Value Add Strategies That Could Work for Distressed Assets

While many lenders have soured on the retail and hospitality space, Mark Fogel isn’t among that group. 

Fogel, the CEO of ACRES Capital and the President and CEO at Exantas Capital Corp., thinks strong sponsors can turn some of these seemingly hopeless situations into long-term winners.

Success, as it does in many cases with real estate, depends on what the buyer is paying. If they can get a deal, making a loan on a distressed property looks a lot better for Fogel. “It can be as simple as somebody is buying an office building at a very low basis because it’s vacant,” Fogel says.

In that situation, Fogel might be betting that the sponsor can effectively reposition the asset by turning a single-tenant office building and into a multi-tenant property.

“You’re probably getting it at 50 percent of what the basis had been previously,” Fogel says. “So you’re at a much lower starting point. 

On the retail side, the transformation may need to be more dramatic to make a property successful. “People are looking at well-located shopping centers and re-imagining how they can look and perform in the future by potentially adding a different type of tenant mix,” Fogel says. “They are even doing some sort of adaptive reuse where you take down half of the retail and add multifamily or hotel to the property.”

Fogel monitors these types of projects closely because ACRES specializes in lending for construction, renovation and adaptive reuse projects. Fogel says there are a lot of well-located properties that can be repositioned in ways where there is a value creation opportunity.

“As you might expect, most retail properties are located in pretty good locations in their markets,” Fogel says. “So, there’s an opportunity to create more long-term value in those types of locations.”

On the hospitality side, Fogel sees the opportunity for a “basis play.” “The hospitality market is not performing,” he says. “People need to sell their properties. They need to get out, and lenders need to get those assets off of their books. We have a lot of good equity investors on the hospitality side that are just waiting to come in and buy assets.”

Even if these retail and hospitality assets appear to have little value today, Fogel thinks someone will have the vision to make them profitable, if they can make the acquisition at the right price. 

“Every time you think something is dead and every time you think that a sector doesn’t work anymore, somebody comes up with a great idea and creates value,” Fogel says. “I know that there are really good real estate people out there that know what they’re doing, and those are the people I’m going to back on the lending side.”