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SANTA MONICA, CA-Locally based Colony Capital has acquired controlling interest in a $607 million portfolio of 760 loans secured by commercial real estate in 25 states throughout the US. Washington, DC-based shareholder Tom Galli of the law firm Greenberg Traurig, who represented Santa Monica-based Colony Capital in its acquisition of the controlling interest in the portfolio, tells GlobeSt.com that the structured transaction involved a public-private partnership between Colony Capital and the FDIC in its capacity as receiver for 42 failed banks.
Galli explains that Colony acquired a 40% stake (the controlling interest) in a newly created entity to which the FDIC contributed the loan portfolio, and in which the FDIC retains the remaining 60% interest. In the transaction, the FDIC provided financing of $164 million.
With this transaction, Galli has represented different private equity firms on eight out of the last 11 commercial real estate/land loan portfolios included in structured transactions in public-private partnerships closed by the FDIC. Those eight loan portfolios have an aggregate unpaid principal balance of approximately $5 billion.
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Galli points out that the offers on the $607 million loan portfolio, which attracted multiple bidders, were submitted before the turmoil in the stock market. “I think that as a result of what has happened the last couple of weeks on Wall Street, there is now more uncertainty than ever relative to the timing for recovery,” he says.
As a result, Galli says, “I expect there will likely be a widening of the bid-ask gap between banks and the private sector.” Bidders are likely to rethink pricing on portfolios going forward, Galli says, and therefore they will likely be offering lower bids, especially for smaller-balance loan portfolios secured by property in tertiary markets.
In addition, pricing is becoming more competitive because the investors bidding on the portfolios have lowered their expectations relative to return on investment, Galli notes. He says that’s happening because investors who can’t find opportunities to satisfy their requirements for return on investment are lowering those requirements in order to be more competitive.
The Wall Street turmoil has added more uncertainty to a pricing question that was already difficult, according to Galli. “We have all been trying to figure out a pattern of pricing, but you are never going to be able to figure out a pattern of pricing for these non-performing loan portfolios, whether they’re coming from the FDIC, from banks or from somebody else, because they have so many different characteristics to them that you can’t identify a trend,” he says.
Factors like geographic concentration, the types of properties securing the loans, what percentage are performing versus non-performing, how many guarantees were signed—and a host of other factors enter into the pricing question, Galli explains. “The factors on any individual loan or any collection of loans vary widely from portfolio to portfolio.”
The $607 million FDIC portfolio that Colony has gained control over includes all commercial real estate product types and a combination of performing and non-performing loans, although far more of them are non-performing. There were multiple bidders for the portfolio, but the actual number of bidders won’t be disclosed until the FDIC posts the information, which usually occurs two to three months after the FDIC chooses the winning bid.
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