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When Good Assets Go Bad

After opening in 1972, Crossroads Mall was the largest enclosed shopping center in the state of Oklahoma. Today it sits in receivership on the southeastern outskirts of Oklahoma City, a product of lax management and challenging times for the retail sector.

The saga of Crossroads is becoming all too familiar in markets across the country. As the pace of financial distress increases, lenders are ratcheting up their use of receiverships and auctions to realize whatever value the market can bring to their troubled assets.

Due to years of stagnation and the development of several new malls farther north, Crossroads became a cliché. Hope sprang eternal in 2006 when Macerich sold the center to Midwest Mall Properties, an entity formed by a group of Arkansas-based investors. But over the past year all four of the mall’s anchor stores closed, due to a combination of chain-store downsizing and bankruptcy.

By January 2009, Midwest Mall Properties could no longer make its mortgage payments to the primary lender, Bank of America. Given the property’s challenges, the bank determined that its best exit strategy was to take title to the mall and sell it, so it began foreclosure proceedings and asked the Oklahoma County Court to appoint a receiver to oversee the property until the foreclosure was completed. As in many states, Oklahoma law requires the receiver to be an individual. In this case it was James Parrack, a senior vice president with real estate services firm Price Edwards & Co. in Oklahoma City.

Addressing the court

Typically receivers do not work for the lender or the borrower. "Our ultimate client is the court," explains Parrack. "Even though as a receiver I have a lot of authority, I have a fiduciary responsibility to the court. I want to be as fair as I can to both the borrower and the lender. I tend to go out of my way to communicate with both of them to solicit advice and be as open and transparent as possible."

According to Parrack, two attributes count when it comes to becoming a court-appointed receiver. "One is having experience in real estate and the other is knowing how to go through the receivership process. Having gone through that process gives everybody involved a much higher comfort level."

Ultimately the court decides whether a receiver is needed in any given situation and what receiver will be named. Prior to a court filing, lenders often enlist the help of an experienced receiver and negotiate the terms of the receivership, including compensation and what is expected during the receivership. This information is then presented in court by the lender’s counsel.

"What is presented to the judge really has to demonstrate that the receiver is the right solution," says Kristin Mueller, executive vice president of new business development with Jones Lang LaSalle Retail in Atlanta. Mueller heads up the distressed asset practice for all property types at the real estate services firm.

"What the lender needs to accomplish, first and foremost, is to take control of the cash being produced by that income-producing property," says Mueller. "The lender also is very interested in the state of the real estate, the collateral. The lender doesn’t want to see the value of the real estate diminishing in any way."

Receiverships require a delicate balancing act when it comes to investing in the property. "You do walk a fine line when it comes to spending money to preserve the asset and spending money to keep the business going, but not spending too much," notes Parrack.

In the case of Crossroads Mall, Parrack and his property management team reconfigured the mall’s energy usage and renegotiated several vendor contracts, saving $63,000 a month in expenses.

Jones Lang LaSalle has served as a court-appointed receiver for 15 years, but the number of assignments is on the rise. "In the past the foreclosures have been only one at a time. The big difference is lots of it at once and a shift in complexity," says Mueller.

To illustrate Mueller’s point, Jones Lang LaSalle is serving as the receiver on four enclosed malls totaling nearly 2 million sq. ft. in four tertiary markets. Adding to the complexity of the situation, each mall is in a different state, and each state has different laws governing the receivership process.

"The lender is looking for some consistency in the process," says Mueller. "There are probably 450 occupants in those buildings, and the communities are interested in seeing what happens to those assets."

Do I hear a bid?

While investors typically associate auctions with residential properties, many firms have been conducting commercial auctions for years. Auctions, also known as "accelerated marketing programs," provide a relatively fast way for lenders to sell off foreclosed properties. Now their services are being called upon in far greater numbers than in recent years, and several firms have formalized programs to fill the need.

Real estate services firm Colliers International announced in January it was forming a partnership with Kansas City-based United Country Auction Services. According to Patrick Duffy, president of Colliers’ National Retail Group in Houston, the joint venture has about $600 million of properties in its auction pipeline compared with less than $10 million for all of 2008.

Other firms are hoping to capitalize on the auction trend. In January, services firm NAI Global launched its "PowerSale" program in partnership with Higgenbotham Auctioneers, which has been in the auction business since 1959. The program pools many properties, which are then marketed and sold via the Internet in a series of sealed-bid auctions on a specific date.

The program benefits sellers of single properties and portfolios alike since they are bundled and marketed to a targeted group of investors. "One person with one property can get the same benefit as a guy who has a 50-property portfolio," says Jeffrey Finn, president and CEO of NAI Global based in Princeton, N.J.

NAI’s first auction included 50 properties in 22 states and was expected to be complete on May 1. The next auction occurs June 11 and Finn expects to conduct them every six to eight weeks.

So does it work? "What’s fascinating to me is the brokers are saying they’ve had listings for six to nine months, and when they put the auction sign up people come out of the woodwork," says Finn.

"[Brokers] are finding the phones are ringing off the hook and all of a sudden you’ve got everybody looking for an opportunity," adds Finn. "Now is the time to get in because on the other side of the cycle prices are going to jump."

Irvine, Calif.-based real estate services provider Sperry Van Ness (SVN) launched its own version of the auction process, dubbed "ART" for asset recovery team, in the fall of 2008.

"The problem with a traditional sale is that you identify a buyer and he has 30 days for a free look. Then he comes back and renegotiates," says Joseph French, regional director of SVN’s asset recovery program. "Accelerated marketing provides the lender with certainty of close, and it allows the lender to move the project off his books and move onto the next deal."

Ultimately the goal of receiverships and auctions is the same — to provide relief to the borrower and the lender.
In the case of Crossroads Mall in Oklahoma City, relief may come in the form of new ownership and a totally new game plan for the property, says Parrack of real estate services provider Price Edwards & Co. "Sometime down the road, someone may want to tear the whole thing down."

Ben Johnson is a Dallas-based writer.

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