reo lifecycle session at ccim live!

REO LIFECYCLE

Jeffrey S PitcherBallard Spahr, LLP

PartnerPhoenix, AZ

Tim MichelCassidy Turley

Senior Managing DirectorIndianapolis, IN

Steve PriceRealytics, LLC

OwnerColorado Springs, CO

REO Lifecycle Panelists

Working withServicers

and Receivers

Broker ToolsRequiredTo work with REO

TheLegal

Perspective

REO and NPN Market

CMBS and Banks

REO and NPN Market

For the Q2 reporting period in 2011 3,543 banks are reporting commercial REO for a total of $10.14B.

So far this year 73 banks have been closed by FDIC.

Source; FDIC

REO and NPN Market

Bank owned commercial property currently represents about 17% of the total distressed commercial real estate balances which for our purposes is made up of 30-day late, 90-day late, non accrual, and bank owned commercial property totals held at (non OTS regulated) US banks as of this release.

Source; FDIC

REO Market

MF 13%

OwnerOccupied

30%

ConstructionDevelopment

22%

Income Producing

35%

50 US Markets

OFFICE

APARTMENTS

INDUSTRIAL

RETAIL

Peak Years

CMBS

BANKS

How long will it last?




and Receivers

CMBS LOANS(Securitized Loans)

Multiple loans pooled and transferred to a trust

Trust issues series of bonds

Various tranches are sold (AAA to B-)

REMIC(Real Estate Mortgage Investment Conduit)

Tax Free Structure in which bonds are held

POOLING AND SERVICING AGREEMENT

Governs the allocation and distribution of

proceeds and losses to the Bond holders

MASTER SERVICER

Services the loans through maturity unless borrower defaults

SPECIAL SERVICER

• Loans transferred to Special Servicer upon borrower default

• Must maximize the recovery• Loan modifications• Foreclosures• Deed in lieu• Negotiated payoffs

Directing Certificate Holder(B-piece buyer)

• Most subordinate Bond Holder• First loss Bond Holder• Can appoint or terminate Special

Servicer• Many times they are the Special

Servicer

Most-Active Special Servicers Special Servicer #Loans Balance

($ mln) Mkt Shr

% LNR Partners 1,295 26,376.76 30.76 CW Capital 952 19,796.91 23.09 C-III Asset Management 665 9,944.76 11.60 Midland Loan Services 471 7,994.12 9.32 J.E. Robert Cos. 317 4,777.78 5.57 Helios AMC 194 3,691.77 4.31 Torchlight Loan Services 180 3,474.61 4.05 Wells Fargo Bank 44 3,257.36 3.80 Bank of America 17 2,597.80 3.03 Berkadia Commercial Mortgage 300 2,145.11 2.50

Source: Morningstar

4,562 loans totaling 85.7 billion

Most-Active Special Servicers

Property Type #Loans Bal ($mln)

% of total

Office 1,071 24,269.19 28.30

Multifamily 949 20,113.01 23.46

Retail 1,448 17,747.27 20.70

Hotel 434 12,711.28 14.83

Industrial 294 3,603.83 4.20

Healthcare 10 278.63 0.32

Other 346 7,018.83 8.19

Source: Morningstar

Special Servicer Divisions

• Work-Out Groups• REO Groups

Work-Out Groups

• Responsible for loan modifications, restructuring, and ultimately foreclosure

• Look to REO groups usually to determine who are the best providers in each market

• When an asset is in special servicing or work-out, the payments back to the bond holders cease.

REO Groups

• These groups will ultimately oversee the asset. They become the owner.

• They hire firms to manage, lease, and sell.

• After assets transfer from work-out to REO, payments back to bond holders resume until asset is sold to a third party.

What services are provided by the Commercial Real Estate Industry?

• Broker Opinions of Value• Receiverships• Property Management• Leasing• Disposition• Construction Management

General Receiver Duties & Responsibilities

• Appointed by and responsible to the Court, and has fiduciary duty to all creditors– NOT working for the foreclosing Lender– NOT working for the Debtor or Owner in

Foreclosure

• Receiver's decisions must place the interest of preserving the Property first

• Generally responsible for such activities as collecting income, paying bills, maintaining insurance.

Who can be a Receiver?It varies from state to state and really

depends on each states law:• Some states allow a corporation to be

appointed.• Many states, however, require that an

individual be appointed as a Receiver.• Some states even have approved lists of

Receivers and you must be on that list!

The Receiver's AuthorityA Receiver's Power or Authority comes

from two places:1) The Order entered by the Court that

Appoints the Receiver, and

2) The state's law where the lawsuit is pending. Each state has its own laws that govern how a Receiver is to conduct his or her services.

