YouTube Transcript Bankruptcy webinar April 30, 2020

YouTube Transcript Bankruptcy webinar
April 30, 2020
Link: https://youtu.be/Y1rcud9xi_s

This is Adam Pincus of PincusCo Media
we’re speaking today with a panel of
real estate bankruptcy experts to help
us understand what the next year might
look like in the bankruptcy sector as
the city absorbs the impacts of this
pandemic I’d like to introduce our
panelists it’s David Schechtman senior
executive managing director at the
brokerage Meridian Capital Group, Michael
Fay principal managing director chairman
of US Capital Markets Executive
Committee at the brokerage Avison
Young, David Scharf, chair and co-managing partner at the law firm
Morrison Cohen, Eli Tabak, co-founder and
CEO at the owner and broker and
financing firm the Bluestone group and
Richard Maltz the CEO at Maltz Auctions.

we’re gonna get right to the discussion
your questions for panelists please feel
free to use the Q&A button at the bottom
of your screen to send them. We will be
taking questions towards the end of this
hour.

now some expect a flood and some expect
a trickle of bankruptcies I’d like to
start with David Scharf with this question
what does the litigation landscape in
New York City look like as it relates to
bankruptcy in the coming year?

David Scharf:
I hope everyone is doing well. thank you Adam
thank you for inviting all of us

I really believe that we’re gonna be in
the trickle mode a lot of the resolution
a lot of displacement that needs to be
resolved is going to get resolved in the
boardroom as opposed to the courtroom I
think the last place anybody’s going to
end up and it’s only if they’re going to
be forced to go there is the Bankruptcy
Court and

AP
why is that why do you think
it would be that way as opposed to sort
of visions right now an enormous flood

SCHARF
sure there are there are so many aspects
of why a bankruptcy can be an efficient
process
there are a couple of things that are
particularly important to remember when
you’re dealing with a real estate world
number one bankruptcy is typically only
a last resort and the reason for that is
because there will be course carve outs
in almost every single loan that you’re
out there it’s a non-recourse loan but
you file a bankruptcy you’re gonna go on
the hook for all of it so that’s a
massive disincentive in the first in
point number two the efficiency of the
bankruptcy process which is something
that is often utilized to viewed as a
possibility right now it’s not that
efficiency because there’s no authority
lending there’s no visibility as to what
the future holds and distress sales is
not where anyone wants to go right now
because of the lack of visibility as to
what the future holds for real estate or
for real estate operating companies
therefore that incentivizes whoever is
on whatever side of whatever transaction
you’re on to sit down and try to figure
it out collaboratively and collectively
as opposed to spend your time and your
effort in a process that probably won’t
get you a better outcome

MICHAEL FAY
I might
disagree a little bit about that just to
be on a on the safer side here you know
we do workouts and business throughout
the country and we’ve seen a lot of
issues on the tenant side for
bankruptcies we’re gonna see a lot of
issues from borrowers who are uneducated
and still will still file the
bankruptcies. In the last 37 years and
all the workout business that I’ve done
you’re right the carve-outs do have a
personal guarantee component but it’s
still you know they believe that they
need to do this from a legal standpoint
so a lot of the panel trustees I’ve
spoken to you through several district
courts throughout the country as well as
a lot of them bankruptcy judges they
believe September October November will
be a larger flood of those bankruptcies
that are coming be coming in we also
know on the CMBS side which is what
you’re really referring to about the
bad-boy carve-outs which then accelerate
the personal guarantees we’re gonna see
a lot of those still as I said a lot of
these bars are seven million dollars to
twenty five million dollars and they
just they’re gonna feel like they’re
backed up against the wall conversely
they’re gonna be giving back a lot of
keys
is what we also believe was same here
take the keys and be done because we’re
not going to put more capital in for a
long slog uphill so anyway I don’t mean
to disagree but I had to just because I
think that’s gonna happen
I actually

TABAK
I will just say I’m sorry
even checking on your neck okay well
we’ll true up soon David but III think
that both David and Michael are correct
it depends what you’re dealing with if
you’re dealing with a borrower that
somewhat sophisticated not even that
sophisticated
I think bankruptcy is really a last
resort anybody will tell you that one of
the first questions on any mortgage
application or loan application is going
to be have you filed bankruptcy before
and frankly speaking from a mortgagee
perspective in a litigious situation
we’d almost prefer to be in bankruptcy
than the way state court is these days
and somebody would rather go to a state
court and go down that road almost for a
couple of years and then use bankruptcy
as a last resort and there’s no reason
for them to go into bankruptcy now when
they can use the slow court process
that’s available to us now in New York
or available to them now in New York and
then use bankruptcy as a last resort so
I really don’t think somebody is jumping
and filing bankruptcy before he files a
state court action or before he gets
into a state court action I don’t know I
don’t see any reason why somebody would
do that

