Rush to the Rescue (1/22)
Jan 22, 2009 10:44 AM, By Elaine Misonzhnik
One example of what might become an all too common phenomenon this year occurred on Jan. 6 when a court ordered the 509,000-square-foot Shenango Valley Mall in Hermitage, Pa. into receivership at the request of its lenders. Receivership is a strategy often employed by lenders for assets in financial distress, whereby the lender asks the court to appoint a third party to manage the property and get its finances in order until a longer-term solution could be found. The Shenango Valley receivership came after the mall’s owner, New York City-based Lightstone Group, defaulted on $74 million in cross-collateralized mortgages, including one on Shenango Valley, in September. To help the lenders deal with the fallout, Jones Lang LaSalle’s value recovery services group has stepped in to assess the condition of the mall and advise on the best course of action, be it a discount sale, a capital infusion, a joint venture or some other method of recouping lost value. The mall is in decent shape, compared to some other properties he’s seen, according to Greg Maloney, CEO and president of Jones Lang LaSalle Retail, an Atlanta-based third party management firm, with an occupancy level of between 70 percent and 80 percent. Current tenants include American Eagle Outfitters, Bath & Body Works and Bon Worth. Over the next several months, the company will review the mall’s revenues and operational expenses, pay all outstanding bills, make sure the asset is being managed properly and come back to the lender with a recommendation for the best solution going forward. “We will just sort of monitor it for them and manage and lease it, as with all of our assets, and will try to advise the lenders on what our opinion is of the property,” Maloney says.
Shenango Valley is one of four malls to come into Jones Lang’s value recovery group’s hands since December. The others are 478,000-square-foot Mount Berry Square, in Rome, Ga., 335,000-square-foot Bradley Square in Cleveland, Tenn. and the 556,000-square-foot Martinsburg Mall, in Martinsburg, W.Va. Altogether, Jones Lang LaSalle now has 16 commercial properties under receivership and 7 additional properties in various states of distress that it’s monitoring while the lenders decide on what to do next. For the company, this isn’t a new business. It’s always had professionals with receivership experience on staff, according to Maloney, who himself has a 15-year receiver track record, but after last year’s RECon conference in Las Vegas, the firm decided it was time to consolidate its forces into a new unit. The creation of the value recovery services group was announced this November.
“It was right around the Las Vegas time that we started to hear all the rumblings [about upcoming defaults] and decided to get all our ducks in a row should the lenders need our services to take these properties back,” Maloney notes.
Jones Lang isn’t alone in attempting to tap what could become a booming business during the next few years, as the commercial real estate industry experiences a steep downturn. Other companies have started new distressed asset businesses or bolstered existing operations. Savills LLC, a New York City-based real estate investment banking firm, launched a distressed real estate division. Cushman & Wakefield, the New York City-based international brokerage firm, formed a resolution group. Grubb & Ellis, a Santa Ana, Calif.-based real estate services provider, started a financial services asset management practice. And Sperry Van Ness, an Irvine, Calif.-based real estate investment brokerage firm, put together an asset recovery team. In addition, CB Richard Ellis and Marcus & Millichap Real Estate Investment Services, each consolidated existing distressed asset networks.
“We are going through a cycle where there is going to be a tremendous amount of distress in virtually every [real estate] sector and to ignore that would be impossible,” says Jeffrey W. Baker, executive managing director with Savills. “The only transactions that are happening are the ones where there is some level of distress, whether a broken capital structure or an asset with an underlying issue.”
Increasingly, it appears commercial real estate will face a reckoning not unlike what has occurred in the residential real estate market. Much of the commercial real estate boom in recent years was fueled by cheap and freely available debt. Often, commercial real estate loans were structured on interest-only payments for years, with balloon payments at the end of loan terms. However, in many cases, borrowers simply refinanced before those payments came due, in a strategy similar to what subprime borrowers on housing loans did after teaser periods on their mortgages expired. On the residential side, when house prices stopped rising and the availability of mortgages decreased, delinquencies and defaults spiked. A similar scenario is now facing commercial real estate, where $3.4 trillion in debt is outstanding, according to the Mortgage Bankers Association (MBA). Borrowers facing balloon payments are either finding they can’t get refinancing at all or when they can, the terms are much more conservative, with lower assessed values and loan-to-value ratios requiring new infusions of equity.
That’s where distressed asset specialists plan to come into play. Most of the firms currently offering distressed asset solutions aim to be full-service providers for the lenders—after evaluating a given asset and advising the lender on how best to recoup value, these firms have the capability to manage distressed properties long-term in an attempt to raise cash flow, arrange capital infusions in the form of joint venture partners or, if need be, take the asset to market through an auction. Many, including Jones Lang LaSalle, also offer advisory services to owners who suspect their assets might be at risk of distress. How the firms get paid depends on the scope of the services offered—for example, Marcus & Millichap, which does not offer property management for distressed assets to avoid conflict of interest, gets compensated only when it has closed a sales transaction, according to Bernard J. Haddigan, managing director of the national retail group with the firm and head of its special asset services division. But a company that secures a contract to manage and lease a distressed asset could also gain revenue that way, according to Jones Lang LaSalle.
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