. Any commerciap loan originated in 2006 or 2007 should be pricerd at a 30percent discount, said Ballard. “As bankse are shut down, those will happen in You’ll see increasing bank closures in the seconc halfthis year,” said He said big banks are waiting to see whether TARP — the federal government’s Troubled Asset Relief Program — will be willing to buy some of the troublee commercial loans, and how much it woulde be willing to pay.
“Until there becomes more clarity on what TARPwill be, I don’t think you’ll see a lot of tradinvg volume,” said Ballard. Jeffrey Eliason of said a client looke d at selling debt on a parcek in Silicon Valley but that the bids came in at 65 percen to 70 percent ofthe note. “They think the land is worth twice as much asthe note, so they are goinhg to keep it,” he said. “Everybodyh wants to buy distressed debt, but we have not heard of anyon reallybuying it.
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