It therefore stands to reason that most of the commonly deployed workout strategies don't involve the lender assuming ownership. Five of the most common are discussed here, although the list is by no means exhaustive.

A workout watchword since the downturn began has been extend and pretend, and both Heller and Hollowell offer explanations for this strategy's widespread use. "They couldn't think of anything better to do," Heller says simply. "All of the alternatives were terrible."

Hollowell's 35-year career in evaluating, managing and disposing of real estate assets naturally spans the era of the Resolution Trust Corp. in the late 1980s and early 1990s. "This cycle has really been nothing like that one," he tells DAI. When the residential and commercial sectors began heading south this time around, Hollowell says he predicted a distress deluge of "biblical proportions" and thought an RTC-like agency would be necessary "to really handle the problems of failing institutions. But the government took the tack of trying to give lenders the leeway to recapitalize and work through their processes, as opposed to possibly losing 1,500 banks in the process."

Lenders sought to buy time via extending and pretending, and the strategy accomplished a similar purpose for developers. "You've seen a lot of interesting deals where new money came in via refinancing, or an equity investor came in and took a piece of the project," Heller says.

A moratorium on foreclosures has also helped; Heller cites a recent New York Times article on the vigorous recovery in the South Florida condo market, eroding the supply of unsold, distressed inventory and encouraging developers to plan on building more. During the first six months of 2011, there were 439 Miami-area sales for at least $2 million, up 13% from last year, according to the Times.

That reversal of fortune in the apartment sector is reflected in some of the business BBK has been doing lately. "We're in the market looking for co-investors on development deals, because multifamily is becoming very fashionable on the development side," Hollowell says.

Over the past six to nine months, Hollowell says, "the larger banks have made a conscious effort to shed these assets, more so in the form of nonperforming note sales than foreclosures. They have chosen not to get into the chain of title if they can help it, even though they know that the potential for recovery is probably 10% higher" if the lender takes a property through the foreclosure process and then markets it as an REO. "We've written a lot of reports for the top 20 banks, particularly on condo projects, telling them what the value of that asset would be if you were to sell the note, and what it would be if you took the project through foreclosure and then put it on as an REO," he says. "Even with that, most have said, ‘we're earning enough money.' We have seen different institutions announce the sale of $300 million or $500 million in assets on a quarterly basis, knowing that the earnings are coming in and would offset the losses." Another strategy is a note split. A lender may bifurcate a troubled $30-million loan, for example, into a $21-million prime loan and a $9-million troubled loan, retaining the performing $21-million note and selling the $9-million note at a discount. Hollowell sees this as a strategy of first resort with CMBS note sales by special servicer, with BBK representing the borrowers in these restructurings.

"If that doesn't work, normally the CMBS lender will say, ‘nobody will pay more for this note than the borrower,'" he says. "They may test the market, saying, ‘let's look at four other customers for this project, get some bids from them and then go back to our borrower and see if he won't pay 10% more.' Historically, the borrower has some motivation to try to keep that property. He knows the property, he's invested in it and he's got tax consequences if a foreclosure happens."

In another workout scenario, a white knight may ride in, investing equity into a written-down note and then taking title to the property. The prior borrower stays on as a minority partner, although the white knight receives the lion's share of operating proceeds. Call it a win-win-win: the lender avoids taking the asset through foreclosure, the white knight now has control of it and the original borrower can share proceeds from any increase in value.

"White knights come in for one reason, and that's to make money," Hollowell says. "There has to be a substantial discount, so that the yield is commensurate with the risk."

He says BBK has a list of 175 such white knights around the country, entities that have raised billions of dollars to buy properties in all asset classes. "We pretty much know who the right party is, based on the risk profile of the deal and their yield requirements," says Hollowell.

Although white knights may be roaming the land, looking for properties rather than damsels in distress, condo workouts can still face cash-flow issues. "The biggest one I see is: what are you going to do about loans for the buyers?" Heller says. "If you're not in one of these markets where every apartment is $10 million and everyone pays all-cash, you have concerns."

With that in mind, Heller recommends that the sponsor pay attention to unit-buyer financing as a means of helping to generate enough cash to help the viability of the condo project. "Some lenders recognize this, in all fairness," he says. "You run into a situation where the lender says ‘pay me back' and the developer says ‘I've got a great product here, but nobody can borrow the money to buy the units. So why don't you make the loans?'" The construction lender's ability to do this varies from institution to institution. "Some of them aren't even licensed to give individual loans, so they go to their individual loan department and say ‘you've got to get us out of this,'" Heller says. "One hand of the bank has to wash the other."

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