'Loan to Own Guys' Chase 12% Returns in Distressed Real Estate

(Bloomberg) - US $ 196 billion in commercial real estate private loan funds are on the brink of boom as real estate owners seek credit to help weather the pandemic.
Around $ 430 billion in trade and multi-family debt will mature in 2021, more than half of which is held by banks. Fresh capital is needed to deal with a tsunami of defaults.
Read more: Commercial Real Estate at $ 430 Billion
With banks looking to tick shaky debt and office, hotel and retail property owners resisting selling at distressed prices, private loan funds expect 2021 to be a busy year with plenty of opportunity to put capital to work.
"At 30,000 feet above sea level, these capital requirements will create a huge demand for debt," said Jonathan Pollack, global director of real estate debt strategies for Blackstone Group Inc., which raised a record $ 8 billion in debt fund that in September has been closed.
Commercial property sales were down 40% through November this year, led by a 72% decline in hotel transactions. For the most part, the market remains frozen as property buyers and sellers are far apart in price, according to Real Capital Analytics Inc.
Private credit fund managers anticipate a pattern similar to that of the global financial crisis, when distressed debt changed hands a year or two before buying opportunities.
Madison Realty Capital, a New York-based private equity lender with $ 5.6 billion in assets under management, is among the companies offering new debt to difficult borrowers after they have acquired their problem loans from banks and other lenders to have.
"Over the past 90 days, I've had many direct conversations with banks and debt funds about loan sales," said co-founder Josh Zegen. "We did some of these, but I see a lot more in Q1 and Q2 of 2021."
Runway ends
Russell Gimelstob, CEO of Ascendant Capital Partners, a Los Angeles-based financial firm with a $ 20 billion investment, new debt financing for distressed homes can generate returns of 10% to 12% for lenders.
Read more: Commercial property prices soar with distressed deals on hold
This is less than the potential return on buying distressed properties directly, but these deals will remain scarce until current owners run out of money or lenders run out of patience. That could take at least another year.
"We believe stock and real estate deals will be more common at the end of the runway," said Gimelstob.
Debt can be a way to buy real estate at a discount, with lenders being able to lock in and take over the property if borrowers default. Legal action in New York courts to seize property from criminal borrowers has already begun, led by Neil Shapiro, a real estate attorney with The Loan-to-Own Boys and the Loan We-Not-Owning Boys, Herrick Feinstein LLP said.
"As with any other cycle, I would expect these actions to accelerate since this stress has lasted for over a year," he said.
Bank Void
Private capital fills a void that traditional lenders have left. Commercial mortgage lending by banks declined 68% year over year in the third quarter, according to the Mortgage Bankers Association. Banks holding $ 1.5 trillion in commercial and multi-family debt have also been sluggish in lending. So far, regulators have allowed them to delay the recording of bad debt.
The Tax Relief Act passed by Congress allows for an additional year to account for these potential losses and extends the deadline to January 1, 2022.
Read more: Deutsche Bank to sell $ 814 million in commercial real estate loans
The lack of bad loans launched so far has surprised Kingsley Greenland, CEO of the Debt Exchange, who said that around $ 700 million was auctioned on its platform in the second half of 2020, which is opposite hardly changed in volume before the pandemic. But now there are more buyers.
"It's a classic demand that exceeds the supply scenario and drives prices up," said Greenland. "It's a seller's market."
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