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May 23, 2016

A major European bank hired A&M to help the workout group evaluate the best alternative to maximize warehouse line recovery.

Client Mandate
A major European bank (the “Bank”) had expanded into the U.S. real estate market through various types of lending, including warehouse lines to support development. As real estate values declined, the Bank wished to reduce exposure to U.S. real estate, especially higher-risk products that were warehouse lines providing mezzanine and equity funding. The Bank had two warehouse lines that were in default and transferred to the Bank’s workout group; the Bank’s personnel originally responsible for the lines were no longer available. The Bank hired A&M to help the workout group evaluate the best alternative to maximize warehouse line recovery.

The RETAIL Line:
One warehouse line was to a mezzanine lender involved in retail development (“Retail Line”), secured by 23 development projects that were in various stages of horizontal and vertical construction, ranging from 85 percent-leased to raw land. For 12 of the projects, the original developer had declared bankruptcy and the mezzanine lender assumed the developer’s role and requesting additional draws. 

The MOUNTAIN Line:
Another warehouse line was primarily for opportunistic residential developments and supporting retail in mountain communities (“Mountain Line”). The Mountain Line was originated to a single developer who used the facility to provide equity and construction materials for the projects. 

A&M’s Approach
By the time A&M became involved, both warehouse lines were already in distress. We divided the assets into those requiring immediate attention, either because of pending legal action (imminent foreclosures) or requested capital calls. 

Once the triage properties had been evaluated, A&M prepared a comprehensive analysis of the remaining properties, which involved:

  • Preparing preliminary evaluations of proposed recapitalization plans for five development projects
  • Monitoring real estate market conditions and researching competitive properties to evaluate market positioning
  • Conducting site inspections for all properties to determine status of development and current occupancy

Results
A&M successfully advised the client by leveraging our property analytics skills and restructuring experience to propose an accurate and actionable plan to resolve the Bank’s distressed warehouse lines.  A&M's Real Estate Advisory Services (REAS) professionals prepared preliminary evaluations of all other properties based on stage of development.

  • Land holdings: Valued through sales approach
  • Land under development: Valued through cost approach
  • Completed / pre-stabilized: Valued through income approach, including DCF and direct capitalization

Based on those evaluations, A&M recommended and worked with an asset manager to assume day-to-day management of the portfolios. Based on our recommendations, the Bank was able to restructure the lines for a partial recovery from the viable developments and avoid putting additional loan advances into an out-of-the-money development. Development properties were later sold through a foreclosure sale for significantly less than the senior mortgage.