Elusive real estate deals nigh

Is the era of extend and pretend coming to an end?

For months now investors, armed with war chests of cash, have been sitting on the sidelines waiting for the wave of distressed commercial real estate to come on the market.

Until recently, they have mostly been disappointed.

Eager to avoid writing down the loans on their books, banks have been extending many of them with the hope that the market will improve. Even banks that foreclosed on properties have kept them on their books, reluctant to auction them in a market where investors were offering just 10 cents on the dollar.

Now that appears to be changing, and it could have implications for Triangle property owners caught up in the sell-off.

"The proverbial logjam is beginning to break up," said Jim Anthony, CEO of Anthony & Co., a Raleigh real estate services company.

As evidence, Anthony said BB&T plans to auction $1 billion in performing and nonperforming loans in the Southeast. Winston-Salem-based BB&T is one of the larger real estate lenders in the state, and such a pool would likely include some Triangle loans.

BB&T would neither confirm nor deny the auction.

"BB&T continues to evaluate opportunities to best execute our problem loan disposition strategy, which may or may not include bulk sales," spokeswoman Cynthia Williams said.

BB&T has been more aggressive of late in writing down its troubled loans and moving to rid itself of some of them. The bank's CEO, Kelly King, has indicated the strategy will continue as long as investor appetite for the loans remains at current levels.

Other regional banks, including Pittsburgh-based PNC Financial Services Group and Birmingham, Ala.-based Regions Financial, are pursuing similar strategies.

The move to deal with troubled real estate loans is driven partly by federal regulators who have increased pressure on banks whose capital ratios fall below a certain level.

The amount of distressed commercial real estate that was resolved - meaning the properties were refinanced or sold to a financially stable investor - during the first half of 2010 was 272 percent more than the resolutions that took place during the same period last year, according to Real Capital Analytics, a New York firm.

"I think the banks are coming to terms with the fact that, particularly, commercial real estate is declining in value and it's just not coming back in the next three months or six months," said Tony Plath, a banking professor at UNC-Charlotte. "It's going to be a while before we're out of the hole as far as real estate values are concerned."

The auctions also are a sign that the gap between what the banks will take for the loans and what investors will pay is narrowing.

"I think all of the banks have reached the point where they realize they're not going to get 80 cents on the dollar for the value of the loans they package," Plath said. "They're going to be looking at something like 35 or 40 cents on the dollar, which seems to be where these loan packages are selling."

The buyers for such loan packages will likely include large private equity firms, such as Blackstone and Apollo Management, and many others who over the past two years have formed funds to specifically target distressed commercial real estate assets.

Whether these loans are sold in bulk or broken up will depend on which type of deals offer banks the best returns.

Trouble for owners

For Triangle property owners whose loans are included in these packages, the auctions could mean trouble.

If an investor buys a loan for 40 cents on the dollar, that means they can foreclose on the property, auction it off and still make a profit.

"The borrowers that are included in the package face much more rigorous collection efforts on behalf of the buyer," Plath said. "[If you're a borrower] you really don't want that loan sold."