In this podcast episode Bob Thomas, President of Turnstone Property talks with us about working on the front lines of distressed commercial real estate loans and consulting with banks with distressed loans in South Florida

1. [dp]
Distressed Commercial Real Estate
Workouts and Opportunities
Brecht Palombo of distressedpro.com and Bob Thomas of Turnstone Property
PODCAST
TRANSCRIPT
http://www.distresesdpro.com/blog/podcasts/
1 of 9 Tuesday, October 27, 2009

2. Brecht Palombo: Okay everybody this is Brecht Palombo with Distressed
Pro and The Bank Prospector and today I am very excited to have Bob
Thomas on the line. Bob has owned a company called Turnstone Property
since 1997 and he is very well know in the greater Boston area and beyond
for doing a number of different sorts of deals in this area and we have him
on the line today because what we are going to talk about it what he has
been doing since we have seen a shiD in the market here and what his
company has been up to so the first thing I want to just go right at it, what
have you been working on out there Bob?
Bob Thomas: Hi Brecht, glad to be here, I have been working recently on
workouts and consulJng relaJng to commercial real estate loans in Florida
recently.
Brecht Palombo: Okay, everybody is excited about working with the banks
right now and I know banks are, they are moving through an awful lot of
stuff so I thought having you on the line today where you have been out
there doing all sorts of loan consulJng and workout that you have been
doing maybe tell us a liLle bit about, well first, what kind of assets have
you been working on in Florida?
Bob Thomas: The gamet, everything from failed subdivisions to industrial
to condo conversions that did not work out, office buildings, the whole
gamet.
Brecht Palombo: Okay, that is good; it sort of gives us a nice base to see
where you are coming from. So why don’t you tell us, what is it that you
see as sort of the biggest problem or the biggest challenge out there on
the market right now?
Bob Thomas: The challenge is see and keeps coming back over and over is
a detachment by lenders from the underlying bricks and mortar collateral
and I think this is really at the root of the current situaJon. UlJmately the
value of these loans comes down to the quality and the characterisJcs and
the performance of the collateral and the loans were oDen made on faulty
assumpJons about the performance or the potenJal of the quality of the
real estate, and in the most egregious cases loans were made on property
which the lender may have never actually physically inspected.
Brecht Palombo: Wow, and so these are real problems you are seeing out
there in the market.
2 of 9 Tuesday, October 27, 2009

3. Bob Thomas: Well sure, and it is not always the case of the market shiD is
the main thing that has happened but yeah, there is a detachment or there
has been a detachment from, by lenders for the collateral.
Brecht Palombo: Okay, then tell us a liLle bit about your company has
been up to since the shiD in the market and sort of how you are addressing
that problem or that challenge?
Bob Thomas: Well through Turnstone ProperJes affiliate special assets
advisors, we have been focusing more on debt and asset management the
recent work in Miami and less given the environment on development, we
have a great team with experience that spans back from the last situaJon
in the late 80’s and early 90’s and all the way through the current situaJon
and experience in both banking and real estate. In addiJon to working with
lenders we have been talking to private equity funds and other investors
about evaluaJng loan pools and individual assets.
Brecht Palombo: So I guess a liLle bit, you talked a liLle bit about who
your clients are but why are banks looking at outside consultants like you?
Bob Thomas: Yeah, well the truth is many banks are not hiring outside
consultants and are opJng to use in‐house resources and oDen this
involves having loan officers handling workouts. SomeJmes their own or
their colleagues loans which does present a conflict.
Brecht Palombo: What do you mean by that?
Bob Thomas: Well, handling workouts implies a criJcism of the loan, so
even though the goal is not to place blame an insider might feel
uncomfortable or unable to say the tough things and make the tough calls
on a loan that he may have made or a colleague or even his boss may have
made so the primary reason to bring in an outsider is that consultants can
say things that insiders have a harder Jme saying.
Brecht Palombo: Right.
Bob Thomas: Also of course the skill set is different, underwriJng loans,
managing the relaJonship with the borrower; this is all different from deal
with a loan that is broken. So it requires a change of perspecJve and it
requires different strategies.
3 of 9 Tuesday, October 27, 2009

