CHARLOTTE, NC-This week, Mountain Real Estate Capital, a locally based real estate company specializing in the buying and disposition of distressed assets, announced it had purchased a portfolio of 135 residential communities most of which are located in counties surrounding Atlanta.

The portfolio, which was sold by Synovus Bank, had a prior basis of $110 million, based on what was owed to the bank, but Arthur Nevid, chief investment officer for Mountain, did not reveal what his company actually paid for it, except to say that it was a discounted price.

There is a lot variability in the amount of discounting taking place today. But, on average, for commercial and residential properties, if they are non-income producing, or minimally-income-producing, they usually sell for between 25% to 30% of the original price, says David Walmsley, executive vice president at the Atlanta-based Jordan Co., a commercial real estate investment brokerage firm specializing in lender-owned assets.  Included in this category are partially-completed subdivisions, partially-completed homes, fractured condominiums and office buildings with low or no occupancy.

Distress sales of large portfolios like the one from Synovus Bank are routine today, says Nevid, although he says that no one is keeping track of the dollar volume of these sales. Suffice it to say, though, the volume is huge, he opines. “In the last nine months, Mountain Real Estate Capital bid on $5 billion to $6 billion worth of notes and REOs and we don’t bid on everything,” Nevid says.

The higher the risk, the lower the price, say Nevid and Walmsley. And for land, the discount is generally deeper than for buildings, says Nevid. "That's because there is no obvious, immediate exit strategy for the property. It is harder to see what the future holds for land than for an office building," he says.

Walmsley says that he recently evaluated a raw piece of land “in a rural county about 30 miles north of Atlanta on the far edge of suburbia, but in a good area.”  The property was entitled, but foreclosed on by the bank because the borrower was in default on a $3 million loan.  In this case, he says, the land will probably sell for $300,000, a 90% discount.

Nevid forecasts a less dismal picture for the Synovus portfolio, which consists of 1,300 home sites and about 1,500 acres. The company’s plan is to first sell a portion of the project to merchant builders and secondly to build houses in joint ventures with local and regional builders with whom the company has an existing relationship. The portfolio has a combination of subdivisions with improved lots, unimproved acreage and some houses. Nevid expects that it will take three years to sell all of the inventory in the portfolio.

Most of the distressed assets being sold today are residential properties--single family homes, land and fractured condominiums. "The banks haven't let go of commercial properties as much as residentia," says Nevid. With these properties, they are still "extending and pretending,"he says. "If they can wait it out, they are not letting go," says Nevid.

"Everybody talks about the CMBS bubble" and property owners who can't pay their debt, says Walmsley. But the healthy stabilized assets, such as the well-leased retail centers where many tenants can't pay their rent because they are struggling, are not going back to the banks," he says. Today at least, it is only the half-finished deals, the properties which are in the wrong place and can't be rented, or which have some other obvious flaw, which are being taken back by the banks, says Walmsley.

Once properties are taken over by the lender, who then sells them, new owners often seek financing if they can get it. But land is almost impossible to finance, says Nevid. For non-distressed commercial buildings, it may be possible to get a loan with a loan-to-value ratio  of no more than 65%, but for distressed commercial buildings, a borrower can typically get only 50% loan-to-value, he says.

But even if loans are hard to come by, says Nevid, a leveraged return is still better than an equity return, which is higher. "If I buy a property for $1 million and can't get a loan, the cost to raise that $1 million might be 25% which is what equity investors are seeking today," he says."But if I buy an office building and and can finance $500,000 of it, half of my investment is purchased with more affordable debt at a lower interest rate, as an example 8% versus 25% for equity," says Nevid.

Because you can’t borrow to finance land, you have to assume that the whole property needs to earn 20% to 30%, so you will pay much less for it than for a commercial property, because it needs to earn a higher return,” says Nevid.

“Land values take the biggest hit, because even if the land is entitled, but no development has started, the hold period for the investor may be five to 10 years in a good submarket in Atlanta,” says Walmsley.

As for residential properties,"There is a terrific competition for high end homes. But with some assets in B and C markets, lenders can't even give the real estate away," says Walmsley. "The folks who are the most aggressive buyers are typically developers or builders who want assets that can be put into production immediately. They are interested in a one-to-three year investment window," he says.

“We brokered a subdivision sale in Fayette County in the Atlanta area, for a development called Waterlace,” says Walmsley. The original developer, Steve Macauley, an experienced Atlanta developer,  purchased the site, a farm, for $19 million, then developed 160 lots, 40 of which were sold, he says. A few months ago, the property was sold for $5.25 million to the Reynolds Development and Management Group after Macauley had spent about $4 million to $5 million in development costs, says Walmsley.