$70M Loan Offering Provides Market Snapshot

CENTURY CITY, CA-Commercial real estate investment banking firm George Smith Partners Inc. is marketing $70 million of loans on behalf of two banks in an offering that provides a snapshot of where the market for lender assets stands and where it is heading. The $70 million in loans includes a portfolio of 10 land development loans and a $31 million loan that is secured by 5.29 acres of land on the Las Vegas Strip across the street from the Mandalay Bay Resort.

The loans are the first to be offered for sale by GSP through the firm’s new Lender Services, Asset Sales and Advisory Group, which was formed last year to market and sell lenders’ assets and to offer services such as portfolio evaluation, workout advice and other strategies designed to help lenders maximize their assets. The 10-loan portfolio is owned by a West Coast regional bank the Las Vegas loan is owned by a Midwestern community bank.

David Rifkind, principal and managing director of George Smith Partners, tells GlobeSt.com that the portfolio of 10 is a mix of performing and nonperforming loans, leaning toward nonperforming, while the $31 million loan is nonperforming. GSP is marketing the 10-loan portfolio for sale as a portfolio, individually or in groups.

While the specific pricing of the loans will be determined by the bids received, Rifkind says that since the 10 are mostly land-development loans for single-family tracts, the assumption is that they will be discounted. “What we’re learning in marketing these loans is that the spread between the bid and the ask is very wide,” Rifkind notes. He says that those spreads are just beginning to narrow as the sellers of the notes “become more realistic in understanding where the market is.”

Although George Smith Partners has sold loans on an ad-hoc basis from time to time throughout the 17-year history of the company, these are the first loans that it has taken to market as an organized sale under its new lender services group. In addition to the loans now on the market, Rifkind says that GSP is working on a significant amount of loans that it is in the process of listing. The firm expects to have an average flow of between $15 million and $50 million per month in new product to take to market.

The first $70 million in loans that GSP is offering are coming to market at a time when the real estate and financial industries have yet to establish pricing for such assets because relatively few loans have been sold, according to Rifkind. “There has been very little product to bid on, but we believe that in this first quarter we will start to see more product come to market, so that pricing trends will start to establish themselves and be more reliable,” he says.

Commercial real estate brokerages and research firms that track loan defaults have thus far reported relatively low default rates, but Rifkind points out that it’s hard to get a true vision of how many commercial loans are in default because many institutions and banks have been holding off filing defaults for various reasons. One reason is that, for a while last year, lenders delayed decisions on selling assets in the hopes that they would get an infusion from the government’s Troubled Asset Relief Program that would reduce their need to sell assets.

Now that there is a clearer understanding of how TARP is going to work and which banks will or will not receive TARP funds, “We think we are going to see a lot more of both REO assets and loans that will need to be sold,” Rifkind says.While there is much talk in the press about potential defaults, “What is motivating the sale of loans is liquidity more than defaults,” Rifkind notes.

Rifkind points out that GSP’s new lender services group is providing a number of other loan-related services that reflect what is happening in the commercial real estate finance arena right now. For example, it is working on a number of cases in which a lender has gone bankrupt and there are multiple investors in its loans. These are “very complex transactions” that can have up to 10 or 15 investors on any one loan, Rifkind explains.

GSP is also working with participants in loan syndications in helping them with liquidity. As an example, Rifkind explains that a syndication might include 10 banks, with three that need to get out of the loan while the remaining seven don’t want to sell. GSP’s job in these deals is to make a market for the lenders who want to sell. In light of market conditions and the lenders’ needs for liquidity, GSP’s mission is “to make the deals as strong and rapid as possible for both the buyers and the sellers,” Rifkind says.