While Distress Is Building For CRE, Resolution Needs To Come Before Foreclosure

About $950B in commercial real estate loans are set to mature by the end of 2024. This number is expected to rise to nearly $1T in 2025 and peak in 2027 at $1.26T. 

Within this landscape, CRE may need to navigate a considerable level of distress, SitusAMC Head of Special Servicing Curt Spaugh said. But rather than wait for the impact of rising delinquencies to hit, the best way to achieve long-term success is to pursue resolution.

“Taking a resolution-first approach is undoubtedly the best strategy to maximize recovery for everyone involved,” Spaugh said. “This isn’t easy, but if a lender focuses on collaboration and clear communication, backed up by a holistic evaluation of the situation, a much better outcome can be achieved.”

SitusAMC’s special servicing team manages complex capital structures, including bankruptcy proceedings across all property types. The company is the named special servicer on more than $121B in CRE debt and has helped resolve $21B of unpaid principal balance over the past few years.  

When a client engages SitusAMC to help them navigate distress in their portfolio, the team begins by evaluating whether there are alternative options to foreclosure, Spaugh said.

“We want to avoid having to liquidate collateral at a time we believe is the bottom of the market, but there are essential criteria to make that work,” he said. “One is that the borrower needs to be capable. Once we’ve done our due diligence on the borrower, we need to conclude that the distress isn’t the borrower’s fault but is caused by the market.”

Many borrowers have assets in distress due to market conditions following the pandemic, Spaugh said. SitusAMC’s team takes the time to fully understand market conditions, which includes speaking to local brokers to understand requirements of the current pool of prospective buyers and tenants.

A second factor that determines whether it is possible to avoid foreclosure is whether or not there is evidence of commitment from the borrower, Spaugh said.

“If we’re going to defer debt services or modify the loan, they need to give some sort of financial commitment that they will turn assets around, perhaps by making improvements to get a new tenant in,” he said. “Navigating defaults can be stressful, so it’s natural to want to find a solution as quickly as possible, but lenders could end up missing out if a solution is landed upon without due consideration.”

Where a resolution-first approach is possible, the result benefits everyone, Spaugh said. SitusAMC’s special servicing team recently helped a private equity firm manage a default after a borrower abandoned a hotel when the pandemic first arrived, and the special servicer aided in rebuilding the value of the investment.

The hotel operator had received $332M from the lender. SitusAMC filed the judicial foreclosure in October 2020, and once a receiver with hospitality expertise was appointed, the team monitored management with minimum staffing, improved operations and forecast when the hotel could reopen, avoiding further operating losses.

When the hotel reopened in July 2021, SitusAMC developed $17M in net cash flow in the first full year of operating. Once the foreclosure was complete, SitusAMC negotiated the sale of the property to use proceeds to repay senior secured debt and all operating advances. 

Spaugh said this example, like many for SitusAMC and its clients, required all stakeholders to be committed to transparency, collaboration and constant communication.

“It’s essential that a special servicing team is deeply connected with all stakeholders and is considering everyone’s perspective,” he said. “This allows us to weigh up potential strategies and align everyone’s interests.”

A resolution-first approach isn’t always possible and depends largely on market conditions, Spaugh said. While retail is generally performing well, the office sector is still facing distress in many areas outside of major cities such as New York.

“You have to be more creative with solutions, but you also have to deal with reality,” he said. “Some Class-B buildings built in the 1980s are simply not desirable. When tenants leave, it could mean there has to be some kind of conversion.”

SitusAMC’s special servicing team averages more than 30 years of experience in advising clients and achieves a 92% recovery rate through its understanding of markets, Spaugh said. As well as maximizing the immediate recovery of a distressed asset, there are longer-term benefits to this holistic approach.

“Ultimately, we want to help lenders and borrowers avoid revisiting the same challenges,” he said. “Our strength lies in our ability to carry out the research necessary, weigh up all the options and create a clear strategy that works for everyone. This way, we foster long-term sustainability for bondholders.”

This article was produced in collaboration between SitusAMC and Studio B. Bisnow news staff was not involved in the production of this content.

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