SCHECHTMAN
so I would have had Adam I’ll
take a little bit from everybody I think
the the fundamental difference between
this downturn which is much more social
issues and health issues when you take
2008 bear stearns collapsed in August in
the middle of August of 2008 by
September all of the portfolio lenders
and and then again any regulated bank
had physically had regulators in the
banks with highlighters circling and
highlighting loans saying you can’t put
out more money until you right the ship
you need to get these things off your
books
when all of the people on this panel are
on the phone with our contacts we all
are gray-haired folks except for
Richard’s looks great
we you know we were on the phone with
all these lenders and we’re saying to
them
here’s XYZ loan that we’re tracking we
know it’s because we sold it to you
David was the lawyer and and Ellie
probably did mezz on it
we know that the ship isn’t is upside
down what’s interesting this time as the
lenders are saying we agree with you you
don’t have to be Einstein to tell me
that my 20 million dollar loan on a
twenty eight million dollar building
that I’m just barely above water because
we had three major factors affecting the
market before Corona one was the natural
downturn from peak to peak we had been
going up for nearly seven years to was
the draconian and socialist legislation
which decimated free trade and certainly
multifamily and then the evolution of
technology that hurt retail in parking
then when you add Corona to it I think
everybody universally agrees values are
down so a lot of these loans are
underwater but the fascinating thing
that I’m finding right now is I’m making
my cold calls and reaching out looking
for product to sell and to value is I
have bankers saying to me we agree with
you we have to sell these but there’s
one problem Schechtman I don’t have a
regulator in sight
I’m gonna forbear my pants off I have
the federal government giving me mixed
signals about whether or not they’re
gonna give us the lenders any relief we
know that the tenants have been given a
reprieve if you’re a residential renter
the commercial tenants are being given
relief at the local and municipal levels
you know comrade de Blasio and his folks
on City Council are looking to forbear
everything so I think what’s going to be
created whether there’s good guy clauses
or not and whether it triggers other
obligations I think that you’re going to
be inundated with bankruptcies but not
until the leaves change color and I so
yeah go ahead

MICHAEL FAY 842
no, really important and
this is one thing just to add one quick
point was the rate the cares Act and the
stimulus package is giving the
regulator’s of the FDIC in the banks
banks not CMBS
the other lenders the forbearance
options and they do not have to classify
and/or write down those loans very very
important I believe we’re gonna have
probably one more extension of that so
what happens on the 181st day they come
back in and the borrower says hey I need
three more months again so what’s gonna
happen is what we’re seeing is a lot of
these banks right now are turning around
and compiling all those loans that have
been asked for those forbearances
they’re gonna start to see some
portfolio loan sales going on so they
don’t have to turn around and start
taking the writedowns
and other classifications call it in six
months from now so that’s where I think
we start to see some of the nuances
between CMBS and banks life companies
mezzanine lenders and etc so

ADAM who would
actually let me just before we follow up
on that I just want to ask Richard what
where where do you see things in in the
next six months next year

RICHARD I mean I
substantially agree with Dave Schechtman
I think you hit the nail on the head one
of the other considerations that we see
before we see bankruptcy assets to sell
is it’s usually filed on the eve of a
foreclosure right now there are no
foreclosures that it into itself is
going to delay the process at least
three or four months
AP
and how after that
we’re like do you think if with all the
forbearance and stuff do you is that
could that extend for years or could
people start getting

RICHED
the combination
there’s plenty of borrowers that are
either aren’t sophisticated enough or
have chosen just to throw their hands up
in the air and there’s gonna be in my
opinion three to six times the volume of
bankruptcy asset sales as there’s been
in the last year starting in maybe four
to six months from now hundred times
like there could get compared to

AP
compared to two thousand nine ten I said
like on par or more or less than that

SCHECH
it’s gonna dwarf it it’s gonna be worth
it once the flood miliary
FAY
totally agreed

SCHECHTMAN
and you know out of the unfortunate
circumstances is 2008 was large
engineered by us it was credit driven we
created all kinds of you know Ethan
Penner esque
products CEOs and cielos and acronyms
that to this day you know sound like MSG
and Chinese food to me and all those
things really created the credit crunch.
the four factors that I articulated
earlier we’ve got a real issue I don’t
think that there is a borrower or a
lender who will disagree that values
have fallen precipitously it’s not 11:38
artificial we have technology that has
changed a retail store on the
Magnificent Mile and Michael was no
better that’s getting three four five
six seven hundred dollars a foot you
could be sitting there for two years you
can chop up the old Navy into thirty
five different stores
it may take you four years to rent it
and you’re gonna see a net fifty percent
of what you used to this has nothing to
do with good guy clauses we are just
going to see vacancies I think that the
first bankruptcies that you’re gonna
that you’re going to see also are going
to be businesses where the real estate
is ancillary or a surplus corporate real
estate you know for pete’s sake you’re
talking about Neiman’s
you’re talking about JCPenney but you’re
also gonna be talking about chain of
food chains potbelly I hope they never
go under their stuffs culture I promise
le but you know you’re gonna sheet
bankruptcies happening a hundred miles
an hour the issue is how long until we
get to an auction so I’m very active in
the southern and eastern districts of
New York and have the good fortune of
having handled 71 363 sales I had to
plug myself I’m sorry over the past 15
years as a broker and six previously as
a lawyer and there but look at that toy
you know I was on the phone with a
federal bankruptcy judge and one of
these zoom calls with my mouth shut and
he essentially said to me look the
Bankruptcy Code has you know it was
written as a safe haven for people and
it’s oftentimes from beginning to end
from notice of default to a bankruptcy
auction is generally two years I’ll bet
all of our listeners and nickel that
you’re looking at
three years if you default somebody today
on a retail strip in lower Manhattan
you’re not gonna get to an auction for
36 months which is actually going to
make the loan sale a more attractive
option right yeah

