How much of that number can be attributed to the unintended consequences of regulatory reform is unclear, and probably incalculable. Nonetheless, it is clearly a factor behind some of the distressed assets on the market, even when the government's intention has been specifically to avoid deal failure.

"The government can claim that they have avoided making the real estate opportunity funds rich by not having fire sales," Prigoff says. "However, the government strategy has impeded market clearing mechanisms and is likely to lead to a long period of real estate and bank stagnation and value decline, except in the most liquid markets."

Leaving aside specific regulations such as Dodd-Frank and the forthcoming Volcker Amendment (more on that in a moment), the biggest influence on distressed investment opportunity, or lack thereof, has been the fuzzy approach on both the federal level and in accounting standard-setting communities toward mark to market.

At the start of the crisis, banks were given a de facto pass by regulators on how to account for losses on loans. In short, with the financial system in peril, banks were allowed to let problem assets ride as long as needed. Hence, the birth of extend-and-pretend policies. That has been changing over the last several months as regulators, especially of community banks, and accounting standard setters start to clamp down on such valuations.

At the start of the year, the Financial Accounting Standards Board and the International Accounting Standards Board announced they had reached agreement on a single approach on how banks should account for losses. In the simplest of terms, it was decided that banks must book a loss if it appeared a default was likely.

Previously, loans were written down under the "incurred loss" model: that is, only when a so-called trigger event made it clear that the debt would not be repaid in full. "The incurred loss model attracted criticism during the financial crisis because it does not permit credit losses to be recognized until a trigger event has occurred, even when those losses are expected," according to an IASB summary of the accounting change this past January. "This led to complaints that loan losses were recognized ‘too little, too late.' "

The accounting convergence process, of course, is a painfully slow one and it will be an extended period of time before this position becomes fully effective in accounting regulations. In the meantime, though, regulators are insisting that banks clear their books.

It is this push by regulators, says Gil Priel, managing director and principal at Peak Corporate Network in Woodland Hills, CA, that will increase the flow of distress deals dramatically.

"Many lenders, either voluntarily or by regulatory pressure, are having to write down their bad assets," he says. "So along with the current cost of money, they're able to now show a profit by liquidating those assets to a receptive and cash-flush audience."

This scrutiny touches upon almost every aspect of banks' commercial real estate portfolios. To cite just one example, examiners have become highly critical of many banks' appraisals and are tightening requirements on collateral valuations, a recent report by the Government Accountability Office finds. "For example, these officials stated that examiners have been requiring appraisals on CRE collateral more often, criticizing the banks' appraisal review process and criticizing the appraisals themselves," the GAO report reads.

Emphasis on asset valuation is going to ratchet up several levels of intensity once the Volcker regulation goes into effect, predicts Edward Indvik, CEO of the Los Angeles-based Lee & Associates. "Anything that isn't risk free will be challenged from a valuation standpoint," he says. "That's going to be one of the legacies of this regulation."

Of course, the Volcker rule, named after former Federal Reserve chairman Paul Volcker, is a very complex piece of regulation that the industry is only just beginning to grasp, now that federal regulators released their long-awaited draft in mid-October. Briefly, the regulation was designed to limit large banks' bets with their own money, banning proprietary trading at federally insured institutions.

It is expected that the 298-page proposal, which includes enough loopholes to give banks the leeway to continue this activity in a different guise, will have far-reaching implications even in seemingly unrelated areas.

Both Dodd-Frank and the Volcker regulation will have a strong impact on valuation and financing availability going forward, Indvik says. "They'll rein in some of the excesses we saw with the use of debt and credit-default and interest-rate swaps."

This will have a dual-edged impact on distress, he predicts. Questionable deals and borrowers will find it harder to continue to sustain unprofitable scenarios. But they will also limit the available dollars that would be used to buy distress debt.

Not that these twin forces will put the distress market out of commission. "The distress market is still very active and will remain so," Indvik adds. "Lenders are becoming more aggressive in their pursuit of foreclosures and liquidations."

Indeed, if there has been any one rule to characterize distress over the past two years, it is that the sources of investment opportunities are very fluid and often unexpected. Fallout from new legislation is just one example of such unpredictability. The risk-retention rule for CMBS, for instance-long debated and much anticipated-is still a work in progress. The Notice of Proposed Rulemaking for Risk-Retention Rules was issued on March 29 of this year, with responses due June 10. An extension was granted for August 1, to allow the many players to respond in a timely and thoughtful manner, given the sweeping nature of the rule that requires financial institutions to retain 5% of the credit risk of securitized loans.

Among those players was the Commercial Real Estate Finance Council, which has endorsed the "menu of options" available to securitizers via Dodd-Frank. "Flexibility will be necessary to avoid the inefficient and impractical structuring of securitizations that would undoubtedly flow from a one-size- fits-all approach," Stephen Renna, CEO of the New York City-based CREFC, wrote in a letter to federal regulators this past July. However, Renna added that the agencies responsible for implementing the risk-retention rule, including the Securities and Exchange Commission and the Federal Reserve, could go further "to implement rules that meet the goals of alignment of fair and efficient capital markets," among others. Most importantly, Renna wrote, the proposed risk-retention rule "should allow for additional flexibility within the ‘base' risk retention structure; should address the option for risk retention in the form of adequate representations and warranties; and should exclude certain types of CMBS structures from the risk-retention framework."

As a result of stakeholder input, the various agencies responsible for implementing this rule are still wrangling with such issues as flexibility in structuring the 5% requirement, whether enhanced representations and warranties can satisfy some of the requirement and if single-asset and single-borrower deals should be exempt as such transactions are extensively disclosed. All of these eventual decisions will have an impact on any resulting distress opportunities.

For these and other reasons, "I'm not sure whether distress investors should actively target opportunities that may arise out of legislative change," says Greg Leisch, CEO of Alexandria, VA-based Delta Associates. "Yes, we'll continue to see distress opportunities in the economy, especially as it relates to lack of liquidity for certain markets and asset classes." And yes, he continues, some of this will be a result of legislative change. "What's more important, though, are the economic factors and market conditions that are driving distress," Leisch adds. There is little guesswork, unfortunately, to those factors. "They'll be a part of the landscape for some time."

GlobeSt.com News Hub is your link to relevant real estate and business stories from other local, regional and national publications.