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Black Cloud of Distressed Commercial RE Loans May Have Silver Lining, by IDI
The number of distressed properties in commercial real estate has opened a flood of opportunities for higher risk tolerant investors to acquire loans at significant discounts to par, according to Jennifer Widener vice president, director of acquisitions, Industrial Development International, writing in the firm’s spring 2013 newsletter. She explained that investment strategies in this market typically play out in one of two scenarios:
1. The investor acquires the note and steps in as the lender. In this scenario, investors make money on the acquisition and assess risk based on the debtor.
2. The investor acquires the note with the goal of foreclosing and taking ownership of the property. Here, investors have more control and gain value through the underlying asset.
Both strategies can be successful if the investor has thorough knowledge of the market and solid underwriting.
According to the article, the number of distressed commercial real estate loans has climbed to an all-time high since the economic downturn began in late 2007. Back then, distressed loans for all property types were valued at about $20 billion, a number that grew to almost $170 billion by the end of 2012. The cumulative total of distressed loans went to $387 billion through the entire cycle. As expected, distressed property foreclosures rose as well, increasing by four to six times normal levels at their peak and remaining at two to four times the normal levels today, depending on the state.
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