In addition, Strockis points out that the FDIC is promoting whole-bank acquisitions of failing institutions-sometimes with loss share provisions. "These acquiring banks are buying distressed loans and REO property at substantial discounts and have the staff, expertise and capital to create value back into these NPLs and REO assets," he says. "These acquiring banks will also take a three- to five-year horizon to maximize proceeds."

The question of whether to sell now or wait was high on the agenda at the Grubb & Ellis annual meeting earlier this year, where a panel on distressed assets discussed what goes into deciding whether to sell the REO or wait for an "as-stabilized" sale after the property is leased-up or otherwise improved. Paul Nakae, an executive vice president and workout manager in the San Francisco office of Bank of the West, said that the lender takes both a short- and long-term approach to the recovery of assets.

"On larger assets, we may be willing to wait for an as-stabilized disposition if we can maximize recovery," he said. "On smaller assets, if the monetary difference between the ‘current as is' and a ‘stabilized' value is small, the bank will look to sell immediately."

He pointed out that the bank tries to look at the timing and the reward of the cost of managing it through the stabilization process. Also, he said, the bank will sell notes on assets that are either small or have liability issues that the bank would prefer to avoid.

Nakae cited the example of a partially built seniors apartment project that Bank of the West foreclosed on. The bank completed construction, hired an outside property manager, initiated a leasing program and had the property about 85% leased, with plans to put it on the market this past spring. By contrast, senior vice president Wayne Pitman of UK-based Lloyds Banking Group said his bank would probably not tend to take such a long-term view, although the decision is very much based on the individual asset.

Dallas-based Steve Pumper, executive managing director of Transwestern's investment services and asset services groups, points out that the decision depends on who is foreclosing on the asset and where you are in the fundamental recovery cycle. One key point, he says, is that if you are going to foreclose on something but take the time to add value, "You need to be in markets where job growth is occurring." Pumper says adding value might be a good bet in markets where fundamentals are heading in the right direction. He cites places such as Dallas; Houston; Austin; Orange County, CA; and possibly Denver-in addition to the obvious candidates like New York City; Washington, DC; and Boston.

If you foreclose on an asset and immediately put it on the market, that's one thing, Pumper says, pointing out that this is what the majority of people do. "But there's a group that happens to be willing to take it back and add value through the lease-up period, through the blend-and-extend of current tenants, through the funding and TIs of commissions that may not have been done by the previous ownership," he says. "They ultimately might hold it anywhere from a year to two-and-a-half years. They're hiring property managers and leasing people to handle their buildings in the interim, and they're performing the asset management function," he explains. But you have to assess all of this against your internal capabilities to asset manage the property. You also have to evaluate the external team charged with the management and leasing, Pumper says. "Ultimately it comes down to each individual situation," he says. For example, "If you had an owner who hadn't done anything in the past 12 months and hadn't been able to fund TIs or commissions," foreclosing and adding value might make sense. "If you can foreclose, quickly shore up some of the tenants and then maybe add some occupancy and reintroduce the asset into the marketplace, then the foreclosure/ upgrade process may make sense."

San Diego-based Pathfinder Partners LLC, which specializes in opportunistic investments in distressed real estate assets and defaulted loans, recently acquired 20 units in Hunter's Chase, a condominium project in Parker, CO, outside of Denver. Bringing a long-stalled property back on the market, Pathfinder listed it with Denver-based Koelbel and Co.

According to Lorne Polger, senior managing director of Pathfinder, the project was bank-owned for a number of years when his company acquired it in late April. "Our focus will be on concluding construction immediately and selling the condos over the next six to 12 months." The Hunter's Chase project was first developed in 2005, but construction was halted in 2007 when the economy soured." As Pumper suggests, Pathfinder's approach may be the path that others take. As asset quality gets better, he says, foreclosing and adding value might well "become the place where you have opportunities where you really didn't last year."

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