Joseph P. Egan [1] is a Massachusetts Certified General Real Estate Appraiser with over 25 years of professional valuation experience. The assignments performed by his firm, Joseph P. Egan & Associates [2], cover a broad range of commercial real estate properties as well as family and closely-held businesses in Cape Cod, Nantucket and Southeastern Massachusetts. This experience intersects with all major industries such as the automotive, food service, healthcare, lodging, marine, professional services, recreational, and retail sectors. Joe is a thoughtful and thorough writer who draws on this experience when delivering unique insight on issues that impact appraisers in today’s market. I am deeply grateful to have Joe’s to help us “navigate” this challenging environment for appraisers.
– Jonathan Miller
Earlier this month the Troubled Assets Relief Program (TARP) [3] became a done deal and the U.S. Treasury has since been diligently crafting a global strategy to implement the greatest government bailout or rescue since the 1930’s.
Despite the many unknowns of the $700 billion program, one underlying theme being increasingly acknowledged is that TARP related assets will stimulate demand for experienced workout related professionals. Given what we know, it appears the increase will largely concern asset collateralized by commercial real estate and new construction assets.
One piece of evidence of the growing demand are the widely published reports of the FDIC’s efforts to employ more workout professionals beginning with retirees possessing prior on the job experience gained in the prior S&L bailout. In the private sector, Anthony LoPinto of SelectLeaders a leading commercial real estate recruiter stated in a recent blog post [4] that due to “a meltdown of the financial system” and the need to “contend with the large pools and billions of dollars of commercial real estate loans that will be maturing over the next 12 to 36 months”, demand for experienced workout and restructuring professionals is expected to increase. An anecdotal review of available job postings, hiring news, and general industry dialogue all seem to corroborate Mr. LoPinto’s front line perspective.
The positive news is advisory and valuation companies of all types will likely have opportunities to meet the growing need for workout services. Professionals and organizations with prior workout exposure may have a leg up and perhaps be most inclined to seize opportunities. Less experienced professionals seeking to diversify into the arena can still adopt strategic and focused measures to explore opportunities.
Regardless of your level of workout experience, before dipping into this inviting yet clouded pool, it may be best to develop a reasonable short list of what we currently perceive to be in store under TARP and highlight a few differences between the last time workout services was a growth industry. Armed with this perspective (which is being further refined at this moment) a range of possible workout opportunities likely to be offered in the marketplace can be brought into closer focus.
Fully recognizing that the range of differences is an evolving topic, as TARP unfolds the short list of current differences include:
- The financial and systemic magnitude of the TARP program and the solution it hopes to provide are much larger and more global than the S&L bailout. From a structural perspective, the range and diversity of market participants, stake holders and service providers will be broader as well.
- Using the establishment of FIRREA in 1989 as the starting point, the S&L bailout lasted into the mid 1990’s. The timeframe for the TARP program is unknown due to dependent variables such as the type of assets to be acquired, price levels achieved, the degree to which assets are performing, holding periods (some assets may be held to maturity), and the manner in which Treasury adjusts their terms over time. Continued bank mergers and failures along with the dysfunctional state of the commercial credit pipeline, thus triggering the degree to which banks will need to participate in the TARP program, all remain significant variables as well.
- In the S&L bailout, the bulk of assets acquired by the RTC and resold comprised whole asset sales acquired from a neat profile of U.S. banks. A significantly higher percentage of the troubled assets to be acquired under TARP, however, are expected to comprise internationally held whole mortgages and other financial instruments of many blends, rather than primarily hard assets such as real property. In addition, the troubled assets will be divided among the yet to be named asset managers in two groups handling either whole loans or securities backed by a multitude of mortgages.
- Based on available information, gaining adequate control of securitized assets, aptly assessing risk, and developing reliable pricing and buy/sell mechanisms, particularly for securitized assets, will be the major challenges.
- Through the consistent introduction of “innovative debt” structures and greater reliance on private rather than institutional capital, a broader pallet of international stakeholders now exists. The consistent formation of new private venture funds keen on opportunities to acquire distressed assets at favorable terms is just one example of how this realm is already expanding. Another stakeholder may comprise tax payers like you and me under a plan being considered where Treasury financing would be provided in selected joint venture transactions. The equity partnerships are aimed at promoting assets sales while providing the opportunity for tax payers to be a stakeholder.
