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Opportunistic and Distressed Debt Acquisitions: 5 Ways Alternative Lenders Can Reduce Risk and Maximize Returns

The commercial real estate market is reeling from higher interest rates, declining property values, particularly in the office sector, and the withdrawal of key players from lending. With more than $1 trillion in debt set to come due before the end of 2025, alternative lenders such as debt funds are raising funds to capitalize on opportunistic debt acquisitions and distressed debt sales. This includes the next round of portfolio loan sales from Federal Deposit Insurance Corporation (FDIC) following the failure of Signature Bank. Regional institutions are also reportedly looking to shed commercial property loan portfolios. 

Here are five ways alternative investors and lenders can mitigate risk and make the most of opportunistic real estate investment sales and distressed commercial auctions: 

1. Scale up to manage a tight diligence window. 

While investors may occasionally or even regularly buy commercial property loan pools to capitalize on market downturns, bidding on thousands of assets in one fell swoop requires a different approach and set of resources. In an effort to maximize bids, sellers tend to provide less-than-optimal amounts of data, which must be digested quickly – sometimes as short as 30 to 45 days. Bidders don't know in advance what kind of data and diligence will be provided, nor the exact composition of pools. Investors should consider augmenting full-time staff with third-party providers (TPPs), and have an army at the ready to perform commercial property due diligence in a short time frame.  

2. Establish a flexible suite of strategies and action plans. 

Since the element of the unknown looms large, investors must coordinate with TPPs on battle plans. This means establishing multiple investment and review strategies crafted with different size scopes and corresponding action steps. Build out flexible loan analysis tools and review templates to accommodate the flood of assets, navigate varying underwriting standards, and make provisions for non-performing loans and distressed commercial properties that may require a deeper dive. 

3. Onboard partners early to minimize administrative ramp up. 

Investors will want to hit the ground running once the seller opens the war room for diligence and the clock starts ticking. By onboarding a partner early, the team can devote all of its time to assessing the granular details -- from cash flow to property and valuation data -- and create better opportunities for commercial property risk mitigation. Addressing administrative ramp up in advance and focusing precious time on diligence reduces the possibility that the bid will be mispriced, provides more time to socialize the deal with investment committees, and helps ensure a smooth close to the transaction. 

4. Prioritize a seamless handoff to servicing and asset management. 

A winning bid requires a speedy and controlled handoff to servicing and asset management. Choosing a TPP that can provide a unified solution -- supporting the deal from initial diligence through a winning bid, post-close onboarding, and into servicing and asset management -- eliminates the loss of momentum typically seen when handing off a deal from one provider to another. It also ensures a seamless transition of the high-level knowledge base and facilitates faster check-ups on every loan to quickly establish a deep understanding of the investment and value-add opportunities. Investors acquiring assets are likely working off static financials, and property performance can change dramatically by the time a deal closes. Buyers won't know if they have troubled commercial assets until they look under the hood -- and the faster they do this the better. Meanwhile, each asset comes with a host of management duties, and missing deadlines -- whether it's for paying property taxes or renewing a ground lease -- can be costly and put an investment in jeopardy. 

5. Consider a TPP that can offer a wider lens into the market.  

SitusAMC works with banks, debt funds, REITs, insurance companies and other institutional investors, gleaning perspective on a wide breadth of market activity in real time. In addition to advisory teams and servicing and asset management professionals, SitusAMC’s asset valuation teams review massive portfolios quarter over quarter, gaining a high-level view on macro trends, geographies and property sectors. The firm’s research team of industry experts, PhDs, and data scientists provide bespoke economic, market, asset- and transaction-specific analysis to power more informed decision-making. SitusAMC’s special servicing professionals have deep experience with commercial property risk mitigation, distressed asset management, and loan workouts.  

All of this translates into unparalleled market intelligence, invaluable forward-looking insights, and an eye to how assets will perform in the future. Because it's not only about where the portfolio sits today -- it's about how will it perform in 12 months or in three years, and the best strategies to optimize the outcome. From front line Advisory and Diligence teams, to Valuation Advisory and Risk Services professionals, to Servicing and Asset Management experts, SitusAMC offers an opportunity for true partnership and support to guide an acquisition from start to finish.   

SitusAMC is the leader in opportunistic CRE asset acquisitions and management with more than 30 years of proven experience. We allow companies focused on opportunistic and distressed commercial investing strategies to scale up or down as the market changes and their internal business objectives change, with a bespoke suite of services tailored to their needs for strategic support. Learn more here about how SitusAMC can power opportunities in the distressed debt market.