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VOL. 126 | NO. 246 | Monday, December 19, 2011

‘Get In and Out’

Companies find value in Memphis’ distressed properties

By Sarah Baker

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In a local commercial real estate market where prices have plunged as much as 40 percent from 2007 peaks, special service companies are taking advantage of opportunities for buying distressed debt.

The Home Depot at Winchester and Riverdale roads is part of Cross Creek Shopping Center, one of the properties LNR Partners LLC has been involved in.
(Photo: Ben Fant)

National players that have the cash and resources – such as CWCapital, RAM Realty Services and LNR Partners LLC – are currently active across various property types and portfolios.

Special servicers work to recuperate and maximize the return for bondholders of distressed or non-performing commercial mortgage-backed securities loans, said Andrew Phillips, vice president of Colliers International. This can be done by way of a note sale – where an investor purchases the debt – or by traditional sale after a property has become real estate owned.

“The goal of a special servicer is simply to salvage the integrity of a property’s value when the borrower has either defaulted or is unable to financially operate and manage the property,” Phillips said.

Case in point is Miami-based LNR Partners, a subsidiary of LNR Property LLC – the world’s largest commercial mortgage special servicer. As of June 30, LNR Partners Inc. had 14,616 special servicing loans with a total U.S. collateral amount of $192.3 million, according to a mid-year 2011 report by the Mortgage Bankers Association.

Throughout 2011, LNR has been involved in a number of high-dollar Memphis real estate transactions – both acquisitions and dispositions – all involving property it acquired through foreclosure sales.

Sales included Cross Creek Shopping Center at Winchester and Riverdale roads for $12.7 million and Trinity Ridge Business Center in Cordova for $7.6 million.

Purchases – again, all at foreclosure sales – included Waterford Place Apartments for $18.2 million; The Villas at Cordova apartment complex for $14.2 million; Bartlett Logistics Center for $15 million; and Oakwood apartment complex in Germantown for $17.1 million.

Some local CRE players are familiar with the firm from its involvement in the foreclosure sales of Cordova’s Trinity Place and the former Comcast Building at 6555 Quince Road during 2009.

“Memphis has seen its fair share of properties that were purchased at the height of the real estate boom that have been foreclosed,” said Phillips, who was involved in brokerage for the Trinity Ridge Business Center and Bartlett Logistics Center. “This typically occurs when either the operating income has deteriorated to the point where the monthly debt cannot be serviced or the original loans have matured and the borrower has been unable to refinance due to an overall loss in value.”

Servicers like LNR act as a third party on behalf of an owner, in essence serving as a trustee between the two parties, said Danny Buring, partner with The Shopping Center Group LLC.

“They’re not the owner, they’re not the lender, and they’re not the group that got the loan that’s being foreclosed on, obviously,” Buring said. “Like an attorney would act as a trustee, the attorney’s name may be on closing documents and it may have actually shown them as an owner, but they’re really acting as a trustee.”

Buring sold Cross Creek on behalf of Michael Lightman in May 2005 for $57.5 million to Washington-based Premier Management.

In November, Commack, N.Y.-based Allied Development of Memphis LLC bought Cross Creek for $12.7 million. The seller was JPMCC 2005-LDP2 Riverdale Retail LLC – an entity managed by LNR Partners LLC that bought the property for $12.3 million out of foreclosure in October 2010.

From start to finish, LNR’s involvement with Cross Creek was 13 months.

The goal is to be involved in an asset on as short of a term as possible, both for themselves and their clients, Buring said.

“They’re a fee-based company and they’re probably making the same fee, whether it’s two years or two months, so get in and out,” Buring said.

And unless there are some extenuating circumstances, it’s uncommon to see companies like LNR in a fire sale situation, Phillips said.

“Servicers would like to (sell) in the shortest timeframe possible, but are not necessarily driven to liquidate as soon as it hits their REO department,” Phillips said. “Most of the time, it is best for them to try and stabilize the income of the property and take the property to market in an orderly fashion.”

PROPERTY SALES 23 23 1,365
MORTGAGES 21 21 1,068
BUILDING PERMITS 117 117 3,173