When a distressed portfolio of 13 former Mervyns stores came to market in California and Arizona recently, several of the nation’s biggest brokerages competed for the deal, valued at more than $100 million. But to the surprise of its rivals, the company picked by court-appointed receiver Trigild Corp. was Irvine, Calif.-based Faris Lee Investments, a relatively small brokerage and investment sales firm.
“We had pretty stiff competition. There were six different brokerage firms, all the major players — all the big ones out there. I’m sure they wanted that assignment,” says Richard Walter, president of Faris Lee Investments.
Although Faris Lee is not among the top 25 brokers in the country, as measured by investment sales and leasing transactions, it wields powerful financial tools and strategies for maximizing value that make it an irresistible choice for San Diego-based Trigild.
For instance, Walter at times deploys a “breakup” strategy in which retail projects are fragmented into parcels and sold separately to earn a higher total sales price for the seller.
“We did the largest one ever done in the United States,” says Walter. Torrance Crossroads in Torrance, Calif. sold for $107 million in 2001. “We resold it in pieces for $138 million,” earning a $31 million profit for the seller. “There was nothing done at the property level. It was all marketing.”
Walter used the technique recently at Center Pointe, a 105,000 sq. ft. shopping center in Santa Clarita, Calif., anchored by Office Depot and Wickes Furniture. “We did seven deals there, seven different sales,” he says. The sales totaled $47.2 million. “If they had sold that as a whole project the value was probably just below $40 million. So there was probably an $8 million profit in just the marketing.”
Faris Lee’s bold approach to engineering higher sales prices, as well as managing financing and investment for clients is emblematic of a shift in the industry. At many brokerages, roles have become far more complex as companies morph into sophisticated real estate service firms.
Today, major brokerage firms offer such services as distressed asset dispositions, real estate owned asset management, financial intermediary services, valuations, loan sales, and even investment banking. Some brokerages serve as court-appointed receivers in distress cases.
“The brokers no longer are there just to put two parties together — a buyer and a seller or a landlord and a tenant, a borrower and a lender. These are very complicated situations,” says Christopher Cooper, chief executive officer of Los Angeles-based brokerage Charles Dunn Co. Today, brokers need to bring to the table many people with competing or divergent interests, particularly in cases involving distressed properties.
The parties may include the existing lender, the special servicer, and the buyers of discounted debt. All the parties need to cooperate, says Cooper. “The broker has to create and communicate the overall vision of the transaction. He or she has to align everyone’s interests, so that everyone feels comfortable with their go-in or exit strategy out of the transaction.”
The financial arrangements need to make sense for each participant, as the negotiation proceeds to the ultimate closing date. That’s a far more comprehensive, complex and holistic approach to transactions than in most pre-recession deals, says Cooper. If an asset is under water, the broker needs a strategy. “Where do we go from here? It’s really the broker’s job to identify fundamental alternatives and solutions. So we’ve gone from matchmaker to solution creator.”
A dramatic change
CB Richard Ellis (CBRE), the nation’s largest brokerage, began its transition to sophisticated financial services nearly two decades ago. “We believed we had to expand the suite of services well beyond the traditional transaction,” says Christopher Ludeman, president of Americas brokerage and capital markets at Irvine, Calif.-based CBRE. Direct and indirect lending now play a major role at the company.
The capital markets were a focus of change, as at other firms. “The industry demanded it. A couple of decades ago we were providing investment sales advice, and then we decided we needed to provide advice around people obtaining debt,” says Ludeman. “The way that business has evolved, we seldom go before a client without the flexibility to provide debt and equity finance as well as investment sales.”
That includes secured and unsecured debt, loan origination and servicing as well as note sales. “We had a big note sales business last year, something on the order of $4.5 billion,” says Ludeman. CBRE placed more than $6 billion of direct debt and it continues to write investment sales. “We service a very large, $80 billion loan portfolio.”
In the 1990s, CBRE decided to migrate toward institutional property management, among other specialties. Today, the company manages more than 2 billion sq. ft. of real estate for other firms. And its agents continue to negotiate high-profile deals, such as Google’s $1.8 billion purchase of 111 Eighth Avenue in Manhattan in 2010.
The firm’s size did not shield it from the turbulence of the economic downturn, but CBRE emerged with new ideas for financial services. “The economic headwinds hit us so hard,” says Ludeman.