SCHARF can I pick up on that
yeah I think I think it’s really
important to maybe tie some of these
ideas together because III agree with
David in terms of as it relates to
timing and I just want to pick up on
what Ellie said the concept of the
timing of the filing for a real estate
Anthony that’s not an operating business
we need to separate out operating
businesses that had real estate as a
component of their asset base which may
have been in trouble before the Cova 19 14:08
it but for real estate assets that are
just real estate assets that are that’s
what they are they generate income
there’s death service that’s due on them
there was a lender out there the way you
need to think about that is there’s
going to be a notice of default but
before you get there you’re looking at a
three six month forbearance period of
time and then things are gonna start
spiraling downhill because the biggest
problem and I think has been in the
marketplace for the last couple of years
is the fact that low cost of capital has
not forced some market to reprice prices
have been very high but nobody’s been
taking back properties there hasn’t been
a lot of trading going on because you
can just keep the property afloat for a
long time for very little money now that
you’ve had a cataclysmic economic event
it’s forcing the repricing it’s gonna
require people to look at Value at 50 to
70% of where it was three months ago
and that repricing because of the timing
that’s about three to six months for
Barris to year state court foreclosure
three year bankruptcy 363 process that
gets tagged on after that that’s why I
come back to that’s why this is going to
get resolved by people buying and
selling loans Schechtman is gonna be busy
like nobody else’s business Michael is
going to be helping people
who are sophisticated we’re gonna be
saying here there’s a path that you need
to take that is different than the
foreclosure that’s different than the
bankruptcy you’ve got to figure out is
there white knight capital that’s out
there you want to give the keys back how
do you want to hopper it so once

AP

I mean
since I want to talk here about
bankruptcy
how will the process be different right
now there’s a couple things that are not
even happening like the foreclosures are
not happening what are other steps along
sort of the classic bankruptcy process
that that are not happening right now

SCHARF so
I think there are two problems with and
there’s been a lot of preparation I’ll
turn it back to Michael because he can
talk about it
probably best than all of us but as a
matter of process you know once a
company files and goes in and there’s a
plan for reorganization concept there’s
a need for a better and possession
financing and right now that cost is
either very very very high or not
available so that becomes a deterrent to
an immediate filing the next part that
is that would typically happen in 363
process is a marketing process where the
directors need to make decisions about
what offers to take prospective
purchasers need to go out and kick the
tires those have all been affected by
social distancing those concepts of
typically going in looking at assets
doing due diligence getting your
environmental reports done looking at
you know if you’re dealing with a
portfolio of properties looking at
multiple properties around country
getting on a plane all those things that 17:26
we took for granted that made the
process seamless and ultimately
transparent and somewhat more efficient
than a state court foreclosure there are
all these new barriers that are now in
place because of Coben 19 and that’s
going to have a profound impact on
whether or not it’s a smart option but
it’s also going to change the process
and the way people think about

FAY
so to
pile back on what David was saying this
it’s a good situation you know really
everybody has to realize
people if they don’t believe there’s an
end in sight they’re gonna go to
bankruptcy quicker but you know normally
you’ll have to go through a state court
proceedings to go through there to get
in and do what you got to do unless
there’s a cool-down period some some
loan provisions have cooldown periods
where you’ve got to go through that
first before you then can enter into the
courts and right on the last days that’s
when people tend to file bankruptcy you
know
AP
ask what types of loans
have the cooldown period

FAY it depends a
lot of you know I think Ellie will know
that a lot of the mezack witty groups
have cooldown periods the trigger
buy-sell agreements they trigger other
capital to come in white knight capital
they have a lot of things that they can
try and then we’ve normally seen when
that is failing literally on the night
of going to either the foreclosure or
filing them the new courts they will
file bankruptcy and then that starts the
clock all over again
so we tend to see a lot of those
different things and you know all of us
are talking about different situations
even if you go to a note sale a note
sale you sell the note you sell the box
of papers with a lawsuit attached to it
possibly and then you’re going to find a
way to even get to the real estate and
or work through the issues the buyer the
note has got to continue the whole
process so it doesn’t use shirk
anybody’s responsibility it just it
gives it to somebody else and that’s why
banks a lot of times don’t want to spend
the money on the foreclosure process
they don’t want to have to identify the
loans and then go ahead and reserve
against the loans there’s all sorts of
you know other expounding and
compounding issues that would go through
this so for all of us on this phone here
on this panel we all seen different
areas and you know from Richard and
Eli and and all of us we all have a
different touch point on this and some
to some degrees it’s bigger or worse you
know we’ve doing all the work for Sears
corporate right now they’ve already gone
through their bankruptcy and we’re
liquidating and selling off assets for
Sears it’s because it’s heavy real
estate which is great real estate which
then helps the the old chapter 11 and
you know recapitalize it on that so
there’s different plans so
gonna see stuff in the beginning stuff
in the middle under 363 sales or
reorganizations which that’s a whole
other key and or you know outright you
know selling it again for the
foreclosure of
AP
Ele I’d like to ask like
the different kinds of properties that
might different kinds of business
structures that would go into would you
be looking at like ongoing businesses
versus just single assets

ELI so so let me
just just to pick up on the conversation
that we were having now and maybe going
to this I I think this trend that we’re
gonna start seeing and I think everyone
on this conference will agree that we’re
gonna start seeing a big uptick in loan
sales and that’s where things are
heading and the reason for that is and I
don’t have to tell that to anyone on
this panel banks are not in the real
estate business they’re in the lending
business and most people on the note
purchase side are in the real estate
business. the last thing a bank wants to
do is own a piece of the owned a 6-story
walk up in the Bronx with 40 apartment
and have HPD calling them in the middle
of the night
the investor sees this as alternative
investment into real estate and you know
that comes along obviously with a lot of
hair on it and that’s why they’re coming
in at a you know at a discount compared
to the market value of it so what you’re
going to be seeing over here is people
that are ordinarily out in the
marketplace buying real estate are going
to be shifting their focus to look at
buying these assets these loan assets as
a way to get to the real estate now
depending on what that investor’s
appetite is in terms of what kind of
real estate he likes to buy
that’s the area of note purchases that
that there’s he’s going to look at but
in terms of what’s going to be available
I think the first thing that you’re
going to see available and conversely
the first thing that people are not
going to want to look at even in a
default and an opportunistic scenario is
the hospitality market
I mean I don’t see that coming back to
where it was five months ago quite
frankly for another couple of years and
I think that’s where you’re gonna see 22:25
the first crack in the long sales sid

