"special situations" = distressed debt investing?

I always see people who worked in the special situations team - I get the sense that this is distressed debt investing?

Second, Curious to know if these positions pigeon hole yourself even more into a specialized area of RE - or if the skillset you learn from debt investing can be used to move into other areas of RE?

Comments (14)

May 1, 2013

Special situations cover a much broader field than distressed debts, some acquire debt then convert to equity while others come in with mezzanine capital or other types of structured investments. I don't see how this pigeonholes someone to RE seeing that special situations investments deal with much more than just real estate assets. Sure hard assets such as real estate are often the preferred means of collateral but there is much more involved than just dealing with the RE aspect.

May 1, 2013

not necessarily investing; special situations at, say, a regional bank could mean working out bad loans for the original lender. but yes, distressed is correct.

you would not be pigeonholed into distressed. there's a ton of stuff you could do. people do distressed and then move on to other things.

May 1, 2013

I don't follow. You're correct in saying that special situations typically relates to distressed situations, but where does the question about being pigeonholed into RE come from?

May 1, 2013
NorthSider:

I don't follow. You're correct in saying that special situations typically relates to distressed situations, but where does the question about being pigeonholed into RE come from?

He's in the RE forum, writing under the assumption that people understand he's referring to special situations REPE.

May 1, 2013
APAE:

He's in the RE forum, writing under the assumption that people understand he's referring to special situations REPE.

Aha! That makes sense. lol.

May 1, 2013

You do work with a lot of RE and will become quite versed in valuing it. Still, like othere said, SSG is very broad.

Case in point:

Looked at a chemical refining plant built in 2008, ran for 6 months, and shut down. The industrial building appraised for $800k, the equipment $300k, so we are looking at $1.1MM in "real estate & equipment".

Now for the special situtation part:
Cost $10MM to build, potential stabilzed EBITDA of $6MM/yr. Needs $5MM capital to get there. They have an LOI in place from an investor seeking 51% equity, so theoretically will be able to get up to that EBITDA #.

The debt is $4MM.
Some questions that needed answers:
- How much do you pay for the debt?
- Is there someone in TX who wants to purchase this plant to avoid spending $10MM themselves?
- Does the $5MM injection fall through and you need to convert your debt, take the keys, build and sell the plant yourself?
- Is there no market for this type of chemical and you only have RE value?

There is a lot more to this one but as you can see, the SSG skillset involves everything from valuing RE to a potential operation company, to mezz purchase, to everything in between.

May 1, 2013
sk8247365:

- Is there no market for this type of chemical and you only have RE value?

Sometimes this is where it gets really interesting, as people go after the RE value regardless of the operating company and its business model. In particular, if you can manage to have the land re-zoned from industrial to residential use then the land value might explode.

May 3, 2013
brandon st randy:
sk8247365:

- Is there no market for this type of chemical and you only have RE value?

Sometimes this is where it gets really interesting, as people go after the RE value regardless of the operating company and its business model. In particular, if you can manage to have the land re-zoned from industrial to residential use then the land value might explode.

And then it could get really interesting if your Phase I more or less insists you order actual soil samples, and they come back with all sorts of contamination under your proposed residential development, because, uh, you're trying to build on a former chemical refinery. Have fun replacing all the soil on site, hope it doesn't hurt your projected returns. Real estate is fun!

But jokes aside, redevelopment of former industrial properties seems very cool. I think you see a lot more of it in dense, infill locations where the land value/demand justifies the extra costs and uncertainties associated with redevelopment.

May 1, 2013

thanks for the replies - yes, in a broader sense I was referring to a debt REPE fund which invests in distressed debt....which in some banks, the team can be grouped into the special situations team. Perhaps, my essential question though is - if you start in distressed RE debt investing - does this limit you from moving into more traditional direct investing or other areas?

Apologies for any confusion.

May 1, 2013
welcome2nyc:

thanks for the replies - yes, in a broader sense I was referring to a debt REPE fund which invests in distressed debt....which in some banks, the team can be grouped into the special situations team. Perhaps, my essential question though is - if you start in distressed RE debt investing - does this limit you from moving into more traditional direct investing or other areas?

Apologies for any confusion.

I'm far from an expert on the topic but having asked this question myself to people in the industry: starting out on the debt side, or particularly distressed debt, won't necessarily limit you from moving to "traditional direct" or equity investing. The majority of your opportunities will be to stay on the debt side; however, people can move to a direct equity investing role especially if they are still early in their career.

May 1, 2013

since when is there an RE forum here???

May 7, 2013

Are you asking about a specific bank's SSG platform?

May 7, 2013
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