Buy the Loan, Not the Building

Trepp's September report put the CMBS delinquency rate at 8.02%, the highest since late 2020. Office was just above 12% and multifamily at 8.04%. KBRA's distress measure, which adds loans already with the special servicer, has office at 17.6%. The same stress sits on bank balance sheets, where it is reported quarterly and marked slowly.

The opportunity is in the gap between what a loan is worth and what the bank is willing to recognize. For a buyer who can underwrite the real estate, the better entry point is often the note.

Why banks sell when they do

A bank's decision to sell has more to do with its capital and earnings than with the building. Under CECL, a bank can reserve against a troubled loan over several quarters. Once it decides to sell, the loan moves to held-for-sale at the lower of cost or fair value, and the loss lands in a single quarter. So banks hold longer than the collateral justifies.

What breaks the logjam is usually an event. It might be an exam finding, a merger, a capital raise, or CRE concentration above the 300%-of-capital line regulators still watch. The fourth quarter adds its own pressure as banks clean up before year-end. A buyer who can close inside that window solves the bank's problem while buying an asset.

What we look for

The discount to par is the least important number in the file. What matters:

• Collateral we would own outright. If the building were offered to us at our basis, would we buy it? If not, the note is a credit bet, and that is not our business.
• Basis against value and replacement cost. We price off the building, not the unpaid balance. Par is the borrower's problem.
• A clear path to control. That means a first lien, clean assignment rights, no participant consents that can stall a decision, and a guaranty that will hold up.
• The sponsor's situation. A tired sponsor with a personal guaranty at risk usually wants a negotiated exit. A well-capitalized fund protecting its track record may fight and file for bankruptcy. Those are different timelines and different prices.
• What sits ahead of us. Tax arrears, mechanic's liens, deferred maintenance and near-term lease rollover all come with the building.

Price the paths, not the paper

Take an illustrative case. A $20 million loan sits on a building worth $16 million today. With $2 million of capital and two years of leasing, it might be worth $21 million stabilized. The bank sells the note at $13.5 million, or 84% of current value.

A discounted payoff near $16 million within a year returns about 1.2x. If the property comes to us, the all-in basis after carry and capital is roughly $16.3 million against $21 million stabilized, about 1.3x before leverage.

The payoff is the faster return. Ownership is the larger one, and it is the only path that protects the downside. A buyer who can't execute it is pricing the other two with no floor underneath.

In California, a noteholder gets to the property one of two ways. The first is foreclosure, almost always the nonjudicial route: a trustee's sale under the deed of trust, 90 days from the notice of default to the notice of sale and at least 20 more days to the sale itself, where the noteholder can credit bid the debt. It is faster than a judicial foreclosure but gives up any deficiency claim, so the guaranty is what keeps the borrower at the table. The second is a negotiated deed in lieu, which is quicker and cheaper, but junior liens survive it where a foreclosure would wipe them out. Either way, a court-appointed receiver can control rents and leasing while the process runs.

What an operator brings

Most note buyers are credit investors. They price the paper, model a timeline and hope for a payoff. Running buildings changes the trade in specific ways.

• We underwrite from inside the building. Our asset and construction management teams walk it and price deferred capital with real contractor numbers. The rent roll in a bank file is often stale, and a site visit tells you which tenants are real.
• We can bid the ownership case. Because we are prepared to take title and run the asset, we can pay for an outcome a credit fund has to discount.
• We are useful in a receivership. A receiver needs someone to lease, manage and stabilize the property while the process runs. That is our day job.
• We talk to the borrower as an operator. Owners respond differently to someone who has worked through a downturn on their own buildings. A consensual deed in lieu can save a year of litigation.
• We understand the bank's side. Our advisory work with lenders is about choosing between hold, modify and sell. When we buy, we can structure around the bank's quarter as well as our own return.

Where this goes

The owner waiting on lower rates may get that wish. The bank has less time, and a sale is often its cleanest way out.

We are building our note practice alongside our bank advisory work because both depend on the same judgment: what a building is worth, and what it takes to get it there. We believe buying the loan is a strategy that makes sense in this market, and a sound way for a buyer who can operate what it finds to reach value.