Re: The perfect "White Knight" Scenario

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Posted by ray@lcorn on February 04, 2010 at 10:36:14:

In Reply to: Assuming or taking over delinquent apartments posted by William on January 31, 2010 at 21:50:39:

William,

I've been meaning to answer your post all week because it is a perfect example of the "White Knight" strategy I've been mentioning over the last six months and featured in my 2010 Commercial Forecast as one of the strategies I’m using to succeed in recessionary times.

You are right in your thoughts about the existing lender being the one to keep in the deal. And you are the perfect type of investor they need to solve their problem.

Remember, you are doing them the favor... you are the White Knight riding to their rescue to bail them out of a bad situation. You can provide the expertise and the resources to help the bank avoid taking a major hit to capital reserves, and turn a non-performing asset into a new loan relationship with a quality client. That puts you in the driver's seat, but it takes some work to create a plan the bank can buy into.

First and foremost you’ve got to do your homework on the physical condition of the asset and the local market conditions. This information is needed to quantify the cost of improvements and to project the rental rates and time needed for lease-up after the improvements.

Then you’re ready to *offer* the bank your assistance in solving their problem. Note the tone… this is a buyer’s market, and no one in your position (e.g. an investor with experience and capital) has to beg for a deal. In short, be prepared to walk away.

The White Knight concept is a variation on the old "you name the price and I name the terms" game. If you understand how bank accounting works (discussed at length in the Forecast), in some cases it is possible to structure the deal for a true win-win outcome. Your deal sounds like it will fit the template for an alignment of interests.

The banks are interested in one thing... taking as small a loss as possible on the REO asset. What the bank needs is an investor with the experience and the resources to do the job.

You’re interested in one thing: acquiring an asset with potential upside with as little cash out of pocket as possible. What you need to accomplish your goal is the time to turn it around, and on terms that do not over-leverage the existing cash flow.

See the meeting ground here?

In a nutshell, the "you name the price" portion of the strategy is to offer to purchase the property at the par value of the debt, meaning the existing balance on the loan. They’ll get all their money, but not right away.

In return, you get to “name the terms”, e.g. interest rate, payment terms (amortization vs. interest-only), add-on credit lines for improvements, exit strategies, etc. You get the asset, but don’t have to use cash out-of-pocket to carry it during the turnaround.

I've done three of these deals in the last year, and have two more in the works. Don’t be shy in demanding whatever terms it takes to reduce your downside risk, but don’t get too greedy on the upside. If the bank is going to play they have to sell it to their board, so leave some meat on the bone.

ray

p.s. as a shameless plug, for more details on this and other strategies I'm using this year get the 2010 Commercial Real Estate Forecast. The direct link is http://www.creonline.com/Ray-Alcorn/report-order-now.html

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