On one side are the private buyers who have been amassing capital (though recent market woes may have hurt them significantly). Berkshire is already buying distressed debt, while companies such as Northland Investment Corp., an apartment owner based in Newton, Mass., are considering jumping into the arena as well.
Apeseche, head of a private company that will close a $600 million fund early next year that hasn’t been allocated yet, says both opportunity funds and hedge funds (those that remained healthy) are looking at buying distressed paper.
“There are lots of funds sitting on the sidelines,” says Tim Beaudin, chief property operating officer for AIMCO, a Denver-based REIT with 188,672 apartment units. “Those guys tend to be more aggressive and take bigger swings at the ball.”
Then there are the REITs. Campo—armed with Camden’s two recently closed funds with combined equity commitments of $375 million—is prepared to scoop up the debt under these projects or provide an infusion of capital, provided he can get a good return.
That’s why Campo is looking at the less direct—and possibly riskier—route of buying the debt or providing the loan to the owner. There are advantages in pursuing such a strategy. Returns can be much higher, but that return has a price. “If you see opportunities at 15 percent or 16 percent, it’s for a reason,” St. Juste says. “It’s because of risk.”
In some cases, it may be simpler to buy the asset outright. But often, the owner won’t sell for just any price. That’s what Campo found during the last downturn. “When you made a low-ball offer, people capitulated,” Campo says. “And people were unwilling to take their losses. There wasn’t a great opportunity to buy stuff cheap. The question is whether that happens this time.”
Then there’s the chance of the owner defaulting and the opportunity to assume ownership of a property at a deep discount. “If you’re the debt holder and the equity gets whacked out, you may come into control of an asset [or a company] via this debt investment as opposed to acquiring the equity,” St. Juste says.
ACTION ITEMS:DEBT AHEAD
Buying debt at an apartment property is risky. Here’s what to remember before jumping in.
- 1. Measure risk. Taking on lending can be a risky proposition. Just ask the banks that have either gone out of business or gotten swallowed up this year. “I’ll look at the property and see [that] it was worth $100 million a year ago, the bank lent $90 million, and I will have $75 million in it,” says Ric Campo, chairmain and CEO of Houston-based Camden Property Trust. “Is that a reasonable gap for me to take the risk of owning that piece of paper?”
- 2. Know the property. If your goal is owning the asset, make sure foreclosure is a possibility. “We would consider buying in if the long-term fundamentals are good, there are no construction defects, and we had clear rights as the lender and would end up owning in the near term [assuming the debt is in default with the foreclosure process well on its way],” says Michael Lynd, president of The Lynd Cos., a multifamily owner and manager based in San Antonio.
- 3. Stay competitive. Once the market hits the bottom, you need to have your own house in order. Experience with complicated transactions doesn’t hurt, either. “As we come out of this, the companies that are operated well and have good balance sheets will give you an advantage,” says Tim Beaudin, chief property operations officer at Denver-based REIT AIMCO.
