A Q&A with Matt Zifrony
Transactions continue to pick up around the country across commercial real estate sectors, and especially for properties with debt issues, there are opportunities for investors to capitalize. However, negotiations for these types of assets remain challenging.
REBusinessOnline (REBO) took some time to chat with Matt Zifrony, a director with Tripp Scott, to discuss what challenges investors are in fact facing in distressed deals, and how they can better work with banks to overcome some of the hurdles in acquiring assets.
REBO: Where are the opportunities for discounted deals?
Zifrony: There are a lot of investor groups out there looking for opportunities knowing that the banks have a lot of troubled loans on their portfolio, through foreclosure or otherwise, that they’re trying to get rid of.
REBO: What property types and classes provide the best opportunities for investment in this market?
Zifrony: Unfortunately, the breadth of the downturn has been so far and wide that, for better or worse, these opportunities everywhere. You have your obvious pockets on the coasts and the major markets. But you can also go out to smaller markets that were hit as hard as anywhere, but they don’t have the same degree of commercial exposure. While you have a fewer number of potential deals, that may mean fewer people looking for the deal.
REBO: For what reasons has the distressed sales volume been more protracted than some might have expected and predicted?
Zifrony: One of the big troubles banks seem to be having trouble is to determine which individuals and groups are legitimate. There are quite a few people out there that continue to try and tie up investment properties so they can turn around and flip the contract and market it themselves, and the banks do not want to have to deal with those types of investors. They want to deal with the legitimate person who can actually follow through and close on the transaction.
Because of the reluctance by the banks to get burnt, and on the other side, buyers feeling like they have the “edge” so to speak, these deals for the most part take longer than they should. A lot of them don’t go through as a percentage of what typically has gone through in the past. It’s almost like everyone is looking for the reason they shouldn’t do the deal rather than the reason they should.
REBO: What are some of the specific challenges in getting these deals done?
Zifrony: The transactions themselves are no longer cookie cutter, in that each one takes on its own life in how the transaction is set up, and in what both the bank and the buyer are willing to do. You could have the same bank and the same buyer doing two transactions one after another, and they could be structured entirely differently. So there’s a lot more creativity out there.
Another part of it is from a due diligence standpoint. Whether it’s code violations, open permits, water bills that haven’t been paid that need to be addressed, or outstanding real estate taxes, there are a lot of those types of factors that traditionally were not found in a transaction, all of which add to the continuous hurdles that you have to overcome to get that transaction to close. You think you’re buying an asset and suddenly the title work comes back, or a lien search comes back, or a name search comes back, and all of a sudden there are all these extra items you have to address, which lead to further discussions between buyer and seller. If those discussions aren’t concluded in a positive manner, it can result in the deal not going through.
REBO: In what ways has the financing climate played a role in how these transactions transpire?
Zifrony: If the buyer is looking for financing of their own, then they have to go through the same challenges now that most people are facing, and that’s that banks are just reluctant to loan. I’ve seen situations where banks have the property and they’re a lot more flexible and will provide financing to the party acquiring the asset, but other banks, if it’s a property or an asset they had to take back on their own, their policy is that they just won’t lend to the acquirer. They want it entirely off their books and not back on with another loan.
I’ve seen it time and again where the buyer/borrower is very strong and can get their financing anywhere, but when they try to get financing from the bank from whom they’re acquiring the asset to speed up the transaction, that bank just won’t do it.
REBO: What are some examples you can give of unique negotiations?
Zifrony: I’m dealing with one transaction where even though the short sale is completed, the receiver is refusing to budge. The receiver’s argument to the court is that it was appointed to do what’s best for the asset. So the receiver is looking into the short sale to make sure that the buyer is not connected to the seller, and to make sure the seller isn’t benefiting from the transaction outside of the short sale itself. And until they’re comfortable with all that, they are staying on as a receiver. Traditionally none of this involved the receiver, yet the court is keeping them on.
REBO: Overall, what advice are you giving clients in distressed negotiations?
Zifrony: I had a client ask me the other day to tell him this is risk-free. I can’t tell him that. There are unique features that these transactions are encountering, each of which has to be identified and resolved. It’s easy if you can get to the issues before you get to the agreement, but unfortunately a lot of these types of twists spring up after agreement is signed.
REBO: Obviously there are a lot of risks going for distressed deals. But what are the advantages and the positive side of these opportunities?
Zifrony: It comes down to basic risk-reward. There are tremendous deals out there. Buyers must be willing to take the risk, and able to go into the transaction expecting these issues with the attitude that when they arise it’s not an excuse to walk away, but an opportunity to further the deal.
Having the capability to close in this environment puts you ahead of the game, because the potential buyer pool is smaller, which serves to reduce prices from the sellers. You put all that together and you’re willing to take the overriding risk overall, you’re going to find great deals out there.
There are some folks sitting and waiting, but those are the folks that will be kicking themselves when things start turning around.
— Matt Zifrony is a director with the law firm Tripp Scott, who provides strategic counsel for corporate contractual and transactional issues. He also provides property financing and transaction counsel to buyers, sellers, lenders and developers of residential and commercial real estate.