4. Brecht Palombo: Right, so tell me a liLle bit about, or tell us a liLle bit
about what you are consulJng on exactly and sort of what, the mechanics
a liLle bit about what you have been doing?
Bob Thomas: At the moments we are doing workouts on a porolio of
nonperforming loans as I said for a Miami based bank for the same back
we recently completed an assignment evaluaJng collateral underlying
performing loans.
Brecht Palombo: And so what is that, what does that, can you talk a liLle
bit about what work consists of just for anybody who is not in that same
space that you are in?
Brecht Palombo: Sure, sure, well the reason to evaluate performing loans
is that because the environment has changed so dramaJcally over the last
year and a half, two years, property which may have had certain potenJal,
certain value may not any longer have that potenJal or value so the job
entailed in evaluaJon of the collateral is to understand, does the original
evaluaJon, does the original game plan for the property, if there was a
project involved sJll make sense in the current environment. And the goal
there is to get ahead of the curve, for the bank to be able to get ahead of
the curve and understand which loans are at risk and to be proacJve and
working out soluJons because the longer problems go unnoJced the
worse they can become.
Brecht Palombo: So you might get a stack, I am sorry to interrupt you but I
just want to…
Bob Thomas: No, go ahead.
Brecht Palombo: want to make sure I get an understanding of it, so you
might get a stack of currently performing construcJon or commercial notes
that for one reason or another the lender thinks, gees we ought to be
keeping our eye on this and then you will sort of pour through the notes to
get an understanding of what the collateral is, visit the collateral or the
property I should say and this sort of thing, is that..
Bob Thomas: Exactly, this is, in the case of that assignment it was taking a
hard look at the physical asset so to give you and example, a borrower
purchases a mulJ‐family property with the intent of converJng it to
condominiums.
Brecht Palombo: So who did not?
4 of 9 Tuesday, October 27, 2009

5. Bob Thomas: Well and then so maybe we, maybe we go and take a look at
it, maybe this is a really great property and it is really condo quality and
maybe it does not make sense right now but maybe the thing sJll has an
inherent value and maybe that might be a possibility in the future, on the
other hand it might be that that only made sense in a very frothy
environment when a different type of asset at a lower grade of asset could
be successfully converted to condominiums and maybe even occupancy as
a rental has not been so good and maybe the property itself has lost value
over Jme.
Brecht Palombo: Right, and that example that you give with the condos,
maybe you even help the bank to avoid making any further disbursements
on a project that is really never going to come to pass or should not come
to pass.
Bob Thomas: Well there is a broad array of strategies and tools that can be
used and the goal of course is to maximize recovery for the bank or in case
of performing loans to ward off any future problems. There might be a
need to rebalance to loan to value outside addiJonal equity may be
required, there may be a possibility of restructuring the loan, there are any
number of strategies that can be employed.
Brecht Palombo: So that is performing loans let us talk about what
everybody is talking about out there right now and that is nonperforming
loans and I have got to assume that you are seeing stacks of those right
now, what is your strategy there?
Bob Thomas: Well it is really, these tools I have just described possibly
looking to inject more equity into the deal, possibly restructuring the debt
in a way that allows it to perform over the near term, again the goal is
always to maximize recovery for the lender and that may mean recovery
now or the potenJal for future recovery.
Brecht Palombo: Okay, well Bob in addiJon to the banks, is there anyone
else who ought to be looking at the sort of services that you are talking
about?
Bob Thomas: Well yes, for our non‐lender clients, buyers of distressed
assets who are oDen not themselves real estate professionals we can
provide real estate experJse. A reality based bricks and mortar assessment
of the collateral that is underlying the notes. And on the other side for
those that are selling notes, banks selling notes, or other lenders selling
5 of 9 Tuesday, October 27, 2009

6. notes, especially notes that are Jed to complicated development deals, we
found we are able to provide a clear summary for the market of what
exactly is being sold, so that is, what is the land, what are the permits for,
how long do the permits last, what kind of construcJon has been done,
they types of things a developer or an investor needs to know in order to
make a decision about that acquisiJon.
Brecht Palombo: Well where are some of the current opportuniJes if we
could shiD for just a minute, where are some of the current opportuniJes
for investors would you say?
Bob Thomas: Yeah, there are a lot of investors out there wanJng to take
advantage of the current situaJon and I do think that amidst the wreckage,
there are some good opportuniJes. Especially in the hardest hit places like
south Florida where clearing prices are being reached for distressed assets.
I am finding many investors are looking for the perfect deal. High return,
low risk and from what I have seen, perfect deals are very rare, the market
is just too efficient for that and investors I think who are probably going to
be successful are making deals that may look risky now, they have issues,
that is why there are in distress but in the future I think these deals will,
the right ones will seem to have been steals.
Brecht Palombo: And so what other opportuniJes, we talked about some
of it but what else do you see out there as opportuniJes for investors and
what type of person or what type of investments do you see that folks
should be looking to capitalize on right now?
Bob Thomas: Yeah, well I menJoned that I think there are very few perfect
deals and I think the opportunity broadly is for the entrepreneurial
investor who is a problem solver, who is willing to take on an asset that has
something wrong, something that needs fixing and take on that challenge.
Brecht Palombo: And I presume just from the sort of work that you are
doing that you are kind of geang a first look at these sorts of
opportuniJes?
Bob Thomas: Yes, yes there is, I mean I am geang an inside look at the,
some specific examples but one only need drive around some major
American ciJes and you can see the types of deals that did not work out.
Brecht Palombo: Well is that not the truth. Right, now looking at these
opportuniJes, what are some of the pialls that you would say they should
avoid or they can look out for?
6 of 9 Tuesday, October 27, 2009

