Intro to Real Estate Debt investing?
Hi everyone! Are there any books or resources you would recommend for an introduction to real estate debt investing? It seems to be a pretty niche space, so any suggestions would be really appreciated
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Hmm tough one. Any specific kind of debt investing? Performing vs. non-performing? Senior vs sub/mezz? Institutional (big $) or deals you can do on you own?
Give me some more info on what/why you want to know and I'll try to make some recommendations.
Thanks! I'm hoping to learn more about non-performing/distressed real estate debt investing (don't quite know enough to make the senior vs sub/mezz distinction yet...) within an institutional investment context
First off, a solid understanding of property valuation is important. The first step in most potential distressed debt investments would be to value the asset. Usually this is done by building a cash flow model and discounting projected future cash flows. You could probably read a general R.E. text for more info on this. Also you could start playing with ARGUS - I believe you can download a free trial version on their website.
Next, there is the legal component. You need to understand loan docs. You can probably get your hands on some by googling or by asking a friend in the industry to print a few for you. In the Loan Agreement, check out these sections: Events of Default; Remedies - will outline triggers for a loan going into default, grace periods, and Lender remedies. Waterfall - will outline CF waterfall in EOD (event of default), "Lockbox" provisions. May be contained in a separate Cash Management Agreement. Recourse Provisions - will outline actions that will cause personal recourse to Borrower or Gaurantor. Default Rate - interest rate during EOD. There are other relevant loan docs but they are more the scope of lawyers vs. investors. You could pick up a basic RE law text for more info.
Another legal component is foreclosure process. This may be less important than you think as, in my experience, many large defaulted loans are restructured, go to deed-in-lieu, or are otherwise worked out rather than actually foreclosed on. Foreclosure timelines/processes vary widely by locale, and depend on current court backlog. The only way to really understand this is to consult a local attorney. Note that a mezz loan is a loan secured by the equity interest in the entity that holds title to an asset, and does not give you a lien on the asset. As such, the foreclosure process is governed by the Uniform Commercial Code (UCC), and is much quicker than a property foreclosure.
To understand workouts, maybe browse through the public filings of some public REITs that invest in distressed debt. They might have some examples of workout deals.
If I knew a single place to get this info, I'd share it with you, unfortunately I don't know of any. Hope this helps a little bit.
Thank you, this is really helpful!
http://www.wallstreetoasis.com/forums/modelling-a-portfolio-of-non-perf…
Distressed Real Estate (Originally Posted: 03/18/2010)
Hey guys,
Does anyone happen to know of any good resources for learning more about Distressed Real Estate? I've seen Peter Linneman's book mentioned on some of the Real Estate Investing threads; I was curious as to how applicable this book is to Distressed RE situations, and whether there are any other books that people would recommend to learn more about the asset class. Thanks!
I'm not sure if there are any specific books you can read. Usually industry publications have articles on the topic. I find google a pretty good resource.
Distressed RE = Overlevered RE
There are a few ways you can approached distressed RE, but all involve restructuring the capital structure.
If the loans on the RE are non-performing then you will be able to buy them at a discount to par. If you think that the asset is worth sufficiently more than the discounted debt + restucturing costs, then you invest and your profit is the difference. In commercial RE this is more straightforward. It gets a bit messier for residential loans (where you are usually buying a portfolio of non-performing loans and you end up playing a statistics game).
Additionally you can inject equity to pay down the debt. A great case study of an interesting recapitalisation play is Great Portland Estates purchase of Marcol House where GPE injects some equity and works out a plan with Eurohypo such that Eurohypo (the debt holder) decreases the value of the debt, but is allowed to participate in some upside potential.
hmmm, i would say your best bet is to follow the trends in distressed re. if you want to learn about valuing distressed re or re in general, linneman's book is a pretty good one. but there are better books for publicly traded re securities. i know this is pretty vague answer, but you asked a pretty vague question. are you just trying to learn how value re or keep on top of the trends in distressed re? or are you trying to learn about the different ways you can invest in re? or are you trying to learn how to turn a distressed asset into a performing asset?
i also took a peak at your profile, and based on the fact that you posted this question on the trading forum, i am guessing you are trying to put together some kind of investment thesis?
@RE_Banker: Thanks for the response. I hear ya about Google, but are there any specific industry publications that you would recommend? I'm familiar with the basic strategies for looking at non-performing loans and simply wanted to do a deeper dive and get a better sense of the ways that distressed RE would differ from distressed business situations. Speaking of which, is there a specific case study (i.e. HBS) of the Great Portland Estates purchase or is that one I should just Google for? Been following Stuy Town pretty closely and have been really intrigued by what's going on.
@mr1234: Hahaha, guess I should become more specific then. I think the questions that are most pertinent for me are the different ways you can invest in RE and how to turn a distressed RE asset into a performing RE asset. Any recommendations for books that cover these topics in depth? As for your last question, the more important thing for me is trying to get more than just my feet wet in distressed RE.
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