Scharf yeah I
think and you know where you’re starting
proposition is where you’re gonna see
action besides and the trading of the
notes whether it’s in the CMBS but
people are what I call trading down the
cap stack to try to get into that
controlling note holder position there’s
gonna be a lot of action as it relates
to the mezz loans and you know I think
that’s something that Ellie can talk to
because the mezz loans can be the real
catalyst for action and activity that
will see its wave earliest into the
courtrooms when you’re gonna get the UCC
notice that there’s gonna be a UCC
foreclosure sale somebody’s got to react
and the reaction is either gonna be
we’re going to court to get an
injunction or there’s gonna be that
bankruptcy filing and that’s gonna be
where the early action is that’s going
to be visible to everyone to say where
is the activity where’s the distress
happening

ELI
yeah I agree completely and as
David would know most of these mezz
are into creditor agreements between
themselves on the senior lender they
don’t want to be in a situation where
the senior lender is in default
accruing at a default rate at least mezz
lender is in the back of the bus
behind a huge default rate most of these
inter creditor agreements have a
standstill period that allows the mezz
lender to acquire the senior debt and be
in a better position and I think a lot
of the loan sales transactions that
you’re going to see are trades unless
unless the mezz lender is completely out
of the money but if the mezz lender is
still in the money
they’re going to be moving to purchase
the senior loans
SCHECHTMAN
and I think Adam you
know that’s an important point
you’re gonna UCC sales so when

FAY
absolutely

SCHECTMAN
when there’s a big you know
when there’s a pledge of the membership
interest so very often for
for the couple hundred people who are
listening many of them know you have
equity at the top and then you have the
senior secured first mortgage and then
there’s usually if it’s a larger deal
although it comes with an inter creditor
there’s usually another level of debt
or preferred equity and those people
there remedy is through a Uniform
Commercial Code foreclosure which is a
much speedier process in markets that
are flat or only slightly descending or
that are driven more by credit and not a
complete collapse of value like 2008
through 2011 you were seeing a ton of
UCC sales because guys like Eli would say
I’m happy to have a senior secured first
mortgage with Joe fingerman
signature it’s a great rate it’s still
three and three eighths and I’ve got
four years of term this time those
mezzanine lenders are gonna say oh boy
I’m wiped out but do I want to foreclose
because I have a thirty million dollar
loan with signature the assets only
worth twenty six this time so I think
you’ll see UCC sales but I still think
bankruptcy is best route and one last
distinction when we talk about
bankruptcies very often folks like
Richard and Michael get involved with
bankruptcies that are not real estate
driven at their core for instance there
are companies that go under and the real
estate is not the driver of the value
they may have been other operating
businesses and the real estate is
certainly valuable I think what you see
in those will take longer these days but
I think what you’re gonna see first when
you file a bankruptcy and you there’s a
cover sheet you physically check off hey
this is an SARE a single asset real
estate filing meaning it’s one building
one asset those are gonna go quicker
once the note trades
AP
and where do in
terms of picking up properties in the
that have gone into bankrupt this is
looking guy a year or two years down the
line or whatever but the bankruptcy
that’s an ongoing
like a grocery store or and then picking
up leases and stuff like that where is
anything different now

SCHECTHMAN with yes you can
accept you know in I’m the wrong person
to speak to this I only played a
bankruptcy lawyer for a few brief years
we have David Scharf here but there is a
provision that allows the debtor to
accept or reject let’s say it is a
grocery store with 30 leases very often
they’ll accept or reject them so there
is a big problems going to happen in the
city with a a major retailer on a high
street I think it’s Fifth Avenue and
this retailer who is about to file has
already signaled to its creditors we’re
going to reject all these other leases
what we’re going to keep this 5th avenue
lease because we know it has tremendous
value I think the more complicated
bankruptcies like David said are still
going to be a last resort and you’ll be
reading about bankruptcies that have on
the index that have a 20/20 filing you
won’t see an auction for 3 to 4 years
the single asset Real Estate’s will get
resolved much quicker ok

SCHARF
one of the
reasons for that is is by statute and
and you know a single asset real estate
process by statute was required to be
resolved by the bankruptcy court quicker
then the operating businesses that David
is talking about where real estate is 28;14
part of the value but isn’t the only
asset of the business and

AP
Richard do you
all handle that that kind of those kinds
of assets as well it’s for a non real
estate business some companies just
trying to get rid of all their leases or
do you handle that or properties

MALTZ
absolutely so the vast majority of our
sales our real estate sales
however there’s plenty of entities that
file bankruptcy with personal property
intellectual property that needs to be
sold you know it’s part of the bundle of
services that we provide to the
bankruptcy trustees and the chapter
11 debtors we sell everything
AP
it is anything different this time
around do you think as the way that
you’re preparing for what might be
coming

MALTZ I’m preparing for an onslaught of
inventory I think the first thing to
file are going to be the small
mom-and-pop real real retailers as well
as some of the larger retailers I think
I’m going to be changing locks on five
locations a day if not more and kind of
– one of the other panelists point from
that you’re gonna have some of these
entities that file that own the real
estate as well and maybe it isn’t in a
separate LLC or they haven’t been paying
rents properly and the trustee is going
to find a way to bring these assets into
the sale which is going to result in
additional real estate sales

