"Based on that, the hotel is worth less than the debt," Reay says. However, "If we were talking last year, I would have said that the hotel's value was substantially lower than the debt. But given the hunger of the REITS, it's probably worth 80 to 90 cents on the dollar today." That compares to 50 cents last year, he adds. Reay points out that the Grand Del Mar is still distressed in terms of not servicing its debt, but rising prices are one of the reasons that banks and special servicers are hanging onto such assets rather than selling them at fi re-sale prices. What this ultimately means is that properties that once looked like distress opportunities may over time move out of the distressed column and look more like market-rate deals.

However, that's only the case for luxury, high-end properties in toptier locales. "The secondary markets continue to get pummeled," Reay says, because REITs and overseas investors are not going to buy in these areas.

Some of those secondary markets are the places where distress is most likely to rise in 2011, according to Gordon Gerson, managing principal of Gerson Law Firm in San Diego. "The distressed assets are by and large wherever you have high unemployment and fractured local economies," he says. In the West, that means areas such as Phoenix, Las Vegas and the Inland Empire in California.

Gerson's comment is borne out by figures from Real Capital Analytics, which show that Las Vegas has the largest dollar volume of distress in the West, nearly $18 billion worth. That figure contrasts with much larger Los Angeles, where the distress total is $8 billion. RCA figures also show distress as a significantly higher percentage of the market in Las Vegas, 44%, compared with 9% in Los Angeles.

Gerson points out that Los Angeles County has not been hit as hard by distress as some other parts of the country, but distress levels vary within submarkets in the county, with working-class communities more likely to suffer. "Long Beach has largely a working-class population, so consequently, you have more distressed assets there than in other parts of Los Angeles County," he says. "Wherever you have unemployment rising, you will also see the level of distress rising." Similar to the hotel sector, Gerson describes the differences between top-tier and secondary markets for the multifamily market, where his firm is very active because its clients are lenders who originate a high volume of Fannie Mae and Freddie Mac loans. In Northern California, he contrasts the high level of distress in the Oakland multifamily market with that of the much stronger Silicon Valley, where his company has just closed four refinancings of apartment buildings.

The higher level of distress in secondary markets is also reflected in the receivership work at Gerson's firm. In recent weeks, it has put a receiver in place for a multifamily property in Palmdale, CA and coordinated with local counsel in Arizona and Nevada to have receivers put in place for assets in Phoenix and Tucson, AZ and Las Vegas.

Gerson says, "There have not been the fi re-sale opportunities that everyone thought would exist," for lots of reasons. These include the extend-and-pretend practice that banks have followed, along with the relative reluctance of special servicers to foreclose, he says. "There are deals out there, but they are very hard to find, with probably 10 buyers racing for every asset."

Opportunities in distress will be even harder to find in 2011 in top-quality markets, according to David Rifkind, principal and managing director with investment banking firm George Smith Partners in Century City, CA. Opportunities in distress are "spotty" in core markets like Southern California, which have already started to recover, he says: "There is no programmatic play in distress."

Performing loans are now trading at the prices they traded at before 2007, at 98 to 99 cents on the dollar, "Because for banks, it's cheaper to buy a seasoned loan than it is for them to originate," Rifkind points out. "That doesn't leave a lot of margin for a distress investor, and it doesn't leave a lot of value-add for an intermediary." He uses as an example a $150-million package of 10 distressed bank loans that GSP took to market last year that generated 30 bids. "We were astonished at how close to par those bids were."

Grant of California Real Estate Receiverships points out that one challenge for those pursuing distress this year is that there is no one central clearinghouse that lists all of the distress in the region or the country by location, property sector and type of distress, i.e.: whether a notice of default has been filed, whether a receiver is in place or the property has been foreclosed on. Even when that information is available, Grant says, finding distressed deals can be a hit-or-miss proposition.

For instance, the loan might be restructured before the investor gets there, it might still be listed as a note in default when the borrower has already given the lender the keys or there might be a workout in progress between the borrower and lender that will take the property out of the distress category.

Obviously, plenty of distressed properties are out there for the taking because they are listed with commercial real estate brokerages or receiverships or both, Grant points out, but those represent only a portion of what's in the pipeline. And investors looking for bargains oft en want to grab deals before they get to the listing stage.

"If the distress hasn't been listed and it's not officially for sale, the investor might be able to make an unsolicited offer to buy the property through the receiver or from the lender," Grant says. "If they hit the lender at the right time, they might be able to get the deal of the year." Oft en, he says, such deals are done very quietly with hardly anyone ever knowing about them.

Ultimately, regardless of whether investors want to find a "deal of the year" or just identify distress that has yet to be listed by brokers or receivers, "they have to do a lot of digging." Some investors shortcut the process because they've established relationships with the largest banks and special servicers. In addition, there are subscription programs that list the properties that go into special servicing, but an investor who then contacts the servicer will likely be competing against many prospective bidders, Grant points out.

One tack not to pursue, unless you have established connections, is calling the chief workout specialists at banks. Nick Mosich, managing partner at Ion Capital Partners, said at an industry event in Los Angeles recently that making that call is not likely to work because they are flooded with calls every day. Instead, "Focus on assets that are listed through brokerages where there is a clear mandate to sell," he said. Says Grant, "Unless you know someone high enough in the food chain at the bank, they're not going to take your call."

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