GRAND RAPIDS — As West Michigan's commercial real estate market bounces back from rock bottom, Amicus Management Inc. is right in the thick of things.
The Grand Rapids-based turnaround firm and court-appointed receiver is busier than ever, managing and selling distressed properties throughout Michigan. In April, it was named court-appointed receiver of five hotel properties owned by an Illinois couple that had defaulted on nearly $13 million in debt and back taxes. Earlier this year, Amicus was appointed receiver for a half-dozen Holland-area properties developed by local entrepreneur Scott Bosgraaf. Not long before that, Amicus completed the sale of more than 780 acres of foreclosed farmland that was part of Vreba-Hoff Dairy Development projects.
Today, Amicus represents approximately 65 court-appointed receiverships — several include multiple properties — with an estimated market value of about $70 million. That's double the number of receivership engagements it had in 2010, and there are more assignments on the horizon, according to the company's president.
"The whole financial collapse (wasn't) part of our business model," quips Dan Yeomans, president of Amicus.
The firm, he says, has always had an emphasis on income-producing real estate, but the economic meltdown escalated the number of distressed properties and tipped the balance of work at Amicus. As the economy tanked, Yeomans' firm grew, adding staff and tripling the size of its office on Cascade West Parkway. Today, real estate receivership represents about 90 percent of the company's book of business, up from about 60 percent prior to 2008.
"We (had) to adjust the size of our business to the market demand," he said.
While it may not have been in the Amicus business plan, the fall 2008 global credit crisis did help create a perfect storm of opportunity for the firm. As the commercial real estate market deteriorated and loan defaults grew, overstressed lenders turned to the courts for help. Rather than foreclosing on properties in default, they increasingly sought court-appointed receivers to manage distressed properties and maximize their value.
A receiver is a firm or individual to whom the court assigns custodial responsibility for a property that serves as collateral for a loan. The receiver takes on the responsibility of leasing, maintaining, managing and, in many cases, selling the property. Their fees are typically paid out of cash flow from the property's operations or by the lender, which adds the amount to the borrower's loan balance.
Receivership often proves a faster, cheaper option for disposing properties than foreclosure or so-called "363 sales," named for the section of the Federal Bankruptcy Code.
Having someone managing a property can help minimize losses and maximize the value. An apartment complex, for example, would likely be easier to sell and would fetch a higher value if there were tenants paying rent versus an empty complex that the owner neglected.
Data on the number of commercial properties in receivership are hard to come by, though there is general consensus that the use of court-appointed receivers is on the rise. As evidence, real estate experts point to the decrease in foreclosures despite an increase in defaults over the past few years. In 2011, lenders liquidated more than $46.5 billion of defaulted commercial mortgages via short sales, discounted payoffs, or trustee and REO sales, according to market research firm Real Capital Analytics. That was slightly higher than 2010.
Some industry watchers believe the number of commercial mortgage defaults will continue to rise nationally as some borrowers "re-default" on loans, including many modified in the last three years, amid collapsed property values and the stalled U.S. economy, according to a report by Bloomberg.
Local market challenges
While there is no evidence commercial mortgage defaults or repeat defaults will rise in West Michigan, the work of rightsizing properties and maximizing their value continues to keep Amicus staff busier than even Yeomans expected.
While the local commercial real estate market has begun to shake off the doldrums, the number of transactions on distressed properties is growing much more quickly, he says, as investors and expansion-minded business owners shop for bargains, especially in the industrial segment.
The resurgent auto industry is playing an important role in West Michigan, Yeomans said. The shake out of troubled companies has put more properties into play, but also created a pool of buyers. The recession, he says, "shook out a lot of debt. The players that had a lot of debt went under and the ones who survived are the ones who have cash. They've consumed more of the market share and now they're growing and need space."
According to the Grand Rapids office of Colliers International, local industrial properties continue to see the strongest increases in occupancy rates of all property types, with 783,993 square feet of space filled in the first quarter of 2012. An additional 309,000 square feet of market inventory was added in the form of existing firm expansion, according to the report.
Ross Pope, senior project manager at Amicus, confirmed this trend. He expects increased demand for property from manufacturing companies, especially small market industrials that survived the recession and absorbed greater market share because renovating an existing property is generally more cost-effective than new construction.
