Hospitality has found its way into a lot of auctions, more so than other distressed property types, partially because of its exposure to the vicissitudes of the daily economy. Hotels are prone to functional obsolescence, as newer product quickly squeezes outdated assets lower down the hierarchy. "It's not really real estate, right?" Cuticelli jokes, pointing to hotels' reliance on daily room rates for value. "With market volatility, it is not unusual for properties to be monetized due to liquidity issues," he says.

This year hospitality logged one of the largest auction-based transactions when Chatham Lodging Trust and Cerberus Capital Management planned to purchase the 64-hotel Innkeepers portfolio. The joint venture won a bankruptcy auction for the former Innkeepers USA Trust-owned properties at $1.125 billion. (At press time, the deal was put on hold, reportedly due to market turmoil.) A quirk of this auction was that the JV avoided the major hurdle in buying REO assets in a foreclosure auction: not enough time for due diligence. There is a significant amount of due diligence required for REO properties and, as Monaghan notes, loan sales are therefore easier to transact at an auction, because the buyer is not taking title to the property. However, a fair amount of investigation is still required for loan sales, since many buyers are seeking a loan-to-own strategy.

In the case of Innkeepers, the winning JV had more efficient diligence, since Chatham's CEO Jeff Fisher not only had the benefit of helping build the entire portfolio from its inception, but the portfolio was managed by Fisher's management company, Island Hospitality. But this is rarely the case, making the REO auction a typically more difficult process.

The Innkeepers portfolio was available also because of the borrower's leverage issues, not necessarily the health of the property. In the case of nonperforming loans, auctions have caught the eye of a hungry beast in the market: banks. "We've seen banks absolutely taking advantage of liquidity," says William Looney, president, loan sales for Boston-based DebtX. As the market leveled in 2010, banks started shedding the blights on their quarterly statements in anticipation of perceived heavy M&A activity this year and beyond. "There's been no shortage of large bank sales and there are lots of community banks and regional banks that realize that in today's market ‘acquirer' is codeword for healthy," Looney explains. But to get into acquisitions, you need to actually be a healthy bank. Since the depths of the recession, "We've seen consistent increases through the year. We expect to see an extremely active fourth quarter. Our pipeline is full." Banks have a long way to go in terms of getting real estate concentrations and asset levels back to making sense on their balance sheets, he explains, so the sale of commercial real estate loans will continue well into the future. This bodes well for buyers, and Chatham aside, REITs have been having their day in the general market, grabbing performing properties, so auctions are a good place to find smaller properties at a premium. Value for both the buyer and seller can be found by seeking smaller game in a larger game preserve, as special servicers ramp up their dispositions. Auctions are "going to increase over the next couple of years, particularly for the special servicers," Monaghan explains. "It's harder for them to manage small assets. It's less cost effective, so at some threshold, maybe below $5 million, many lenders will consider using auctions."

And in many of these cases, where properties are too small for one-off auctions, auction houses have taken to bundling them into large, eye-catching portfolios to attract more bidders, who are then given the freedom to select the assets that work for them. "In the more heavily distressed markets, if you're trying to sell a $3-million strip retail asset, some assets could get drowned out because there's so much product available," Monaghan says. And as for raising paddles, Cuticelli notes that Sheldon Goode does a fair amount of open bids for condo sales, also nominally known as outcry bids, but notes they use sealed bids for "very high-end properties where there's not a large number of identifiable buyers in the market." DebtX favors a sealed bidding process, as well. "A sealed bid drives the highest price," Looney explains. "You can capture an outlier bid if you've got a particular investor who sees extraordinary value in an asset."

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