7. Bob Thomas: Yeah, well in the case of residenJal deals, it is possible to
pick up blocks of condominiums for example at very low numbers, well
below replacement. Issues are related to homeowner associaJon solvency
issues, there may be a majority of people in the building who are in
financial trouble who may even be in foreclosure and the quesJon is, who
is going to pay the condo fees and who is going to keep the lights on and
there are also issues related to construcJonal liability if you buy enough
units, the investor may take on the liability of the original developer.
Overall it is the issue of, that I would say of pricing and I guess that is true
in any market. I think pricing is Jght and will be Jght because there is
enough money out there looking to get involved. So the challenge is
pricing the asset relaJve to a holding period that might be required and on
incomplete projects, I think there is a good opportunity in incomplete
projects because many people who do not want to take on that risk but
the challenge there is geang the project at a price where it can be
completed at a value that makes sense relaJve to new construcJon that is
being sold at substanJal discounts.
Brecht Palombo: Right, so what would you say if you are just going to, if
you had a barometer out there, what is your feeling on just sort of the
state of the market today?
Bob Thomas: Yeah, well what I would say is probably not anything new,
this has all been reported and speculated about in the papers but the
residenJal market seems to be on its way at least to working out its
problems whereas the commercial market seems to be just at the
beginning of the process.
Brecht Palombo: Sure.
Bob Thomas: We have heard this before that the property downtown,
suburban property elsewhere bought at low cap rates, very low cap rates,
highly leveraged now seeing declining occupancy in rents resulJng in a
drop in value, equity is wiped out, in some cases mezzanine financing
wiped out. These fundamental problems have generally not yet been
worked out as banks have been able to extend maturity dates and have
been able to ignore loan to value covenants so the result is a growing
number of owners who are hanging on to their property but no longer
have equity in it and this will eventually shake out but the situaJon of
course varies geographically, this said in south Florida I think they are
probably a liLle further on in working out the issues because the situaJon
there is just so much worse.
7 of 9 Tuesday, October 27, 2009

8. Brecht Palombo: Right, so lets talk about the shaking out, if you, and I am
going to ask you to look in your crystal ball there and maybe if you could
tell us what you see out there and what kind of Jmeline maybe 12 or 18 or
24 month, what does the future hold from your perspecJve?
Bob Thomas: Well, there has to be the shakeout of commercial real estate
and that is probably given maturity dates we know are out there in 2010,
11, and 12 that is probably when that begins to happen and I do think
there will be conJnued opportuniJes in other areas, residenJal, hospitality
although I think the compeJJon for these assets will grow over Jme.
Brecht Palombo: Okay, well that is awesome Bob, I want to thank you for
coming on the call today and for talking through all the stuff for me and I
know there is a lot of people who are visiJng the site who are engaged in
their own shiD and sort of trying to get their arms around how to tackle
the new environment that we are in. I do not know if there is anything that
you would have that you would say to those folks?
Bob Thomas: Well thank you for the interview and I want to congratulate
you on your terrific new website, it is very good at laying out which banks
are dealing with what troubled assets and you are able to, there, get a lot
of informaJon that is otherwise not found in one place so nice job on that.
Brecht Palombo: Okay, well I appreciate that Bob and that is it, that is the
end of our call and I thank you so much for being on here today and I know
you and I will see each other out there in the market as we are bouncing
around in some of these deals but it was awesome having you on.
Bob Thomas: All right Brecht thanks a lot, see you then.
Brecht Palombo: Thanks a lot Bob.
8 of 9 Tuesday, October 27, 2009

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9 of 9 Tuesday, October 27, 2009