Buckingham lawyers David, Richard and Nate talked with me previously about PPP loans in the commercial real estate space, and how real estate investors can stabilize themselves through the state shutdowns. With their extensive experience in receiverships and bankruptcies, all three of them understand the potential trajectory of many businesses that are on the edge of failing.
Speaking specifically to business owners and real estate investors, David, Richard and Nate have some strategies for you to capitalize on opportunities created by the pandemic. And as lawyers, they have the inside scoop for how you can uniquely keep tabs on distressed properties through the court system.
LIQUIDITY IS GOING TO BE KING
I’ve heard that Fannie Mae and Freddie Mac are starting to require a whole year of cash to be put into an escrow account. This could mean tying up $500,000-$1,000,000 in cash. At a time when liquidity is being squeezed by lenders pulling back and tenants asking for forbearance loans, setting aside such a large chunk of cash can really put a crimp in the kind of deals you can jump on.
Over the next 6 months to a year, it’s going to be a long game to stay liquid. For businesses that took PPP money, they’ve been able to keep people on the payroll. But if your industry was affected by the shutdowns, then you’re trying to balance that payroll with reduced income. For many business owners, that means it’s time to cut expenses to the bone and hold off on capital expenditures until things settle down.
I have friends of mine who’ve been setting aside their cash anticipating the recession that we were overdue for. Of course, now we have the pandemic that not only pushed us into a recession, but has also exacerbated any problems we might have had anyway. For those investors who were already preparing for a potential recession, and who’ve been keeping their powder dry waiting for distressed properties to come on the market, Richard has some advice for you about what’s coming down the pike.
CASH OUT REFINANCING AND OTHER STRATEGIES
We don’t have a crystal ball to know how long it will take before we start seeing the effects of COVID on the housing market. You could have 60, 90 or only 180 days to put yourself into a position that’s ready to purchase discounted properties. But Richard is already seeing advantages for real estate investors, including investors who were facing some distress before the pandemic.
The interest rate for residential loans is amazing right now, and even for commercial loans, I’ve seen it around 3%. That is a killer rate, and that makes refinancing a no brainer. If you have a strong balance sheet, you should definitely consider a cash out refinance and pull out a couple hundred thousand so that you can free up liquidity in your assets.
Not everyone who’s going to be selling is going to be in distress. Older landlords just don’t want to go through another recession, and might be ready to cash out and retire after 20-30 years. So while they might not be in distress, they might notice the crowd of buyers thinning out as hard money lenders pull back and liquidity dries up. That’s great news for any investor still left in the game, and it gives them a fantastic opportunity to retrade on any previously agreed upon prices.
PREPARING FOR DEFAULTS
Normally, it takes about six months to see those defaulted properties wind their way through foreclosure, but the statewide shutdowns put a pause on all of those normal court functions. Once courts open back up, they’re still going to be dealing with emergency orders and the enormous backlog that they have to work through to catch up. But Nate assures me that the foreclosures are coming; they’re not going to just be a file and immediately liquidate kind of situation.
In judicial foreclosure states like Ohio, commercial properties that are being foreclosed on are going to come through a third party like receivership. The receivership has fiduciary duties to the courts and the creditors, but as receiverships increase, banks will be looking for alternate ways to clear off their books. Those are some of the properties that investors with cash can pick up.
With impeccable timing, the Small Business Restructuring Act just became official this year. This act makes it easier and more affordable for small businesses to file Chapter 11 bankruptcies. Additionally, in the CARES Act, lawmakers amended the debt cap, so you can have seven and half million and still file. Nate predicts that we’re going to see a lot more Chapter 11s acting like a giant liquidation sale. We’re going to see a lot of sales come out of bankruptcies, and it’s either going to be a debtor in possession, a small business reorganization trustee, or a court appointed receiver that will be the point of contact for these sales.
If you’ve decided that you’re not going to miss your chance this recession to get in on some basement-level prices, then you’re going to want to know how to find distressed commercial properties like these. You have to have relationships with people who are in the know about these properties so that you have a heads up before they come on the market. Real estate attorneys, especially those in foreclosure or bankruptcy, commercial brokers, court-appointed receivers, bankers in the special-asset groups, and auctioneers in your local market are all the kind of people you need to connect with.
Besides meeting the people who have access to this information, you can also find a lot of this information yourself online. You can access court records, federal filings or set up a Google alert for court dockets or court wires. If you know the owner of a building that you suspect is distressed, you can also set up an alert for their name in bankruptcy dockets to keep an eye on the building.
These strategies for finding distressed commercial properties are next level. While everyone else is waiting around for listings to hit the MLS, you can get a head start by connecting directly with the real decision makers who are to help you build your real estate portfolio through the recession.
WHAT ARE YOU THINKING?
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