Wednesday, June 10, 2009

Home Court Advantage in Real Estate

Home court advantage is a huge factor in sports; for example, historically the home team in deciding games has won 78 of 97 games up until the second round of the 2007 NBA Playoffs. There is a comparable effect in commercial real estate.

I learned about real estate home court advantage from Gus Williams, the Seattle-based basketball star that led the Sonics to their 1979 championship. Somehow Gus ended up as the primary investor in a strip retail center in Selma, California. Selma is a town about 20 miles south of Fresno on Highway 99. You’re probably heard of tertiary markets – Selma is a quaternary, or maybe even a quinary market. I’m not sure how Gus’s money got into the deal, but I can tell you it never got out, because the Los Angeles lender I worked for foreclosed on the center in the early 1990’s.

It’s not noteworthy when a professional athlete loses money in real estate. What distinguished this piece of REO was that fact that absolutely no one would buy it. Months passed, the listing price was reduced again and again, but nothing. Finally, the local businessman who sold the property to Gus came forward and put us out of our misery with an offer which was a small fraction of what he got from Gus five years before. We (and Gus) were the away team, and the home team blew us out.

Local investors are starting to step up this time around too. From Zero Hedge:

The Buffalo News reports that REIT Developers Diversified Realty is selling back 11 upstate New York shopping malls to the entity it originally purchased them from, Benderson Development Co., at a 30% discount to their 2004 purchase price…“It’s good that the ownership is going in the direction that it is,” said Michael C. Clark, director of retail tenant services at CB Richard Ellis in Buffalo. “There’s going to be a lot of markets in other parts of the country where they have portfolios for sale by different REITs and they don’t have someone like Benderson to step up.
“We’re pretty fortunate in terms of the market, in regard to that. How much better can you get than the folks that developed them and are intimately familiar with them and live and breathe here? They certainly know what they’re doing,” Clark said.

The Zero Hedge spin is that CRE values have fallen, but that misses the real point of the story – a REIT based in Ohio is not going to do a good job pricing and operating malls in upstate New York.

Another example is from the Portland Oregonian, via Portland Housing Blog:

Portland condo king Homer Williams is pursuing a surprising new business.

With the residential real estate market struggling, Williams has turned to a newly hot commodity: failed bank loans.

Williams confirmed that he's the man behind BCC Fund I Limited Partnership, which the FDIC identified this week as the successful bidder for two packages of loans from the defunct Bank of Clark County.

The FDIC auctioned the loans last month from the Vancouver bank that failed in January.

Williams declined further comment. But according to the FDIC, BCC Fund 1 paid just more than $2 million for one bunch of loans with an outstanding balance of $6.1 million. BCC also successfully bid $3.3 million for a group of 53 other loans with an outstanding balance of $10.3 million.

That means BCC paid about a third of the outstanding balance of the loans.

Buying a loan from the FDIC is buying a pig in a poke (REIT Wrecks has a great post on that here), but I have to believe a Portland developer buying loans from a failed Portland bank is going to do better than a hedge fund out of New York.

Moral of the stories: keep the home court advantage.