Working at Workouts

6420 Words Dec 4th, 2014 26 Pages
For the exclusive use of C. JUTIDHARABONGSE
KEL697
Revised October 16, 2012

CRAIG FURFINE

Working at Workouts:
Commercial Real Estate Debt in Distress
Sam Schey, asset manager at Drive Property Solutions, came into his office on Monday, May
10, 2010. He had just returned from a weeklong tour of distressed retail properties in the southeastern United States. Touring commercial properties at various stages of distress was the most fascinating part of Schey’s career. His specialty was “special servicing”—the resolution of defaulting commercial real estate loans—a niche industry that had recently become big business in the wake of the severe downturn in commercial real estate.
On his voicemail Schey heard a message from Jonathan Stewart, a
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government in charge of finding acquirers for the assets and liabilities of failed banks. By May 2010, the FDIC had closed or facilitated the acquisition of 245 banks since the onset of the financial crisis.1
As a result, the FDIC had amassed a portfolio of more than $7 billion of largely nonperforming mortgage loans, much of which was secured by commercial real estate properties.
The influx of loans was overwhelming and, more often than not, the receivers put in place by the
FDIC simply monitored payments while the government agency assembled portfolios of loans to market to bidders for their large note auctions. These auctions were marketed to a dozen or so approved bidders, who would be equity partners in joint-venture relationships with the FDIC for the liquidation of these pools of assets. These investors would assume the risk of nonpayment on the loan in exchange for purchasing the distressed notes at a discount. For example, a bidder might be willing to pay $650,000 for a loan (mortgage note) that carried a face value (promised repayment) of $2 million.

Drive Property Solutions
Once investors purchased these distressed notes, their interest was to maximize their financial recovery. Because distressed commercial property was a unique asset, investors often looked to special servicers to try to maximize their recoveries from the nonperforming loans. Drive
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