Today’s commercial real estate (CRE) market offers a number of extraordinary opportunities that will not be seen again for a generation or more:

• acquiring distressed or discounted assets
  
• reorganizing or restructuring finance
  
• troubleshooting operational performance
  
• maintaining and restoring improved property
  
  

Specifically, LANDCO has targeted the following areas:

Impaired Bank Resolution:

Metro Resolutions will profit by applying capital and know-how to resolve problems that arise from impaired commercial real estate assets held by community banks in the western U.S. For situations meeting LANDCO’s investment criteria, a tailored investment program designed to dispose of certain bank assets and recapitalize the franchise can reposition the bank to become profitable by unhinging the problems and positioning the enterprise to grow by acquisition. Investors benefit both from an increase in bank franchise value and sale of impaired loans or REO.

Metro Resolutions applies capital and know-how to acquire CRE at distressed prices and help sound banks improve their franchise.

Metro Resolutions adds value by bringing together expertise in real estate and banking

• Bank management, compliance	• Geotechnical engineering
• M & A	• Mechanical engineering
• Accounting, control	• Project management
• Corporate administration	• Property & asset management
• Investor relations	• Repair & maintenance
• Civil engineering	• TI’s, renovation & retrofit
• Land use planning	• Leasing, marketing, sales
• Entitlement, development	• Residential & commercial brokerage
• Construction, contracting	• Finance

CMBS:

Commercial Mortgage Backed Securities are trading at historically deep discounts and spreads. LANDCO believes that carefully selected senior tranches can offer extremely attractive yields compared to other investment opportunities. In many cases, yields to maturity (YTM) may be as high or higher than unleveraged IRR in stand-alone income property. Yet senior tranches of CMBS may be bought at a substantial discount and have levels of subordination up to 30% (meaning that the collateral could suffer a 30% loss of value before the most senior bond-holder would be exposed to loss). When a discount is further applied to the bond-purchase, say 25%, the safety-margin grows to 47.5% (the 70% exposure is reduced by 25%, so another 17.5% cushion is added to the original 30% subordination).

It is this combination of the credit enhancement built into the structure coupled with the additional support provided by the discounted price that has led LANDCO to conclude that senior CMBS is one of the most attractive CRE investments available at this time. The discounted price also provides a built-in hedge against inflation and offers the possibility of even higher yields in the likely event that involuntary prepayments will shorten the duration of the senior bonds.

CMBS, however, is volatile, since it is traded in the financial markets on a daily basis and is also subject to ratings changes. Most importantly, it is a derivative of CRE, which is experiencing extreme price-adjustments. Consequently, the key to successful CMBS investment is to look carefully at the performance and prospects of the underlying CRE assets that collateralize the bond. Too often in the recent past bonds were underwritten to overly optimistic scenarios, or non-stabilized properties were included in CMBS deals. In addition, many CMBS managers apply “black box” models that treat various CMBS bonds as though they are comprised of the same collateral, rather than taking a “bespoke” approach to collateral analysis.

LANDCO believes that each bond needs to be modeled individually to fully reflect the differences in the underlying collateral. LANDCO’s lengthy experience in managing, constructing and developing CRE of all types, combined with its specific CMBS expertise, gives it a distinct advantage in re-underwriting the properties underlying CMBS bonds. The ability to drill down deeper into the properties collateralizing the bonds should provide a higher degree of accuracy in the stress runs that LANDCO models for each particular bond. The combination of boots-on-the-ground real estate experience coupled with significant capital markets experience is the LANDCO difference in CMBS.

Whole Loans:

Roughly two-thirds of all commercial mortgages have not been collateralized in CMBS, but are held by banks, savings institutions and insurance companies. Since 2004, the total originated by such institutions exceeds $450 B. In almost every one of those mortgages, the value of the underlying collateral has been impaired due to severe price-adjustments in CRE. Often the property itself is in need of repair, construction or development. In the aggregate, those loans are presently worth substantially less than $450 B. Some are worth nothing, but others may profitably be acquired at a deep discount — significantly below the liquidation value of the collateral.

Whole loans, however, are the most difficult CRE product to underwrite. They are governed by extensive and complex documents and may sometimes be affected by a history of prior events that suggest unexpected defenses to the borrower. And unlike CMBS, it must be anticipated that investment in a whole loan will lead to ownership and possession of the underlying CRE collateral. So not only is detailed forensic underwriting necessary, but so is experienced, resourceful management. LANDCO feels particularly well-advantaged in this respect.

Real Property:

As the CRE crash resolves itself, numerous individual properties and portfolios will come on the market through foreclosure or otherwise at liquidation prices. Values will likely recede until a firm bottom is established. A great deal of capital is waiting for this eventuality. Prices will vary by market and property type, but it is likely that the bottom will occur in an overall range of 50%-60% x peak value. New construction will not be a significant competitive factor still for several years, so well-underwritten property will operate profitably in the near term. When new construction does return, its relative cost will tend to support higher rent-levels and property-values, pointing the way to attractive gains on sale.

Direct investment in CRE continues to be one of LANDCO’s main business lines. In the field of housing, LANDCO has developed, built, rehabilitated, owned and operated many thousands of apartments, condos, homes, and home-sites. In addition, LANDCO principals and affiliates have extensive experience constructing, improving, owning and operating offices, retail centers, and mixed-use projects. Our expertise in management, finance and construction is the backbone which supports every opportunity we identify.

Reorganization:

With its deep experience, LANDCO has a role to play in various forms of reorganization arising out of the severe dislocation in CRE. Loan workouts, white knight recapitalization, project management, consulting and receiver services are some of the ways that LANDCO seeks to add value in distressed situations. LANDCO’s experience and insight is of benefit to borrowers, lenders, investors, and managers with various property types in various regions of the country.

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