Q&A: Why Real Estate Investors Must Plan for the Possibility of Distressed Assets

Law Matters

Q&A With Bill Lobel of Distressed Capital Resources

For more than 30 years, William “Bill” Lobel has been helping owners of real estate and businesses in financial distress avoid or successfully emerge from chapter 11. A Fellow of the American College of Bankruptcy, Bill is the founder and president of Distressed Capital Resources LLC.

Recently, Bill told Kiplinger, “A perfect storm of COVID-related economic issues mixed with inflation and a stay-at-home workforce is bearing down on small businesses and real estate investors. Don’t wait to take evasive action.” Here’s what he had to say about why real estate investors must plan for the possibility of distressed assets.

Do corporate real estate owners, investors and developers face a greater risk of distressed assets as a result of the 2022 economic climate?

Over the past few years, extraordinarily low interest rates and government funding have helped to support our economy. This has allowed many individuals, business owners, real estate investors, and companies to stay above water. But this support effectively is just kicking the problems down the road - and now those problems are beginning to catch up with us.

A number of those with real estate holdings now are experiencing slow or no pay from an increasing number of tenants. And as we have started to see, economic policy and support has begun to dwindle. Economic experts are predicting that many business owners will be hit with a punch toward the end of 2022 and into 2023.

What are experts forecasting?

As government funds dry up and the Federal Reserve Board raises interest rates to combat inflation, experts are predicting that commercial property owners will be particularly affected. Retail property owners and real estate investors have been severely impacted by the pandemic; already faced with the decline of brick-and-mortar businesses as online shopping becomes the new reality, they saw these problems become more severe as people moved more of their shopping online to reduce risk from the pandemic.

...experts are predicting that commercial property owners will be particularly affected

In addition, business owners are facing the ongoing reality of being unable to secure supplies, employees, and/or operating capital. Many businesses have moved their payables from 30 days to 90 days, demonstrating a weakening financial picture. Continuing sanctions against foreign countries have exacerbated the supply problem along with a backlog of ships in our ports waiting to offload their contents. The obvious result is a difficulty in distributing supplies to their ultimate destinations after they have been off-loaded.

How can corporate real estate owners, investors and developers plan for an economic downturn and higher interest rates?

Kicking a problem down the road often can work effectively. Time changes situations. Sometimes, the cause of the financial distress can be eliminated. Sometimes interest rates will drop, ushering in new financing opportunities. Sometimes the business or real estate entity can be restructured to remove the cause of the financial distress.

The important thing is that the real estate or business owner recognize the looming risk and take immediate steps to address that risk...

However, avoiding the problem usually is not a successful long-term solution for those already in financial distress. Interest rates remain at a historic low, but with inflation increasing, the Federal Reserve already is moving to increase rates. Business owners and investors will have to contend with the consequences of default sooner or later.

What are the options if assets fall into distress?

Owners of real estate or businesses often wait too long before taking the risk seriously and making the adjustments needed or seeking outside help. Waiting too long to deal with financing issues often makes new financing more difficult to obtain and increases the risk that bankruptcy will become the only viable alternative.

Early intervention and attention to available alternatives can help real estate owners and investors mitigate the risk of bankruptcy before things go too far. Many tools are available to help real estate owners maximize value, restructure existing debt, repurpose assets, and modify their business to retain assets.

The important thing is that the real estate or business owner recognize the looming risk and take immediate steps to address that risk. It seems advisable to address distressed financial assets by restructuring now. Lenders still are hesitant to exercise their rights to bad loans and foreclose on properties now, but that approach is likely to change in the coming months.

Why did you start Distressed Capital Resources?

For more than 30 years, I have helped owners of real estate and businesses in financial distress avoid or successfully emerge from chapter 11 bankruptcy. I launched Distressed Capital Resources to bring together a wide variety of advisers and providers of funds and services who can help clients save their businesses, keeping the doors open and preserve jobs and economic activity.

The goal is to help the owners of financially distressed businesses and real estate preserve their reputations and their assets by avoiding the damage of a chapter 11 bankruptcy.

Connect with Bill Lobel on LinkedIn.

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