FAY 29:50
it’s just
gonna be an interesting time I mean I
think that the one thing that I think
David mentioned earlier segment was this
is something that is a big science
experiment and social studies experiment
for all of us
and I think that it’s gonna be far
reaching where a lot of things could
resolve themselves very quickly and some
things are to go on for a long time
and it may take we’re you know in 2007-8
you know it we saw the downturn it was
slowly coming slowly coming that it
ramped up and then it took you know a
whole year of 2009 where everybody was
kind of like pencils down I think we’re
gonna see more people there’s more
capital in this market today than we’ve
had I think lenders there’s a lot of dip
financing right now we’re getting phone
calls from dip financing already but
there’s there’s lenders out there that
are ready to lend as soon as they get
there understand the risk texture in the
marketplace and that is the hardest part
today we’re seeing land deals trading a
little easier because you can price in
risk two years out three years out you
know how do you price and risk on a
retail deal or an office deal right now
where you don’t even know which tenants
are paying one thing I do want to
mention and I think that a lot of people
are calling and asking we do a lot of
work with the CMBS side the special
servicers and did probably 2,700 deals
in the last ten eleven years during that
time and
we saw right now Hospitality is the
number one there’s billions of dollars
coming into into special servicing right
now I mean pre Cova there was probably I
don’t know 70 60 loans and special
service you know hospitality in the last
two weeks it’s up to 509 so you think
about how many of those properties have
come in and again I’m talking the US you
then are seeing the retail there’s
billions of dollars a retail coming
special servicing and then you look at
student housing a little bit of
multifamily you’re looking at office
next and then last on the line is
industrial and the industrial side if
you’ve got manufacturing issues that’s
where you’re seeing some of the some of
that so I wanted to throw that into the
mix of all this

AP
le I wouldn’t ask
or maybe this is someone else
but someone wanted to get into the
process if there was somebody who was a
wanted to be a DIP or to the to the
to the debtor in possession or their
attorneys and their regulations about
who you talk to
ELI
I think that’s I mean I
I could talk about it but I think that’s
really a question today but as to who
could talk to who because that’s an
interesting taffeta

SCHARF
everyone should go to Michael you want
to talk like what are their they’re you
know sure it listen

SCHARF
if people have
capitals and they want to deploy capital
most important people they ought to be
talking to an eye I said tongue-in-cheek
but let me expand on it you talked to
the advisors you talked to the people
that are out there who are dealing with
the distressed borrowers they’re the
ones that need to figure out where their
capital sources are coming from so
raising your hand and going to the likes
of Michael and saying listen I want to
deploy capital into distress markets
whether it’s operating companies whether
it’s real estate I want to be a white
knight I want to make myself available
you know ELi plays in that world Schechtman
it is involved in brokering those deals
yep talking to all these people and
getting your foot if you’re if you’re a
novice to somehow you’ve got a bunch of
capital behind you lucky to be deployed
you’re looking at a lot of people on
your screen right now that can help
source your money into the right funnel
there

AP
are you allowed to if someone
could just call the the judge up or like
what are their what are the rules so

SCHARFyou
know you don’t call the judge it’s not
the judges job it’s it’s not the US
trustees job it’s the lawyer for the
debtor or the prospective better it’s
the advisors to the prospective debtors
then they’re the ones that are the best
people to be talking but they get or or
or

ELI
or the lawyers for the lenders or the
lenders to talk to them about buying
their positions so all of that is that’s
all I’m just like there’s no ethical
legal there’s you’re allowed to call all
those people and of course the the legal
problem is for the debtor in
post-petition to be communicating
directly with the creditor but okay but
someone else other than that can come in
and say I’d like to help you million
bucks –
SCHARF
it’s the hallmark of free
capitalist society and and and you know
it’s you’ve got the capital you want to
jump in there you’ve got to find the
place where to deploy it you’ve got to
find the avenue and you’re looking at a
lot of people who will have the avenues
right now it’s kind of creative yeah

SCHECHTMAN
Adam I think what you’re asking for for
the boy several hundred people three
hundred ninety two people who are
listening besides the panelists is if
I’m a neophyte or somebody who s capital
who do I call I want to buy some of this
stuff values are down and I want to hold
it for ten years I want to get rich
let’s say what you really want to say
how do I get involved its relationship
driven um I was a neophyte 12 years ago
making these calls in 2008 and you get a
little thread and you keep pulling and
pulling but don’t make cold calls to
banks yeah you know it’s it’s and that’s
not to dissuade people from doing it
you’re you’re really going to wind up
with a whole lot of nothing you have to
have been everybody on
this on this call has been in the
bankruptcy and workout and turn around
world or whatever you know
whatever the vernacular is we’ve been in
these markets in good times and in dead
and I don’t think there’s a person on
this line you know Maltz auctions has
been operating in up markets the
bankruptcies oftentimes are caused by
death divorce the change of business
circumstances so if you were to just
pick up the phone today in cold call
Citibank and say I want to take a look
at your list of loans I don’t think
that’s happening this time

FAY right exactly
you know we’ve Avison Young we have
our whole asset resolution team which we
created over ten years ago and we’ve got
professionals across the whole country
that are looking at all these issues for
the banks for the special servicers and
and other mez lenders that we’re helping
with be BOVs were helping on other
assets we’re doing a lot of that work
and then of course we enjoy a great
relationship in the federal courts also
in the state courts in and around the
whole country to where we end up getting
involved in this you know you’re gonna
see a lot of the groups that are gonna
be doing these large loan sales
portfolios you’re gonna see other groups
that are going to be doing individual
loan sales or peel out certain assets
and know that there’s a real piece of
real estate attached to this box of
papers with a lawsuit attached to it so
as David was saying you know there’s
gonna be a lot of ways to look at this
and there’s gonna be a lot of money
that’s going to be looking these
different ways and there’s gonna be a
lot of creativity this time I think to
help because we’re in uncertain times
that we all have not seen before but
there’s a lot of the common denominator
on the bottom which is it’s gonna get
resolved some way

