DRA Purchases $48M Construction Loan

SUMMIT, NJ-Locally based Diversified Realty Advisors recently purchased a $48-million nonperforming construction loan from a four-member consortium of banks. The loan, of which half of the principal balance is outstanding, is for a fully completed, mixed-use condominium building in Hudson County. DRA, which declined to give the property’s owner or location, acquired the note for cash after a brief due diligence period.

“Our strong relationships with the banking industry and strategy of targeting the loan opportunities that have arisen due to distressed market conditions has placed us in a unique position to effectively assist banks in getting these loans off their balance sheets,” DRA partner Jonathan Stein tells GlobeSt.com.

While savvy investors are now starting to scoop up poorly performing loans, many properties are still in limbo. To a large degree, the federal government’s various recovery/bailout programs have enabled lenders to delay bringing their assets to market. “Ultimately, these programs are dragging out any sort of resolution,” says David Csontos, executive managing director of FirstService William’s New Jersey office in Parsippany. “It’s almost like kicking a can down the street.”

Also, the low interest rate environment has enabled some properties to weather the storm longer than anticipated and lenders have been hesitant to sell whole loans given the lack of recent sales needed to establish legitimate valuations.

But DRA’s Stein predicts we’ll start to see more product coming to market now that deals are clearing and pricing is being established. “Some of the larger banks that have repaid their TARP dollars are going to start looking to release their toxic assets now that they are in compliance, so we are going to see a wave of opportunities in the next couple of months,” he predicts.

To that end, several large lenders, such as Prudential and Teachers, have begun to shed assets; the former is currently in talks to sell the 573,000-square-foot Willow Oaks Corporate Center in Merrifield, VA to an unidentified REIT for around $110 million in cash.

And with nearly $7 billion in capital sitting on the sidelines, certain investment opportunities are available. “There are the core assets, meaning class A, institutional-quality properties, and then there are some very opportunistic buys,” says Csontos. To his point, Boston-based REIT HRPT Properties Trust recently purchased 111 River Rd. in Hoboken, a 530,000-square-foot, class A office building, from JPMorgan Chase for $140 million. JPMorgan picked up the property from SJP Properties in 2004 for $180 million.

While not abundant, Csontos notes that these kinds of deals are coming to the marketplace primarily from institutional owners that, in the case of JPMorgan, were faced with redemption requests from some of their funds, and in order to satisfy those requests needed to liquidate assets. “The properties that these owners are more likely to achieve execution on are the high-quality assets,” he adds. “So if you’re a buyer and you want to purchase something that absolutely needs to be sold, it’s going to be those high-quality deals.”

At the other end of the spectrum, FirstService recently brokered the sale of a vacant building in Clifton on behalf of an unnamed client. According to Csontos, it was a surplus, corporate-owned asset. “The company retrenched and pulled back into some of their other owned assets so this became extraneous.” The building ultimately sold at a fraction of what it would cost to build, though he declined to give figures.

But while there is money available for these types of opportunities, it’s the assets between that are stagnant. Still, Wall Street abhors a vacuum. “When they see a void in the capital markets, they are going to fill it,” Csontos predicts. “We don’t know how. It could be some reiteration of a REIT, a CMBS or something new altogether, but whatever the solution there’s going to be a lot more regulatory oversight than there was in the past.”