DETROIT, MI - Just a few years ago, Dennis Bernard would hear about three or four local properties at any given time that had loans in trouble. These days, his desk is stacked with papers detailing bad loans in metro Detroit. By his count, there are more than 200 loans either late on payments or in foreclosure.
As president of Bernard Financial Group, he has built a practice arranging loans for local businesses and servicing those loans for lenders. But as that business line has slowed, he's shifted his business focus to working with borrowers now in trouble. "It's not fun work, because people are hurting," he said. "But the business we're doing now is making money and my firm is OK."
Bernard Financial is an example of a commercial real estate firm shifting focus to adapt to the new real estate market. It's not alone. Loans are going bad. Properties are going into foreclosure. And banks and corporations need to hire professionals to guide them through the processes. As a result, there's a growing trend in firms managing real estate that has gone bad.
Southfield-based Farbman Group has a number of business lines, including a property management operation that has been hired as a court-appointed receiver for properties in foreclosure over the past 33 years, said president and CEO Andy Farbman. Farbman said the firm recently has targeted the receivership business as a potential for growth. The firm has expanded from its Michigan base and is working in nine states.
He said being Michigan based has given his firm an advantage when pitching for work in other states. "Dealing with troubled assets is a skill that a lot of firms don't have," he said. "It's a true Midwest "roll up your sleeves and get it done' type of work. And unfortunately, it's a business we know all too well."
At any given time over the past three months, his firm had 3 million square feet under management through court-appointed receiver programs. One million square feet of that portfolio is in Michigan.
His firm takes over a property and finds ways to reduce the expenses. It looks at how the bills are being paid and finds efficiencies. It extends the leases.
The properties range from major shopping malls to independently owned strip centers. "It's a prudent business, and it has an important place in the process," he said. "The best thing for the lenders and the best thing for the courts is to get a strong receiver in place."
Similarly well-positioned for receivership work is Ann Arbor-based McKinley Inc. The firm owns 11,000 units of rental properties and 4 million square feet of shopping centers — all purchased through receiverships.
So when lenders are looking for someone to manage and reposition a property, CEO Albert Berriz said his firm has credibility based on its own portfolio. "Lenders want us to help them the same way we've helped ourselves," he said.
McKinley is managing and consulting on a portfolio of 18,000 apartments and 5 million square feet of office and retail space in 14 states. The amount of business has doubled in three years. The idea that a business or real estate decision has failed isn't pleasant, but the work itself is, Berriz said. "When you enjoy solving complex real estate problems — and we do — it can be invigorating," he said.
Local law firms have been gearing their practices to work on bad loans from both the owner and lender sides. Detroit-based Honigman Miller Schwartz and Cohn L.L.P. has built a practice to represent developers and investors. As a result, the firm's real estate attorneys have gone from doing transactional work into a specialty of helping investors and owners keep their property, said Larry McLaughlin, chairman of the real estate department.
McLaughlin said that in the past, the firm typically did not represent people who found themselves in trouble with loans. "Now, our firm and other prominent firms are taking on these clients because it's a different scenario," he said. "Anyone who has had a real estate development financed in the last seven years may find themselves in this position."
Likewise at the Troy law firm of Miller, Canfield, Paddock and Stone P.L.C., Jim Allen's loan modification practice has grown from three attorneys three years ago to a current roster of 12. It's a growing sector of law work, he said, as the number of properties in trouble grows within the sector of commercial mortgage-backed security loans, situations in which many loans are packaged together and sold as bonds.
His firm is often retained by the special servicer, one of several key players in the real estate mortgage investment conduit, the overall structure of the CMBS loan. But unlike the master servicer, who maintains the division of interest payments to bondholders, or the primary servicer, who handles local borrowers, the special servicer is the person who can have a loan modified. "There was a time when a high percentage of loans were rehabilitated and sent back to master servicing," Allen said. "In those cases, they didn't need outside counsel. Now, a large number of loans need to be restructured or worked out."
Work on "bad" real estate is forecasted to be a growth industry locally and nationally.
The delinquency rate for CMBS loans increased nationwide from 0.53 percent in the first quarter of 2008 to 1.76 percent at the end of the first quarter of 2009, according to a recent report by New York-based Reis Inc., a real estate research firm.
The Detroit market led the way with an overall delinquency rate of 5.72 percent, with 14.4 percent of multifamily properties either delinquent or in default.
What's more, companies aren't able to pay off the loans once they start to slip.
At the end of the first quarter, $2.5 billion of CMBS loans in the United States reached maturity and needed to be paid off, according to a quarterly report from Standard & Poor's. Of that, only $1.09 billion was paid, representing 55.5 percent of the loans, compared with 83.7 percent paid off in the fourth quarter of 2008.
Further complicating the picture is that many of the loans are structured as 10-year loans, but monthly payments are equal to the monthly payments for a loan stretched out to 30 years, leaving a balloon payment due at the end of 10 years.
Many loans are coming due but cannot be replaced by new loans, Bernard said, because of the difficult national lending environment further complicated by Michigan's economy. In Bernard's business, he charges $10,000 to look at a loan and make an attempt to have it modified. If he is successful, the fee ranges from $25,000 to $75,000 for the modified loan.
In eight months, he has done 13 modifications representing $145 million in value. He has 12 deals in the pipeline. On the other side, a special servicer gets a fee of 1 percent of the value of the loan if a loan is modified. Bernard, as primary servicer, can be hired by the special servicer on an outsourced basis when there is an overflow of work.
It's been lucrative work, and it's expected to grow — though Bernard said he would rather see things go back to the way they were when he was originating loans and having fun. "This isn't something that I built my business to do," Bernard said. "But it's work that needs to be done, and I'm in a perfect position to do it."
Source: CrainsDetroit.com