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Georgia Banks Pushing Atlanta-Area REO Sales

May 18, 2010

In Atlanta, where regional banks and real estate developments are still rotting like sun-baked peaches, ritzy new hotel/condo projects continue capturing headlines.

Developers of the 42-story Mansion on Peachtree in upscale Buckhead earlier this year lost the property to lenders foreclosing on debt reported at nearly $190 million. And participating banks continue battling over $85 million in syndicated debt supporting the W Atlanta-Downtown.

Meanwhile, however, small-balance distressed assets are getting resolved one after another as lenders bargain to get them off their books. Indeed the REO Asset Administration Division of local brokerage Lavista Associates sold no fewer than 10 small REO commercial properties over 40-some days in March and April - mostly on behalf of surviving Georgia institutions such as State Bank & Trust, Westside Bank and Excel Federal Credit Union.

Tom Davenport, president of the Norcross-headquartered brokerage services firm, says lenders in metro Atlanta are stepping up and giving ground on market valuations in order to purge small-balance REOs from balance sheets.

Sales of larger properties aren't closing as regularly, as heavier competition prolongs bidding timetables, and these buyers aren't likely to close with no financing in place as is often the case in the local small-balance arena, Davenport continues.

Hence the Lavista sales team has been regularly closing deals of late for REO office buildings, mostly ranging from 3,000 to 20,000 square feet, in Atlanta proper as well as surrounding suburbs such as Acworth, Loganville, Duluth, Lawrenceville, Suwanee, Alpharetta, and Cumming.

In addition to asset management-minded investors, users tapping SBA and other economic development funding programs are jumping on opportunities to pick up high-vacancy properties at attractive pricing, Davenport adds.

In many cases even with dauntingly-low occupancy rates, in-place income is sufficient to cover debt service, and investors are looking to add value by attracting additional tenants at lower rents, Davidson notes.

Values have fallen as much as 30 percent during the Great Recession, with some properties priced to move at about half of replacement cost, Davenport adds. While valuations vary according to a property's particulars, he estimates the average discount from the balance of the foreclosed note is in the neighborhood of 40 percent.

One reason banks and buyers are coming together: the shared perception that the local office market's cyclical trough is about to run its course.

But for the moment supply continues to outpace demand for commercial space in metro Atlanta, as overall business-related vacancies hit 14.0%, 320 basis points above the national average, and asking rental rates for major property types fell another 5 to 6 percent in the first quarter alone, Boxwood Means reports.

Accordingly, national investment brokerage Marcus & Millichap is projecting additional near-term foreclosure activity. However M&M's research crew also points out that the office development pipeline is about to come to an end - and little if any subsequent construction will likely go forward for quite some time.

While the ongoing bid-ask gap, along with financing issues, continue to hold back sales of $15 million or more, M&M is expecting sales of bank-owned properties to help revive office investment activity that fell 65 percent last year. Savvy in-state investors boasting relationships with the diminished roster of active banks are indeed finding attractive opportunities, the researchers conclude.

Davenport likewise thinks the market is at or close to the bottom of the cycle, and he views the rash of small REO sales as an indication that local businesspeople - users as well as investors - see better days not far off.

While users especially seem inclined to buy small facilities for cash, greater expectations mean various small-balance lenders have again become comfortable financing acquisitions of foreclosed properties, Davenport notes.

With so many Georgia banks having failed, some of the newly formed debt funds and mortgage REITs are competing for this business, as are some of the life companies with experience in the small-balance space, he elaborates.

Some of the foreclosing banks touting relatively healthy balance sheets are willing to discuss seller financing, and tend to trade more attractive rates and terms for higher prices, Davidson continues.

Lenders are typically wiping out existing liens via foreclosure in order to deliver clean title to buyers, he adds. But some are also willing to consider short sales, including a couple of current Lavista clients.

And it's no surprise the FDIC, along with banks that have acquired insolvent Georgia institutions, are also looking to sell undeveloped and partially developed REO acreage. For that reason, entrepreneurs looking to land-bank or eventually participate in developments of homes, condos or commercial properties will find acreage priced to move.

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