- Qualifying banks deciding whether to retain or acquire collateralized assets not sold to Treasury will represent another type of potential workout client. Certainly, the relaxing of market to market requirements, changes on the treatment of distressed assets in whole mergers, along with restrictions on executive pay, equity participation, and recoupment could provide incentives for banks to strongly consider holding or acquiring assets, except for the most seriously impaired. As part of this decision making process, banks will require workout related guidance on assets collateralized by real property.
- The range of sophisticated analytical tools and the level of readily accessible public and proprietary market data, software applications and information technology have significantly increased since the 1990’s. Consequently, on the regional or local level appraisers providing the most sought after workout services will be required to demonstrate the high value capabilities and specialized technical expertise not readily decipherable from third party data sources or based on remotely developed software models.
- Participating appraisers must fully understand the needs and structure of this evolving process which over time will ultimately become a sophisticated and highly channeled niche market. Consequently, a new long-term commitment to being properly positioned on the right regional and national radar screens will be paramount. Getting there first, establishing your targeted expertise, and being “top of mind” is even better.
- Due to the magnitude of the current rescue plan as we know it, efficiency and credible assignments results will even rank higher. Project management skills, accountability, the ability follow defined scope of work requirements, and the willingness to provide high touch follow up service will no doubt reign supreme.
- Given the volume of assets to be managed and Treasury’s emphasis on the “paramount need for expeditious implementation”, asset managers and other workout clients will seek out service providers with the capacity to reliably complete multi-property or portfolio assignments in the most optimum manner possible.
With these observations in mind, in addition to appraisals, some ideas on the types of targeted workout related services to be requested will include:
- Liquidation Value The ability to estimate reasonable and adequately supported liquidation values will be needed area of expertise. Assisting banks in the development of “fair value” estimates on ORE properties could perhaps be another related service to be requested. (See FDIC, FIL 62-2008, Guidance on Other Real Estate, issued July, 2008 [5])
- Development Consulting Professionals and organizations with a firm local and regional grasp on absorption rates, development costs, unit pricing, sales concessions, bulk sale analyses, etc. or the more encompassing market and feasibility studies, will be sought out. Depending on your geographic region, through properly developed scope of work scenarios this niche service sector can offer good opportunities for developing a solid niche and attracting ongoing and repeat assignments.
- Market Analysis Providing market data and specialized analysis to a range of clients are examples of the type of work out related assignments likely to be requested. Possible scenarios include requests for supplemental market data and analysis to be considered by a client in connection with an existing appraisal they are currently reviewing. Individuals and organizations performing advisory or valuation services in a market area where you have superior expertise or better resources may comprise another client group. The need for up to date and reliable market data and trend analyses to be utilized in connection with a client’s internal portfolio review processes is another area where market analysis services will have a good fit in the workout arena. Since the ability to assess a borrower’s capacity to continue to pay on a performing loan will be front and center, one offshoot in this area could possibly involve assignments supporting the underwriting and risk assessment processes with greater precision. Recognizing that the original mortgage was created at both a different time and underwriting scenario, such clients may require more on the ground intelligence addressing critical topics such as the state of the immediate market area and the competitive environment.
- Property or Subject Specialization Professional advisory and firms with specialized areas of expertise will be sought out to provide reliable solutions concerning unique properties and problems. And based on what we already know about lax underwriting and loose credit standards, there will be many unique properties and problems. In a workout environment, prudent asset managers realize they cannot know every market or every property type and are inclined to turn to specialists for answers. The byproduct — timely and sound decision making is what they need most. One obvious example of specialized subjects involves the broad category of distressed properties with the possibility of further segmentation. Additional examples may include specialization by property type (e.g., gas stations, net leased restaurants, lodging properties, recreational properties, food processing plants, interval ownership resorts, etc.), by region or perhaps based on very specialized knowledge within a closely aligned field (e.g., geology, agriculture, environmental engineering, etc.).
The preceding review of the major aspects of the TARP program and brief list of likely workout services serve as only a brief back drop to the anticipated growing need for professional workout services. Certainly, many other key observations are worth noting and no doubt these waters will become clearer in coming weeks. Nevertheless, the preliminary list serves its purpose of being a vehicle to inspire interested professionals to begin to strategically consider the key questions surrounding the future for workout assignments, essentially the who, what, where, when, how, and why of it all. Naturally, for those among us already experiencing a steady increase in workout related assignments sharing your valued observations would be a true reflection of professionalism as we join together and prepare to meet the serious challenges before us in the coming financial and economic environment.