Location: Why don’t you explain, in really simple language, what a distressed asset is? Aim low.
Mr. Levy: There are two basic types of distress. One [comes from a weakness in fundamentals], which is a weakness in the rent roll, weakness in the underlying credit of your tenants, decreasing [net operating income], increasing expenses. Basically, the value of the asset goes down because the value of your income stream goes down. … Category number two is an asset that might have fairly good fundamentals but because of capital markets constraints might be going through distress, because [its owners] can’t refinance their debt. … [Right now] the problem is almost entirely related to the second category of distress, which is capital markets. There’s just very little debt and equity capital out there to refinance these assets.
Everyone and their mother seems to have formed some sort of distressed-asset group. Where are all of these assets coming from?
The way it’s going down is very straightforward. The first level of distress was residential, single-family houses. And then as that problem became worse, it affected the capital markets and then started getting into the commercial asset classes. The first commercial asset class to get hit was land and development deals. As the capital market conditions continued to weaken, you started to see some distress in some of the core asset types. We haven’t seen a lot of it yet, but some of the core asset types that are beginning to show more weakness than others would include retail, hotels and flex industrial. And then if you take a look at certain markets outside of Manhattan, there are obviously pockets of weakness in some of the places like Las Vegas, Orange Country, Calif., Miami—places that had a significant bubble, particularly on the residential side.
So who are you working for besides the F.D.I.C. thus far?
We’re trying to focus in the beginning on just financial institutions; so, banks, insurance companies, [savings and loans] and special servicers. … We have an assignment out in California for IndyMac, which is one of the larger banks that, unfortunately, failed. … But in addition to that, our most active group this year in finance is our loan sales group.
So do you have any thoughts on how this is different from the Resolution Trust Corporation days of the late 1980s and early 1990s?
Do you want me to keep it simple?
None of this is particularly simple.
Everything is different. But I can say that from going into this recession, real estate fundamentals from a supply-demand standpoint are far stronger today than they were then—particularly in places like Manhattan, where you did not see a tremendous amount of overbuilding.
Of commercial real estate?
Of commercial real estate. Now, I think the situation may be different in residential. And that’s certainly the leading edge, and it’s all related. At the end of the day, the same person that was buying [residential mortgage-backed] securities was the same person who was buying [commercial mortgage-backed] securities. They got burned on one, and now they feel they got burned on both. Historically, I think it’s fair to say that a lot of people thought that residential and commercial real estate were not linked. Ultimately, this time, that was proven incorrect.
Simply because the same people who were buying the RMBS were buying CMBS?
That’s probably the biggest reason. I mean, what you’re dealing with here is a complete collapse of the CMBS industry.
So it’s not that the fundamentals underlying the CMBS market weren’t strong. It’s that there’s absolutely no demand anymore for CMBS?
Correct. And the investors won’t buy. Now, I will note it’s fair to say the CMBS underwriting got far more aggressive in the last two years, 2006, 2007, than they were prior to that. So there was certainly some weakness from the fundamentals standpoint in the underwriting of those loans. But, at the same time, the fundamentals of real estate until even today, are relatively strong, but certainly getting weaker in some of the obvious points, particularly retail and hotels.
Were you surprised by the enormity of this crisis?
I think everybody was. There’s obviously a lot of ways to characterize how things got so bad so fast. But I think the common knowledge, which I think is correct, is pre-Lehman and post-Lehman. When Lehman went down, that was the straw, the very large straw, that broke the camel’s back.