Distressed Real Estate Investments

1. Distressed Real Estate Investments

2. Opportunities for Investment • Buy From The Distressed Owner • Buy The (Distressed) Loan • Buy At The Foreclosure Sale/Auction • Buy Out Of Bankruptcy • Buy From The Take-Back Lender (REO) • Buy a Strategic Investment Piece

3. #1 – Money Liquidity Rules Leverage Is Tough (See #2) #2 – Speed and Agility First On The Scene Sets The Terms If The Market Is Allowed To React, It May Set A Higher Price Flexibility On Deal Terms Will Set You Apart From The Pack. Expect To Uncover Issues – This Is Not Your Usual Diligence Have A Deal Team In Place Before The Deal Hits, Including LP, Accountants And Diligence Experts #3 – Vision Have A Plan Of Attack On Day 1 Have A Plan For After You Buy The Asset Understand The Risks Build The “What Ifs” Into Your Pricing #4 – Intestinal Fortitude At Some Point You Must Accept The Risk In Exchange For The Upside There Will Be Surprises Be Prepared To Pay To Make Problems Go Away 4 Keys to Success

4. Why Is The Project Distressed? Is The Loan In Default? Is Ownership Broke/Illiquid? Is Ownership Infighting? Tenant Issues? Contractor Default? What Are The Immediate Needs? Fresh Capital? Leadership/Sponsorship? Tenants? Time? Who is the Real Problem? The Borrower? The Lender? The Tenants? The Community? The Market? Where is the Leverage Point? Does The Lender Want Out? Who Do You “Know”? Who Is The Squeaky Wheel? - What Can You Do? Project Status from 10,000 Feet

5. Timing Your Investment • Pre-Default • Mid-Default • Post-Workout

6. Why Is Timing Important • Often Sets Pricing Parameters • Impacts Diligence Requirements • Mitigates/Heightens Risk • Impacts Deal Leverage • Sets Roadmap • Timing Concerns May Be Driving The Decision to Sell

7. 50 % Borrower Fights Back – Part 1 V ( Forbearance ) M F Borrower Fights Back – Part 2 o ( BK ? Defense ? Counterclaim ? ) t t n u Borrower Fights Back – Part 3 ( White Knight ? Last Ditch ? ) o Formal c Default and At this point , s Demand discount can i go up or D down based Lender upon lender e Threatens investment , l Default lender b Lender Becomes fatigue , a the Owner market b conditions , o etc . r P Borrower Lender Capitulates and Borrower Capitulates ( again ) Grows Tired / Foreclosure ( Deed in Lieu ? Judgment ? ) Worried Filed About Asset Pre - Default Period Default Period Post - Workout Deal Life of the Distressed Loan Our Totally Unscientific Timeline

8. Pros More Deliberate Pace (Maybe) Friendlier Investment More Organized Transaction Better Diligence More Cooperative Parties Less Desperation Capital Needs Better Defined Cons Market Likely To Set Price Multiple Bidder/Auction Lower Risk = Lower Return Harder Deal To Find If A Loan, You May End Up As The Lender For The Term Of The Loan Pre-Default Investment

9. Pros Tumult = More Opportunity Uncertainty = Discount Desperation = Decision Cons Risk of Unresolved Matters Frenetic Pace (Usually) Unknown/Unlimited Capital Multiple Warring Factions Multiple Front War Litigation Usually a Must Have To Be The Bad Guy Post-Default Investment

10. Pros Title Has Been Cleaned Property May Be Stabilized Lender May Be Fatigued Future Capital More Defined More Like a Normal Deal Easier to Leverage Cons Market Probably Sets Price Lender Basis May Be High Lender May Capture Upside Market May Have Turned Broker Usually Involved Soliciting Multiple Bidders Post-Workout

11. Diligence Issues • Bring Down New Title • Review Survey • Lease Review (If Possible) – No Estoppels • Review Loan Documents (Front to Back) • Review Loan File (Every Piece of Paper) • Diligence Title to Loan and Loan Documents • Diligence Borrower Players • Get To Borrower (If Possible)

12. Business Issues • Verify Amount Owed/Value • Identify Immediate Capital Needs • Develop Litigation Budget/Strategy • Establish Pricing • Develop “Exit Plan” Going In • Identify Other Major Players In The Deal Who May Be Friends/Foes

13. Legal Issues • Perform Customary Legal RE Diligence • Examine Litigation Status • Prepare Acquisition Documentation • Obtain Reps and Warranties from Seller • Identify Seller Recourse Issues • Determine Bankruptcy Risk • Evaluate Perfection/Enforcement Issues

14. Common Roadblocks • Unknown Defenses to Enforcement • Lender Liability Issues • Issues of Proof/Local Law • Gaps In Servicing • Bankruptcy • Delay And Additional Expense • Court of Equity – New Problems and Constituencies • Auction Environment • Third Parties • Mechanic’s Lien Claimants • Taxes/Utilities • Tenants • Internal Seller Politics

15. Doomsday Scenarios • Title/Perfection Issues • Borrower Wins When Defending Your Actions • The Lender Didn’t Own What You Bought • Fatal Documentation Flaws • Litigation Risks • Serial Litigation Delays Wipeout Upside • Judge Employs “Equity” To Limit Enforcement • Loan to Own Fails • You Become The Lender and Borrower Reinstates Loan • Auction Environment/Requirements Pay You Off

16. Your Tool Box – Part 1 • Mortgage Foreclosure/Deed of Trust Sale • Wipes Out The Borrower and Most Junior Lien Creditors • Statutory Action • Insurable Through Title Insurance • Preserve Deficiency Claims Against Borrower/Guarantor • Auction Environment • Deeds-In-Lieu of Foreclosure • Gets Rid Of The Borrower, But Not Juniors • May Continue With Foreclosure In Most States • Waive Deficiency Claims Against Borrower/Guarantor

17. Your Tool Box – Part 2 • Bankruptcy Remedies • Section 363 “Lien Clearing” Sales • Stalking Horse Bids • Relief From Automatic Stay • Receiverships • Gets Control Of The Property • Starts Stabilization Which Should Be Recoverable • Prevents Further Deterioration • Disarms Borrower – Takes Away Their War Chest • May Get Better After The Fact Diligence

18. Your Tool Box – Part 3 • UCC Remedies • If Collateral Is “Personal Property” (i.e. Mezz Collateral) • Shorter Time Frame • Other Actions • Mechanic’s Lien Priority Contests • Guarantor Lawsuit • Veil-Piercing Actions • Forbearance Agreements • Consent Foreclosure (Some Jurisdictions) • Power of Sale Without Foreclosure (Some Jurisdictions)

19. Advanced Distressed Investing • Designation Rights in Bankruptcy • Broken Condo Deals • Broken TIC Deals • Vacant Land Banking • Buying Bankruptcy Claims Classes • Preferred Equity Positions • Taking the Borrower’s Position • Buying Minority Equity Positions