Are there Really any deals out there?

S.D. firm buys bank's troubled real estate loans

Ayres Advisors pays 40 cents on the dollar

By Mike Freeman
STAFF WRITER

August 6, 2008

A San Diego real estate investment firm has purchased a group of troubled residential development loans for less than 40 cents on the dollar – a sign that private investors are starting to smell bargains coming from lenders who made loans to builders. Ayres Advisors bought 16 loans and one foreclosure property with a face value of $122 million from Central Pacific Bank of Hawaii. The loans were backed by residential land, some condo projects and nearly completed homes, mostly in California. Ayres bought the loans on behalf of an investment partnership it co-manages.

Central Pacific Bank said in a press release that it sold the portfolio for $44.2 million – or about 36 cents on the dollar. A call and e-mail to the bank were not returned yesterday afternoon.

Keith Horne, president of Ayres Advisors, said the bank's announced price was within $1 million of what Ayres paid.

Ayres Advisors isn't the only investment fund looking to pluck bargains from failed real estate projects. Several private equity funds have announced plans to buy distressed loans or properties.

In San Diego, Pathfinder Partners, a private equity fund, has purchased loans for distressed condo projects in Florida and hopes to invest $300 million to $400 million in similar deals nationwide over the next 12 months.

But until recently, banks have been slow to sell distressed loans at prices low enough to justify the risk, said Lorne Polger, managing director of Pathfinder Partners.

That's starting to change, he said.

“I can tell you what we've seen in the last 60 days is a significant sea change in the way many banks are thinking about these things,” Polger said. “We're seeing pricing much more reflective of the true market value of the asset than we saw six months or 12 months ago.”

Banking regulators are pressuring institutions – particularly those overly exposed to residential land development and construction loans – to get realistic about the prospects of payback, Horne said. So “the smartest banks” have begun selling troubled loans at steep discounts to help clean up their books.

One San Diego bank that made such a move was Pacific Western, which in March sold $34.1 million of residential construction-related loans at a loss of $16.2 million, or about 50 cents on the dollar.

Of the 16 loans Ayres Advisors bought from Central Pacific Bank, 13 are delinquent. The loans are backed by 400 improved residential lots and 1,600 unimproved lots.

There are also 64 condominiums that are nearly completed in the Los Angeles area, and 105 nearly completed homes elsewhere in the state. Two of the loans involved residential developments in Seattle.

The deal also included a 14-acre commercial and residential parcel in Palm Springs that the bank foreclosed on.

“Although real estate markets continue to slide, we believe it is time to position ourselves for the next cycle,” Horne said.

Ayres, formerly known as Ayres Land Co., has done this before. It bought acres of land throughout Southern California from the Resolution Trust Corp. during the last real estate bust in the late '80s and '90s. Its largest project locally was the 600-acre Sunbow development in Chula Vista, which now has 2,000 homes.

Ayres would like to purchase three or four more portfolios similar to the Central Pacific transaction.

“We have been out there for the past year, looking and making offers,” said Horne. “We just finally got to the point, with our underwriting, where the pricing was right for us to purchase.”