US banks will selectively sell troubled loans over next few years

After closing on a 400,000 sq. ft. industrial property acquired through a distressed note sale, the Magellan Group says it’s about ‘shooting with a rifle, not a shotgun’.

Expectations that US banks could start unloading increasing amounts of their troubled real estate loans was challenged today, amid warnings financial institutions will “selectively” sell their legacy notes over the next few years.

The Magellan Group co-founder Kevin Staley said to date there had only a small trickle of deal flow from banks looking to sell loans in need of restructuring, work out or foreclosure. However, he said that wasn’t likely to change in the next few years, adding opportunities would be more selective.

“This is about shooting with a rifle, not a shot gun,” he said, adding the real estate investment community had been hoping for a greater deal flow from banks. “Will the market see more than [what is currently out there]? That’s difficult to answer, but I don’t foresee changes in terms of deal flow.”

With many banks renegotiating loan terms and extensions, many industry professionals warn US financial institutions are merely delaying the day of reckoning for troubled loans. But with estimates of more than $1.3 trillion of commercial real estate debt set to mature over the next three years, banks will have to start dealing – and disposing – of their problem mortgages sooner rather than later.

Last month, Magellan acquired a two-unit, 400,000 square foot industrial asset in Riverside, Los Angeles, from Far East National Bank in partnership with industrial investment firm Penwood Real Estate Investment Management.

Far East National Bank sold the note, which comprised the first and second trust deeds as well as the senior mortgage, following default by the borrower. Los Angeles-based Magellan, which targets industrial, self-storage and aviation-focused real estate, bought the properties through its Magellan Industrial Fund, a private equity real estate-cum-co-investment vehicle.

Staley declined to comment on financial details, but said the deal was sourced through a finder with ties to Far East.

Magellan initiated foreclosure proceedings on the Iowa Avenue assets immediately after acquiring the trust deeds and paying the balance of the loan. The firm, together with Penwood, plan to renovate one of the properties, while the other is 100 percent leased to Ancon Marine, according to data provider Real Capital Analytics.