ELI but David the other
third the other things we didn’t talk
about well yeah that’s gonna be a large
driver for loan sales is all these debt
funds that put out money that are having
huge liquidity issues now as a result of
the fact that they’re leveraged their
positions with CLOs or other
facilities that are tightening and
calling margins and stuff like that and
you’re going to see a lot of the debt
funds close up shop or have to raise
capital to you know secure their
position
and you can see a lot of those type of
sales that are not so much driven by the
particular situation that that asset
it could even be performing loans that
are being sold for them to be able to
raise capital and we’re starting to see
a lot of that actually in New York there
are people offering to sell those in in
all markets it’s not a people once its
funds and the find that are using some
of these sophisticated facilities to be
able to secure to be able to leverage
their positions and those positions are
being pulled

AP the David I just want to
ask the question on the idea that you’ve
been in this from doing it for twelve
years or whatever and people should not
be calling the banks up wouldn’t the
banks have a some kind of fiduciary to
have to listen to anyone who might want
to call out I mean obviously not you
know

SCHECHTMAN
boy once an investigative
journalist always an investigative
journalist how do I get everybody in
there sure Adam they have a fiduciary
but let’s say ma and and let’s really
take off the pretense I’m a 55 year old
workout specialist I’ve seen several
cycles and I work for a portfolio lender
XYZ bank that has commercials and you
have their credit cards but we know
they’ve made a lot of real estate loans
and boy I want to pick off a lot of
their loans in between five and fifteen
million because that’s what my friends
and I have done and we’re gonna buy some
of these notes in ten years from now
we’re gonna be wealthy so I’m gonna
start calling up the bank where do you
start
if you’re a neophyte you start with a
1-800 number and ask for the workout
group guess what that groups gonna give
you it is gonna give you a list of loans
that are for sale but each one of those
loans or I’d say 99% of them it’s gonna
say next to it
Meridian investment sales Avison
young I don’t know of any other firms
but it’ll say there will be a broker
attached to it so when I wanted to with
my principal hat on by a strip mall in
South Jersey that was in bankruptcy in
2011 a couple of us cobbled together
money we had to go through CBRE who was
the appointed broker handling that.
banks fulfilled their fiduciaries by
engaging people who deal in goods of the
kind you’re not going to have that
lender running a process themselves
because they don’t have one or two
they’ve got a lot them,

FAY
they have to 40:28
show things are widely marketed and I’m
not sitting there saying that they’re
not going to do some one-off deals
because they will but but the point is
and David’s right they’re gonna have to
show it’s widely marketed to take
whatever loss they’re gonna do to be
able to justify the shareholders
bondholders whatever they’re going to do
so you’ve got to watch through that you
know it’s it that is the fiduciary that
and that is truly the fiduciary of what
that is so you know in the other part is
this you have to remember something
selling notes it is very very a lot of
confidential you know financial
information you’ve got to be careful of
banking laws who sees it who doesn’t see
it you know and the banks have got to be
very careful they just can’t to say oh
by the way here’s a loan you know they
can be set up under their own issues of
disclosing financials and or you know
certain things that you know can be
detrimental them

SCHARF
the point about the
Michael made about the one offs those
one offs typically happen and their
relationship driven so it’s really hard
for the neophyte to be and that’s why I
think David Schechtman was saying don’t
expect to be successful if you’re gonna
reach out the bank because the bank that
does the one-off is doing the one-off on
a relationship basis with people that
they have dealt with people that they
trust, people that they have not
circumvent an NDA agreements in place
that they have that history of trust
that they’re not worried about the slow
jur and all types of other issues that
they might otherwise have but somebody
off the street

SCHECHTMAN
and to put an end to add
to that point you have to remember when
a bank is making a loan they’re in
essence giving a thumbs up to a borrower
they expect them not to be nefarious and
their partners in essence and they’re
saying we believe in you we’re going to
give you this money let’s get into this
together for whatever reason if they
have to sell that loan you’re talking
about a loan file to Michaels
point that may include personal net
worth statements Social Security numbers
it’s not as simple as it may seem even
for a four million dollar loan on a tiny
building in Red Hook there’s a lot of
sensitive data so when they run these
processes oftentimes a bank a portfolio
lender in particular may call up another
borrower who they know deals and goods
of the kind and say hey we’ve got a
borrower he’s candidly done almost
everything right but the world’s
collapsed around him he doesn’t have
more any more money to pay a lot of
these loans are sold in what we call a
desk to desk transaction I didn’t go to
a good enough college to be in private
equity so but what all the private
equity guys they’ll call each other up
and folks as adept as le Tabak he will
he’s getting phone calls from the
portfolio lenders now and he’ll say I’ll
take number one three five and seven
circle it they sign and close these
loans do not come with soft periods and
and by the way of being provincial
Michael is national and meridian is
national but my loan sale business and
so is Richard my loan sales business is
is really within a hundred miles of New
York even in a down market it’s ten
percent down close inside of 30 days
diligence is whatever file we have and
go and do it on your own they’re not
easy things to buy
AP
so a related question
with how how does someone get into the
the business of being chosen by by the
the receiver the trustee once bankruptcy
you know in two years whenever that
happens how do brokers get some of that
business