Why Become a Receiver?

The Receiver has control of the Property and appoints all property vendors thereby providing a real estate service provider with:

• The opportunity to manage the Property• The opportunity to lease the Property• The opportunity to sell the Property

Receivership Process

1. The Filing: A foreclosure suit is filed or is anticipated.

2. The Invitation: Generally the Lender in a foreclosure asks the RE company to act as a Receiver. (This request can come before or after the foreclosure action is filed.)

3. The Motion: The party seeking to have a Receiver appointed will file a request with the Court called “a motion to appoint a Receiver.” There can be agreements to appoint a Receiver or another party may vigorously oppose a Receiver's appointment.

4. If the motion is granted, the Court will enter an Order Appointing a Receiver.

Receivership Process

Essential Provisions to the Order Appointing a Receiver

1. Receiver's fee.2. Authorization to employ the company as

property manager.3. Authorization to employ the company as

listing broker.4. Authorization to retain Receiver's own legal

counsel at the expense of the property.5. Expenses of Receiver must be expenses of

the property.

Receivership ProcessEssential Provisions to the Order Appointing a

Receiver (continued)

6. Receiver must be named as an insured on existing insurancepolicies or be authorized to obtain insurance if it is not inplace.

7. Authorization for receiver to take immediate possession of the property and bank accounts, and to collect rents and all other amounts payable to landlord.

8. State if a Receiver's Bond is required and amount.

9. YOUR ATTORNEY SHOULD REVIEW ANY ORDER APPOINTING YOU AS A RECEIVER!

You've Been Appointed Receiver: Now What?

• Find the Money: locate all bank accounts and sources of revenue (leases, security deposits, accounts receivable, etc.)

• Verify Insurance: make sure that the property's insurance is in place. If it is not in place…get it.

• Obtain copies: of leases, loan documents and vendor contracts and give notice to tenants, lenders and vendors.

• Possibly inventory personal property: An inventory may be required (depends on the Order Appointing Receiver).

• Be ready to report to the Court: Make sure you have a suitable

report form for required periodic (generally monthly) reports to the Court.

• The Order Appointing the Receiver will give the Receiver the authority to make some decisions without Court approval (opening bank accounts, certain expenditures etc.)…

• Other decisions may require Court approval, such as signing leases or other contracts that may extend past the Receivership large dollar capital improvements, etc.– Know the Order Appointing you as Receiver– Know the state's law governing Receivers

You've Been Appointed Receiver: Now What?

Don't Forget…

• Receiverships are highly specialized areas of the law, and the law differs significantly from state to state.

• Generally, the receiver has the same immunities as the judge.


PartnerPhoenix, AZ

TheLegal

Perspective

Recent Receivership Issues

• Does the receiver have standing to defend claims and lawsuits arising prior to the appointment of the receiver?

• Can the receiver pay expenses arising prior to the appointment of the receiver?

• Are security deposits that are included in the receivership estate to be transferred to the lender?

• Does the receiver need to make new utility deposits?

Receivership Sales:• Does the receiver have the authority to sell the

real property?– Does the receiver have the authority to sell the real

property free and clear of liens?– Is title insurance available and when can the receiver

transfer title?• What limitations are there for receivers to extend

or enter into long term leases.• Can a receiver pay tenant improvement and

leasing commission costs?• Who is to receive the rents and other income

from the property in the receivership estate after a note sale?

What’s in your toolbox?

Is it time to knock the rust off your tools?

Or your ability to use them?

“We are paid in direct proportion to our ability to bring value to the

transaction.”

“Now’s the time to

sharpen your saw.”

Morgan Llewellyn, CCIMKent, WA

“We don’t pay a mechanic to use their tools, but to fix our problems.”

“We don’t pay a mechanic to use their tools,

“The genius of a master painter isn’t the fact that they use a brush.”

“They have the skill and talent to know where to put the paint.”

Surveyors charge not for hammering in the stakes, but knowing where they should go.

Investors

Business Owners

Brokers

Allied ProfessionalsCPAs

AttorneysManagers

Developers

Contractors

Architects Bankers

Landlords

Owners

Vendors

Referrals

The question isn’t…what’s in the box?

“The question is… what’s outside the box?

The question is…

Success Strategies

• Treat every transaction equally• Every assignment is an opportunity• Price your talent accordingly• Sell the salami a slice at a time• FEE, not FREE• Services are not benefits

Clients don’t really care about your products or services.

They care about how your product or service will improve their situation.

“So what are you going to do about it?”


PartnerPhoenix, AZ





Questions for our Panelists?


and Receivers


TheLegal

Perspective