Partners Set to Capitalize on Marginal Real Estate Deals

(9/1/01 FL RE J)

Strategies that were in vogue for the soft real estate market in the early 1990s are making a comeback as the 10-year bull market slows from a charge to a trot.
    While the current slowdown will probably not be as significant as the last one, two veterans of the bankruptcy and foreclosure arena are nonetheless positioning themselves to operate in the coming months. As it turns out, they are ahead of the curve and already have begun working together in a unique way.
    Jeff Schottenstein of Schottenstein Realty Company has long practiced the art of the workout and liquidation. The success of SRC’s most recent real estate bankruptcy/liquidation transaction is on display in Charlotte, N.C., where SRC has turned a bankrupt, vacant office building into the city’s new convention center. SRC, in joint venture with The Portman Company, is now constructing the final piece of the workout—a 700-room convention hotel to be flagged by Westin.
    In its latest strategy, SRC has teamed its financial and operating strengths with its market knowledge and industry contacts to create a business that focuses on acquiring or offering mezzanine financing for property that was poorly capitalized, poorly operated, or the subject of partnership disputes. Schottenstein expects to encounter a significant amount of these situations in the near- to mid-term.
    Next, SRC needed to identify a firm that would complement it by providing independent receivership and trustee-in-bankruptcy services. In Lewis B. Freeman, SRC found the preeminent practitioner of this science. In the past, Lew acted as a liquidation and fiduciary representative for businesses only. By teaming with SRC, Lew’s firm now offers real estate services as well.
    Lew brings his experience as an independent fiduciary to SRC’s team. The combination of SRC and Lew’s firm now fills a unique market niche by providing a package of services that is rarely combined. Clients such as lenders, government agencies, anchor tenants and law firms will be able to work with SRC and Freeman’s new business unit, Lewis B. Freeman Real Estate Solutions (LBFRES), to find the best combination of skills and capital to fit their needs.
    The SRC/LBFRES strategic alliance will act as a SWAT team for secured lenders. What makes this venture different is that not only can it provide management, leasing and operations analysis, it has the in-house capital to provide debtor-in-possession financing and even purchase delinquent or problem notes and mortgages—as well as under-performing or undercapitalized assets.
    By offering these services, the two firms are able to assist clients in preserving and enhancing their assets. The SRC/LBFRES team helps to stabilize or increase cash flow immediately and preserve, enhance or market an asset. In the past, these resources may have taken months or years to coordinate.
    One other difference is that the SRC/LBFRES team can get involved before a bankruptcy is declared by offering a “friendly foreclosure” option that preserves the property’s physical, financial and good will assets.
    SRC is in the process of acquiring retail centers that are well located but undercapitalized, as well as a number of delinquent notes and mortgages secured by multi-family and hospitality properties. SRC is also involved in monitoring the management and leasing of an asset that is the subject of a partnership dispute and on which Lew is the receiver.
    As the real estate cycle evolves, both insolvency experts believe that bundles of services similar to theirs will be useful to a broad sector of the real estate industry.