AMERICAS NEWS: Sharing the profits

If there is one major difference between the real estate crisis of the RTC era and today, it’s the general absence of fire-sale opportunities. Financial institutions have simply been unwilling to offload problem real estate owned assets and non-performing loans for pennies on the dollar. 

Instead, fund managers are working with banks and owners of real estate assets to access deals and recapitalisation opportunities. 

457.gifBy providing some upside opportunity to the financial institutions we can help them start moving their inventory, in a win-win scenario for all sides.458.gif

Alvarez & Marsal Capital Real Estateco-founder and managing director Hugh Hilton

For Alvarez & Marsal Capital Real Estate (CapRE) the solution is clear: allow financial institutions to share in the potential upside as well. As the principal real estate investment arm of restructuring advisory firm Alvarez & Marsal, the firm is eyeing the profit-sharing structure as a way of breaking through the transaction logjam that has been created by the large bid-ask spread. 

“If someone offers 30 cents on the dollar for an asset and it is marked at 80 cents, then someone takes a big loss, while the other party is positioned for a big win with relatively no downside risk,” said co-founder and managing director Hugh Hilton. Founded in March 2009, CapRE provides asset and portfolio strategy, restructuring and workout advice to troubled investors and financial institutions, as well as capital for possible investment.

“Last year saw a lot of low bids and high asking prices and very little happened in terms of transactions,” Hilton explained. “By providing some upside opportunity to the financial institutions we can help them start moving their inventory, in a win-win scenario for all sides.”

The firm hired former Probitas Partners principal Alan Bear as managing director at the start of April to help grow its platform in the US and source capital for future asset and portfolio-level deals.

Bear, who spent four years with Probitas, said CapRE was currently working with several financial institutions on such profit-sharing-style deals. He said financial institutions feel they will benefit from any “value creation upside”.

“Many financial institutions are looking to maximise the value of their non-performing loan and real estate owned portfolios by sourcing new capital. This time round they have been able to hold rather than sell at the distressed pricing of the early 1990s in the RTC days,” said Bear. 

Hospitality is one sector the firm would focus particular attention on,  said Hilton – who first started working with Alvarez & Marsal in 1988 after spells with BankAmerica Investment Real Estate and First Interstate Bancorp/Karsten Institutional Realty Advisors –  not least because it continues to create risk management issues for lenders.

“This is not just real estate, but it’s an operating entity inside a piece of real estate. It’s much more complicated than most other real estate assets as it operates with demand changing daily, guests, liability for those guests. There are a number of risk management issues that banks struggled dealing with,” Hilton said. Bear said the firm would invest in any part of the capital stack, from equity to first lien notes and mezzanine investments, across all real estate sectors.