Business activity in nearly all sectors of the company declined. Leasing fell off, as did sales. “But they rebounded beautifully in 2010,” says Ludeman, as the debt and equity finance business and capital markets executions expanded along with that rebounding activity. “Our loan sale business grew exponentially.”
The company also grew by providing services related to distressed real estate. It provides management and other services for real estate owned property to a variety of governmental and banking entities. “Our business with the FDIC [Federal Deposit Insurance Corp.] didn’t really even exist prior to 2007. It was a significant contributor to our top and bottom line in 2008, 2009 and 2010,” says Ludeman.
Charles Dunn, which will mark its 90th year in 2012, reinvented itself in part by thinking globally. “The company has morphed in a couple of ways,” says CEO Cooper. “While it is a regional company it really plays in a very significant way in the international arena.”
While larger U.S. real estate firms set up overseas offices, Charles Dunn grew its business by working with U.S.-bound Asian investors who are investing in multifamily, office and industrial assets. “If you were to go on our sixth floor where we handle property management and accounting, our employees speak 12 different Asian languages,” says Cooper.
One benefit of going global is to find financial models that can be imported to the U.S. Chicago-based Cushman & Wakefield got a taste of Continental-style asset and investment management when it was tasked with overseeing assets and operating them according to plans agreed upon by otherwise passive investors, says Greg Vorwaller, executive vice president and global head of capital markets for Cushman & Wakefield.
Some of the services involved property management, leasing, valuations, financing, and sales. Some aspects of the model may be tried in the U.S., says Vorwaller, who has three decades of experience in financial services and real estate.
Among current global issues is the potential impact of political turbulence in Middle Eastern countries, and the effect on oil pricing, says CBRE’s Ludeman. “The companies that we advise are always looking for good advice as to where safe havens are for investment. Can they hedge their risks? It’s our job to provide our perspective in the area that we know a lot about, which is commercial real estate.”
Streams in a parched landscape
Transactions all but dried up over the course of the credit crisis and recession. The commercial mortgage-backed securities (CMBS) market collapsed, with CMBS transactions falling from $230 billion in 2007 to $11.6 billion in 2010.
In that environment, new services offered potentially lucrative revenue streams to hard-hit brokerages.
The services generate varying fees. For instance, Faris Lee can potentially earn a fee as a broker and also as a lender, says Rick Chichester, chief operating officer at Faris Lee. The company can earn a performance fee for achieving financial and other goals above a stated level. “Above a certain number, we capture fees for our capital markets, debt and equity,” he says.
Income from both the seller and buyer in a transaction is another scenario, says Chichester. “In many cases, we have the listing with the seller. The seller is not getting the loan, the buyer is.” So Faris Lee may offer to help underwrite their purchase, for a fee.
Although some residential real estate brokers might consider involvement with both buyer and seller a conflict of interest, on the commercial side such an arrangement can be beneficial, says Chichester. “If we represent the seller, we can manage the process.” Providing financing to the buyer lessens the chance that a deal will fall through, and can cut down the time it takes to close a deal. It’s not unusual for a buyer to approach Faris Lee to ask for advice or help in structuring the financing, says Chichester. “We are very deeply resourced and skilled at the financial level.”
Faris Lee can work with a consortium of lenders on behalf of clients or it can offer its own capital. It may also invest in assets, says Chichester. “Our capital markets group out of New York is in some ways a traditional mortgage broker in that it has relationships with life companies and other lenders and is deeply involved in the CMBS market.”
But Faris Lee also has an investment group, known in the company as a principal group. “In that principal group we buy property, we buy notes.” The firm also provides investor services, offering guidance on how it might underwrite a project, manage it or structure a redevelopment. In addition, it is able to provide merchant banking, or co-investment, if necessary.
As to why his company was selected to market the Mervyns properties, Faris Lee president Walter has his theories. “I think it’s our ability to show that we could manage the entire transaction.” That means handling lease investments and vacant boxes. And the ability to find financing can be a critical factor, since buyers may need loans for the empty stores. “It’s our ability to provide a buyer pool for any lease investments, get those clients through any financing needs they might have. The seller is not going to wait around for somebody to go find a tenant and bring them into the mix.”
It helped that Faris Lee had established a relationship with the special servicer and receiver, says Walter. “Yes, I think our competition was surprised. As far as we know, this is the largest retail portfolio that’s gone to market in this fashion, through the special servicer and receiver. It doesn’t surprise us because I think we’re perfect for the assignment.”(credit, d, kalette,nrei)