With an uptick in available financing options, investors are also becoming more comfortable betting on a property's income stream, Yeomans said. Assets are moving and there seems to be more liquidity in the market, he said.
"Two years ago, no one would bet on the income stream from a multifamily or commercial property," Yeomans said.
Pope said those on both the lender and buyer sides believe the market has hit a true bottom and now is the time to purchase.
With interest coming from around the country, Yeomans said investment properties are moving as fears of future inflation cause stress for those sitting on cash.
"Investors are really screaming for investment income, so they're stepping back into it," he said. "People are doing their homework, digging into it and doing deals that make sense."
Investor groups are also playing to their strengths. The buyers approaching Amicus come to the discussion looking for specific property types. A player in industrial properties isn't looking for retail opportunities. Instead they are sticking to what they know — more industrial possibilities.
Yeomans noted that a handful of banks have offloaded large debt portfolios, and a number debt acquisition firms scooped up those assets. He said real estate investments trusts (REITS), corporate entities investing in real estate with no or reduced corporate tax, are also spending again — primarily in multifamily properties and malls with credit quality tenants. He said REITS will become a larger player in the future. However, for now the REITS are still looking for greater certainty and safer deals.
Even with growing investor interest, West Michigan is still a user-driven market with small industrial manufacturers leading the majority of deals, Yeomans said.
With the exception of properties that produce solid income or buildings with strong creditworthy tenants, Yeoman said he could probably take a short list and know who is going to buy a particular type of asset as most of the property is acquired by local companies. For properties with a verifiable income stream, Yeomans said interest could come from anywhere, noting that investors from Montreal, Toronto, New York and Oklahoma have all been looking closely at the West Michigan market.
In particular, Yeomans is seeing considerable interest in the region from Canadian owners and investors.
"They're looking at their market as being overpriced," he said. "They feel like they can get good value here."
Dave Rapp, industrial broker for Colliers, said a lot of property is just being flushed through the system right now as banks offload distressed properties from their balance sheets.
He said Colliers has been pursuing several properties.
"You almost have to be 12 to 24 months upstream with a lot these properties before they even hit the market," he said. "That's why Amicus is having success because they've been working with some of these assets for a while now."
Rapp said it's not a bad thing that many of these properties are being filed through companies like Amicus, because it's helping the market get back to some sort of a normalized state.
Cathy Bronkema, a broker at Cohen Financial, which recently established an office in Grand Rapids, said the city — as a secondary market — is good place for investors because competition in first-tier markets such as Atlanta and Columbus, Ohio is steep.
"If interest rates continue to be low, there is definitely going to be opportunity out there," she said.
As more bank assets come due, Bronkema doesn't think the market will see any kind of mass crisis, but a continuation of the type of market that is happening now.
"We've never seen a market like this," said Don Snide, banking and finance attorney at Varnum LLP.
Snide said that what's happening in the market now goes against the longstanding view that real estate always increases in value. The new reality is that there will continue to be ups and downs, he said.
Opportunity still knocking
Regardless of where the property market goes, Yeomans is confident of the future for Amicus. While numerous companies popped up in 2010 to offer receivership services, many quickly folded after realizing they wouldn't get paid for six months to a year in some cases, he said. There is not a lot of competition in the marketplace.
And while no business owner wants to see a company like Amicus enter the equation, receivership can sometimes be a better solution than a company entering bankruptcy, Yeomans said.
Lawyer fees, administration costs and an extended court process can make the cost of bankruptcy exceed the marginal value of the reorganization, he said.
"Bankruptcy is expensive and may not make sense," Yeomans said. "Receivership is driven by court order. It's very nimble and more efficient."
With banks uninterested in taking back properties in default, court-appointed receivers are seeing more play in getting assets back into the black.
"We can have an appreciation for what has happened with some people's businesses, but you can deliver a hard message in a respectful way," Yeomans said.
Even when the economy is booming and companies are doing well, Yeomans said the reallocation of resources will continue, mistakes will be made and business owners will make the wrong bets. Beyond that, there will always be tax problems, he said.
"The default rate may go down and we'll see less deals, but there is always plenty of work," he said.