The Opportunity
As a result of the economic downturn, banks are trying to dispose of distressed notes secured by real estate (including high quality real estate given an appropriate financing structure). Most investors are unwilling or unprepared to pursue acquiring distressed notes, resulting in an opportunity to buy distressed real estate secured notes at heavy discounts.
The opportunity is found by accessing distressed real estate notes offered by financial institutions on sealed auction platforms to the highest bidder. Typical discounts range from 30-90% discounted off the Unpaid Principal Balance(UPB) of the note. Most of these notes are non-performing and will require negotiations with the borrower and assessment and implementation of a workout or a foreclosure process to maximize the return on the investment.
An example of a note offered for sale at a bank auction:
Original Purchase Price of Collateral: $25,000,000
Original Balance of Note: $15,000,000
Current UPB: $15,300,000
Market Value of Collateral: $9,390,000*
Current Quick Sale Value of Collateral: $8,400,000*
Winning Bid: $4,600,000
Discount Rate from UPB: 70%
Potential Equity: $3,800,000 - $4,790,000
*The Market Value was determined by an appraisal less than 6 months old. The quick sale value was determined by multiple professional local brokers’ opinions for a 90 day sale price determination.
Post Acquisition
After the purchase of a distressed note, the asset and borrower must be further evaluated to determine the best investment strategy. We can work with the borrower to restructure the loan, to enable the borrower to refinance which will result in a quick payoff and quick profit for our stakeholders; or we can modify and extend the loan for the borrower resulting in interest payments for a period until a refinance can be obtained; or we can proceed with foreclosure and seize the real estate collateral. Some assets may warrant additional capital infusion to make repairs or improvements, to enable further leasing of the property, to otherwise enhance the value or marketability of the property, or to fund expenses. If Crown Capital is managing the asset, this will be determined on a case by case basis by our management team subject to appropriate approval by our equity partners.
Thus, in addition to any note payments or cash flow realized from the asset, a return on investment can be realized either through a payoff of the note (including an agreed reduced pay off) by the borrower in connection with a structured workout, thereby allowing investors to benefit from the discount rate off the UPB; or from a foreclosure and subsequent sale of the real estate collateral, thereby recovering the equity in the collateral (over the investment). |
