Working at Workouts
For the exclusive use of C. JUTIDHARABONGSE
KEL697
Revised October 16, 2012
CRAIG FURFINE
Working at Workouts:
Commercial Real Estate Debt in Distress
Sam Schey, asset manager at Drive Property Solutions, came into his office on Monday, May
10, 2010. He had just returned from a weeklong tour of distressed retail properties in the southeastern United States. Touring commercial properties at various stages of distress was the most fascinating part of Schey’s career. His specialty was “special servicing”—the resolution of defaulting commercial real estate loans—a niche industry that had recently become big business in the wake of the severe downturn in commercial real estate.
On his voicemail Schey heard a message from Jonathan Stewart, a lawyer representing
Michael Burton, the current owner of Northwinds Community Crossing, one of the distressed properties Schey was overseeing. After deciphering the lawyer-speak, Schey believed that
Stewart was offering a financial settlement. With an interest in resolving as many of the distressed properties as possible at the greatest value to Drive and its outside investor partners,
Schey anticipated some long days ahead preparing for a protracted negotiation to resolve the problems with Northwinds.
Distressed Debt
During the commercial property boom of 2005–2006, owners of commercial property borrowed huge amounts of money directly from commercial banks and indirectly from sophisticated investors through the sale of commercial mortgage-backed securities—a trend that would soon reverse itself (Exhibit 1). As the economy began to weaken in the latter half of 2007, commercial property owners were faced with rising vacancies and lower rents (Exhibit 2). In an increasing number of cases, property owners were left in the unenviable position of not being able to meet loan obligations. Delinquent loans—those in obvious financial distress—rose dramatically (Exhibit 3).
Traditionally, lenders negotiated bilaterally with a borrower in
KEL697
Revised October 16, 2012
CRAIG FURFINE
Working at Workouts:
Commercial Real Estate Debt in Distress
Sam Schey, asset manager at Drive Property Solutions, came into his office on Monday, May
10, 2010. He had just returned from a weeklong tour of distressed retail properties in the southeastern United States. Touring commercial properties at various stages of distress was the most fascinating part of Schey’s career. His specialty was “special servicing”—the resolution of defaulting commercial real estate loans—a niche industry that had recently become big business in the wake of the severe downturn in commercial real estate.
On his voicemail Schey heard a message from Jonathan Stewart, a lawyer representing
Michael Burton, the current owner of Northwinds Community Crossing, one of the distressed properties Schey was overseeing. After deciphering the lawyer-speak, Schey believed that
Stewart was offering a financial settlement. With an interest in resolving as many of the distressed properties as possible at the greatest value to Drive and its outside investor partners,
Schey anticipated some long days ahead preparing for a protracted negotiation to resolve the problems with Northwinds.
Distressed Debt
During the commercial property boom of 2005–2006, owners of commercial property borrowed huge amounts of money directly from commercial banks and indirectly from sophisticated investors through the sale of commercial mortgage-backed securities—a trend that would soon reverse itself (Exhibit 1). As the economy began to weaken in the latter half of 2007, commercial property owners were faced with rising vacancies and lower rents (Exhibit 2). In an increasing number of cases, property owners were left in the unenviable position of not being able to meet loan obligations. Delinquent loans—those in obvious financial distress—rose dramatically (Exhibit 3).
Traditionally, lenders negotiated bilaterally with a borrower in