SCHECTMAN
malts auctions has been in
business for how many years
MALTZ
going on 40

SCHECHTMAN
40
years
AP well that’s one way

SHECHTMAN
well it’s it’s a real way
and there’s a reason why there’s still in
business. Avison Young has 40
kajillion offices, Meridian did 40
billion in mortgages last year and we’re
entering into our 35th year I’m a
licensed attorney and even in up markets
I’m in the courts so the answer is it is
a very tightly knit club not
to exclude people but to run a process 45:00
once and once a broker or other
professionals are engaged believe me we
go as broad as possible or as broad as
we’re told by our clients we’re
essentially the quarterbacks and they’re
the general managers so it’s some if
some of your viewers are saying I want
to buy a loan I’m a brain surgeon and
six of my friends got together we’ve got
a lawyer in the group and a real estate
guy in the group and we’ve got twenty
million dollars in cash we want to buy
these loans get on the phone with the
auctioneers get different counsel one of
the major pitfalls that I see are very
accomplished real estate people who
historically have not played in this
sandbox they continue to use their
transactional counsel and very often you
can have transactional counsel that are
solo practitioners or five or six person
real estate lawyers they’ll do hundred
million dollar deals and they’ll do it
very well
but when it comes to this sandbox if
they don’t have the suite of services
that somebody like Morrison Cohen has
tax litigation real estate finance and
bankruptcy if they don’t have those
expertise even with money you may not be
able to get it so get a good broker to
bring you opportunities get a good
lawyer who has seen this movie before
preferably a guy or gal with gray hair
because this is not for the weak of
heart it really isn’t

AP so okay I’d like
to throw in some of these questions from
some of the listeners so these would be
kind of round-robin the this is from
Luis how do you see the bankruptcy
question that’s related to multi
residential buildings versus commercial
buildings

FAY
it’s to say it’s the same in
some ways except for there’s gonna be
judicial areas New York is gonna be
different in some ways because of
certain restrictions and/or citywide
laws so you’re gonna see some of that in
certain areas it’s also going to depend
if it’s workforce housing section eight
I mean there’s there are certain things
that you’re going to end up having to
deal with but effectively it’s the same
or if it’s bond
related you know the

AP
okay this is a
question about special servicers sort of
asking why’s is the benefit for special
surfacers holding these distressed
assets solely to take more fees where do
they usually and where do they usually
take their fees I remember okay buying
special servicers SSL Green bought
special interpreters to get an inside
track to live in essence and that one
reason

FAY
so let me I’ll handle this
in a minute or less first of all under C
MBS 3.0 there are you have to hire third
party non affiliated groups to handle
the assets that’s number one so that
that is a big thing the servicers
themselves remember there’s the low the
bps the first lost piece which is known
as the controlling class representative
LNR Rialto a lot of those by those C3
they will buy up and down the
capital stack to maintain that
controlling class representative piece
so that way they will contain so they
can hold and maintain the servicing
piece now the answer your question is
they come up with groups like ourselves
and other brokerage firms with plans we
do a BOV we look at where the assets
it’s what does it look like I mean
there’s a long plan they they can hold
these up to about three years to be
honest with you sometimes they say no
we’re just gonna sell it and be done and
what just in and out but they normally
look to you know take the property
through the foreclosure process and own
it their fees that come across the whole
thing I mean you know so I wouldn’t say
they hold it longer for the fees and
they’re doing it because they’re there
are also controlling the bond piece and
also trying to do the best of the
bondholders which also goes back to
david Schechtman points there’s there’s a
fiduciary there in the bond holders and
you know you’ve got the ret- agencies you know the 48:39
credit rating agencies that are going on
so you’ve got to fulfill those duties to
the bondholders so it goes on and
they’re very… listen
dealing in the CMBS world is totally
different than dealing with the banks
banks are much easier at the end of the
day because of you know they’re there
making their own decisions a little
easier

SCHARF
if you’ve seen that it’s so far
the Cova 19 this has been my experience
so far
I have found with special servicers and
the master services actually easier to
deal with more receptive more responsive
than they were in 2009 to 2011

FAY so I’ll
give you one bit of information the
servicers and the first three weeks of
the covid issue
we’re receiving just default calls or
forbearance calls every 90 seconds so
the master servicer is the one who’s
receiving that with a special service or
so yes there’s much more communication
going on on really what to do because
it’s an onslaught and you have to
remember it will get transferred to
special servicing within a 30-day period
of either a monetary non-monetary
default or an imminent default and when
you’re telling you’re not going to pay
there’s imminent default so that kind of
triggers that so yes I would agree
there’s been more conversation but again
it’s a process you know they just
you can skip around a little bit but
you’re not going to skip right to from
taking it you know oh it’s in serving to
Oh sale it just doesn’t happen
that way and there’s another aspect to
it that I think answers

ELI
the observation
that the David Scharf was just saying
and that is science for the fact that
these special services like to collect
fees and we all know that just to
understand what the concept of a special
service areas you probably need in 20
hour conference like this even know what
we’re talking about but they have their
fiduciary to the bondholders is very
very you know is always hanging over
them so you know being in in a
circumstance like we are now like we’ve
never been and you know and past in
recent history at least gives them a lot
more flexibility and being able to make
a decision and not be exposed to
litigation
later on I think.

