Structured sales can give asset-based lenders actionable insights into the value of real estate in the COVID-19 era, advises Jeff Hubbard, a Senior Managing Director at A&G Real Estate Partners, in a column for ABLAdvisor.com.
“Whether conducted in or out of court, structured sales can be an effective workout solution,” writes Hubbard, who has 28 years of experience across all real estate sectors. “They offer lenders protections that are particularly important in today’s volatile real estate marketplace.”
In the Aug. 24 column (Certainty in an Uncertain World: Structured CRE Sales Give Lenders Real-Time Data), Hubbard cites the example of a newly built student-housing complex to illustrate how the crisis can trigger questions about how much an asset is actually worth.
“The appraised value of that building was derived from the pre-pandemic assumption that it would be part of a fully functional college town—a place where students would be crowding into classrooms, sports venues, bars, restaurants and the like for most of the year,” he writes. “How do you put a number on the value of that building in a world of social-distancing and draconian capacity restrictions or outright shutdowns?”
Much the same can be said of offices, shopping centers, hotels, freestanding restaurants and other properties that were appraised prior to the crisis, Hubbard writes. His column provides a basic overview of the advantages structured sales offer to ABL lenders in today’s highly uncertain marketplace.
In these sales, Hubbard explains, bidders agree to the terms—including due diligence items like rent rolls, environmental reports, preliminary title commitments and management agreements—up front, as opposed to post-contract. “Especially in a time of uncertainty, handling due diligence in this way gives bidders a higher degree of confidence,” Hubbard writes. “It’s a step that bolsters the likelihood of achieving maximum pricing.”
These sales happen faster because the bidders have all agreed to the same set of terms as put forth by the seller—a big difference from conventional deals where disputes over terms can grind everything to a halt late in the game. Structured sales typically result in all-cash offers within 60 to 75 days, Hubbard notes, with sellers exercising greater control over both the process and timing.
In one type of structured transaction—a Section 363 bankruptcy sale—the secured creditor enjoys the right to wholly or partially cancel that borrower’s debt in exchange for those assets—no cash required—in a credit bid. “Acting as a qualified bidder in this way enables lenders to provide price support for structured deals even as they avoid the potential costs (in both time and money) that are so often associated with commercial foreclosures,” Hubbard writes.
He ends the piece by providing a detailed look at how secured creditors benefited in the structured bankruptcy auction of the main campus of the College of New Rochelle in New York’s Westchester County. Hubbard’s firm marketed the 20-building campus in 2019. Ultimately, the campus sold for $32 million—on an all-cash, non-contingent basis—explains Hubbard, whose team boasts 80-plus years of experience in structured sales.
“The College of New Rochelle was a difficult-to-value asset, because its future use was unclear. However, the top three bids all came in within $1 million of each other. It was an absolute demonstration to secured creditors of what the property was worth at that time.”