Recession 2007

My welcome to the current real estate credit crisis came in August when a lender that had always given me the most favorable terms told me ‘We are out of the market and I am going on vacation’.

The well heeled borrower that I was working with asked me what he should do. In the recent past I would have expected many other lenders to fill the breech and quote the transaction with very competitive terms. Instead I found that no lender would quote this well positioned value add transaction. I advised my client to take the property down on his credit line. While I did not earn a fee, I did earn the respect of the client. We will do many more transactions together.

Since that unusual day in early August a number of lenders have come back into the market. They are willing to “help” but with a “short term fix” until the markets “straiten themselves out”. This is a time for the nimble lender to earn new customers and the creative and flexible ones will.

The last time the market was spooked like this was during the “Russian Debt Crisis” of the late 1990’s at that time the markets only took only a short time to recover.  It is already obvious that this current event chilled all sectors of the market.

Unlike the early 1990’s real estate recession when the catch phrase was “survive to ’95” this correction should not be as deep and widespread. The 1990’s retrenchment lasted a long time and cost many people their careers. However, if you were flexible and creative you thrived. Many developers and leasing agents that never did a government transaction in their career suddenly became “workout experts”. I know. I was one of them.

A number of people did very well by working with the banks and Savings and Loans on the way down and with the Resolution Trust Corporation – the RTC (the government answer to the savings and loan crisis) at the bottom and on the way back up. The lessons learned in those times will serve us well now. Those that can evolve and create transactions will do well.

One common thought is that this slowdown should be focused in residential and the most pain will be felt where the most supply was added – the central core, high-rise condominium markets of Florida’s costal cities and the far flung “new towns” with may proposed lots that will not be built out for many years. While it is true that these sectors will be hit hard there are transactions that work if you can put the pieces together.

We recently brokered the sale of sites in Coral Gables and Aventura for new luxury rental apartments. We continue to see new viable mixed use projects for our residential and retail clients across the Southeast.

Flexibility, creativity and hard work will be the watch words again. Real estate professionals that can move to new product types or markets will weather the first choppy seas we have seen for many years.

A transaction I am currently working on recently went thru the post credit crunch readjustment in price. The seller pulled the property back and then offered a below market interest rate on a second mortgage to the buyer to move him to close at the higher price. The tactic worked. The well heeled seller now holds a second mortgage that he crafted in a way that it will be attractive in the secondary market. He will simply resell the paper at a discount. After the sale the seller walks away with gross proceeds that are greater than he could expect without the creative financing.

Another example of creativity and flexibility is a residential condominium developer that I am working with. His project was successful and he sold and closed enough units to take out his construction loan from a local bank and his out-of-state mezzanine lender. He owns the remaining units free and clear – they are his profit. However, he can not liquefy the units to apply the profit to other well conceived residential development projects he owns that are struggling. The solution – a creative transaction where he sells the units and takes back purchase money financing in a format that is attractive to the secondary market. We then sell the paper into the secondary market. The developer liquefies and has enough cash from the transaction to “prop up” his other projects. Creative solutions like this will keep the transactions moving until the credit and residential markets come back.

Who is well positioned in the current market? Someone with CASH. Hard money lenders should have a field day. In addition to being the last lenders of choice for the general market, they will also be buyers of the creative secondary mortgages.

I am working with a major equity player that is waiting on the sidelines flush with cash to take advantage of the problems that many of his competitors face with their second positions on highly leveraged investments. We have already begun buying notes and mortgages together –at a discount.

A key point to remember is that a real estate business person can make money when the market is going up or down. You do this by capitalizing on inefficacies in the market and working harder and smarter. Just remember to be flexible, creative and positive and you will survive if not thrive.