AP actually someone
sent a question for you
it says the challenge
before it’s not exactly a bankruptcy
question but sort of as it all wraps up
the challenge before cope the challenge
before Covid for assets and the new
regulations that they kept coming out
with the rent freeze and stabilization
so there was that challenge so buying
the stress in combination with those
regulations how do you how do you
compare you take that in consideration
for the loan

ELI
well it’s it’s you know buying a loan is
no different than underwriting a piece
of real estate because ultimately that’s
what your collateral is and they the
David Schechtman will tell you we started
seeing loan sales before Covid just as
a result of the the infamous regulation
that came out on the you know on the
multifamily side and when we you know
before all this happens you know as as
the other panelists will tell you
selling a loan for less than are in New
York City almost didn’t exist that
started to change when you know
properties that were loans that were
secured by assets that had a lot of
exposure as a result of the new
regulation and lenders wanted to you
know we’re trying to get rid of those
those conversations changed a lot
because you’re looking at the older
underlying collateral as your security

Schechtman
that’s right so when you’re buying a
loan you still have to be comfortable
hey I’m gonna step in the shoes and I am
gay I’m probably gonna get the keys one
major piece of underwriting that’s
different though from underwriting the
real estate you better underwrite the
legal and as David will tell you and I
oftentimes listen to my wife who’s a
securities lawyer when she’s explaining
to clients and oftentimes private equity
firms hey here’s a litigation budget but
you might as well take it and rip it up
I’ve seen this in David’s done umpteen
litigations you could rip up this budget
because it can go any number of ways you
don’t know who’s on the other side
litigating against you and just because
there’s a good guy clause or it may
trigger other default covenants for an
owner or a borrower or a debtor that
litigation could
really erode all of your profits so again
to my point you can’t have and not to
throw stones at them because they’re a
huge part of my business that one off
storefront real estate lawyer should not
be stepping into federal court and
telling you don’t worry this is gonna
take six months you better really
understand the risks litigation is the
last place on earth the only people who
win in a litigation are the litigators

SCHARF
here’s the thing Adam by the way I think
about the budget that gets done and we
do them quite often in that short
diligence period that our clients are
out there buying loans they’ll come to
us okay here’s the loan portfolio this
is what it looks like here’s the
correspondence here the docs
map it out for us because that’s what
we’re asked to do and that’s part of our
job but the budget looks like an oak
tree and it’s if this happens then
you’re gonna go down this path if you go
down this path you’re gonna you’re gonna
be here and you’ve got the bankruptcy
you’ve got the foreclosure you’ve got
the mandatory settlement conferences
you’ve got the summary judgment motions
you’ve got the appellant work you’ve got
the referee you’ve got the lawyer
it just it’s it’s an oak tree that
branches out and gets bigger and bigger
and bigger and sometimes that’s daunting
but most of our clients really like to
get that because they know and what it
shows them is that we’re thoughtful and
they can start putting some of that into
a pro forma that they’re trying to do
just like Eli said it’s about buying
the asset you have to underwrite you
have time to write it as your
underwriting fee asset you got to underright legal and that’s part of the
underwriting the legal being able to map
out what the huge oak tree looks like

PINCUS
there’s a another question this is from
Jacob he said beyond relationship
building can you talk about some of the
data available to the panelists to
identify distressed assets

SCHECHTMAN
sure you know
when I when I got out of law school 2000
we had LexisNexis and and we had West
law and it
was tons of info when I became a broker
in 2006 I had propertyshark I can’t
help but to sound like that old
crotchety guy because all the folks in
the industry now you have Reonomy me you
have Trepp you have Bloomberg terminals
if you could mortgage your house and get
a subscription you have online
newspapers and in this day of instant
media and instant information so much
including property records and and
mortgages are recorded you could really
do a lot of the research as a neophyte
it’s incredible I have buyers who have
called me up and said here’s a clump of
data and here’s an address and I look at
them and say wow that’s that’s
incredible they’ll say now go get it for
me because I can’t make this call
they’re just gonna say oh another rich
guy who thinks he’s a loan buyer so the
answer is your viewers have a ton of
publicly available information we
remember the days of mimeographs and
Xerox where there is a bank and there’s
a default now what do I do
today it’s I could figure out every step
of the process where to go so there’s a
those aforementioned places away you do
your research.

AP and another sort of broad
question where do you see the most
opportunities today in which asset
classes like it’s just framing that
towards bankruptcy like which ones who’s
saying Hotel

FAY
its hotel and retail that’s
it right now I mean hotel and retail are
the ones that you’re gonna see the most
and I think in the next six months to 12
months we’ll see a little more texture
from some of the other asset classes you
know and again some people talked about
student housing or assisted living or
anything else you know there’s there’s a
lot of there’s a lot of speculation out
there what is the other one but I would
say right now definitely hospitality
hotel and definitely retail and the
retail the retail is is abounding from
all sides from the tenant side the
retailer side the ownership side you
know all those single assets you know
whatever

SCHARF Adam I would throw out to the
panel
for for comment on what I’m about to say
condo projects that are more than 70
percent completed by now is because
there was a not a lot of transparency
and what the market looks like that’s
another asset class that I think is
right for investment for those that have
capital want to complete it will rejigger the entire cap sack bring down
the basis be able to reeprice product
which have to sell for twenty five
hundred dollars a square foot if they
can bring that down and start selling it
for 15 or seventeen hundred square foot
because they’re able to discount their
basis in a project I think that’s
another area besides the retail
hospitality

SCHECHTMAN I agree with David it just
so happens that on my desk I have more
of that I have more partially complete
anywhere from and I’m running a
bankruptcy right now at 435 West 19th
Street in Manhattan
it’s a we just did of cost of
complete analysis and obviously with the
usual disclaimers we think it’s going to
cost about twelve million dollars to
complete this project it’s it’s a broken
condominium project I think that’s the
next one in followed very closely by
multifamily nationally