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News release

Washington, DC

Jones Lang LaSalle and Hunton & Williams Report Commercial Real Estate Investment Activity to Resume Within 12 Months

Receivership remains last resort, but expected to become more prevalent

WASHINGTON D.C., MAY 18, 2009 — At a joint webinar educating lenders, special servicers, investors, receivers, owners and operators about the opportunities and challenges in the current commercial real estate market, executives from Jones Lang LaSalle and Hunton & Williams LLP revealed that half of all webinar participants (50 percent) expect to resume their investment activity in all sectors of the commercial real estate market within the next 12 months.  Another 44 percent predict their purchase of loans, notes, and properties to resume within the next 12 to 24 months.  The webinar, called “Receivership and Pre-negotiated Bankruptcies – What You Don’t Know Can Hurt You”, also provided participants with advice on receiverships and various types of bankruptcy options as the industry seeks a return to stability and eventual recovery.
“It’s clear that restoration of the commercial real estate market relies heavily on the rejuvenation of debt and equity markets, “ said Jere Lucey, managing director of Jones Lang LaSalle’s Real Estate Investment Banking team.  “A combination of increased employment, economic expansion and a decline in the de-leveraging cycle should be the catalyst for increased activity—something it’s clear a majority of our webinar participants expect to happen by the first quarter of 2010.”
As of the third quarter of 2008, the outstanding total mortgage debt on both commercial and multifamily properties stands at $3.4 trillion.   In 2009, it is expected that more than $250 billion of those types of loans will reach maturity.  By 2013, that number is expected to grow to $594 billion as aggressively underwritten 2006 and 2007 vintage loans come due.  That is on top of $220 billion of multifamily mortgages scheduled to come due.
To that end, special servicing exposure also has been on the rise, having increased for the tenth straight month to $17.11 billion in February 2009 from $14.38 billion in January 2009 and only $12.78 billion in December 2008.
“Near-record low interest rates, highly aggressive lending to poorly-qualified borrowers and ‘irrational exuberance’ with regard to investment speculation all contributed to the challenges that commercial real estate is experiencing today,” said Kristin Mueller, executive vice president of Jones Lang LaSalle.  “Currently, the properties that are moving into receivership are those that are most distressed; however, even healthy assets may come into play as more special servicers consider this option for defaulting borrowers.”
Added Thomas Kaufman, partner, Capital Markets and Finance at Hunton & Williams, “A receivership is an insurance policy against lender liability.  When a lender takes possession of a property, fiduciary duties compel the borrower’s concerns to override the lender’s—having an appointed receiver limits that liability.”
Receiverships preserve value, prevent shrinkage and also provide a key platform for making the property palatable to investors.  “If a property is put into foreclosure, no new debt may be added and a third party must finance.  However, if a receiver sells the property—the buyer can assume debt.  In today’s environment, existing debt on a property has real value and will allow the special servicer to sell that asset at a much higher return,” said Ms. Mueller.
One of the last, and most extreme, options available to restructuring problem loans lies in the form of bankruptcy—the process through which companies seek to reorganize debts.  In the traditional bankruptcy, a debtor receives up to 18 months to take advantage of tools that will allow it to manage its liabilities and remain in control of its business.  Another option is a pre-packaged bankruptcy, in which a debtor negotiates and solicits acceptances from creditors to confirm its restructuring plan prior to commencing a bankruptcy.  A pre-negotiated bankruptcy is a hybrid in which a debtor negotiates and secures agreements with creditors through “lock-ups”, but does not solicit votes prior to commencing that bankruptcy.
“Some of the advantages of a pre-packaged bankruptcy include speed, cost and control.  However, this option gives advance notice to creditors, raising the possibility of them declining the terms.  It’s also not suited for very complicated bankruptcies with various creditor types,” said J.R. Smith, partner, Bankruptcy at Hunton & Williams.  “In pre-negotiated bankruptcy, the advantages range from enhanced certainty and flexibility, to enforceable ‘lock-ups’.  The downside here is that creditors are divided into have’s versus have not’s—and those disgruntled creditors could become  “problem children” in the bankruptcy.”
A key factor for any debtor considering bankruptcy lies in the tax considerations.  Depending on the workout method, tax ramifications can vary widely, and the most beneficial workout will vary depending upon the particulars associated with a debtor corporation.  “In the partnership context, there is a recognition of cancellation of indebtedness income (“COD income”) at the partnership level and that income can be shown through to the partners.  For corporate debtors, that COD income can be excluded from gross income, however, tax attributes, including net operating losses, are reduced,” said Cameron Cosby, partner, Tax at Hunton & Williams.
The consensus among panelists at the webinar indicates the structure of loans and underwriting in the commercial real estate market will be vastly different in the future.  While bankruptcies and receiverships will always remain options to restructure non-performing loans, the goal according to moderator Martin Kamm, managing director of Jones Lang LaSalle’s Real Estate Banking team, is the opposite.  “Debt capital is available today, despite the constraints.  However, the type of borrowers who qualify for those loans is vastly different than the qualifiers of the past.  Interest rates are slightly higher, loan to value rates are smaller, and the underwriting standards are irrevocably changed.  This is not necessarily a bad thing—and bodes well for the future.”
Through its Value Recovery Services, Jones Lang LaSalle is focusing its extensive expertise in all facets of commercial real estate to provide specialized services to clients that are affected by the current financial crisis.  These services include helping financial institutions address the operational, occupancy and cost reduction needs resulting from the rapid pace of mergers and acquisitions in that industry.  They also include advising those financial institutions with troubled loans and foreclosed real estate (REO) on their balance sheets, including note sales and disposition of REO. 
Additionally, the firm is providing receivership services, asset and property management, leasing and disposition services for clients with assets experiencing financial difficulties or foreclosure.  The firm also is helping clients raise capital by monetizing owned facilities through sale-leaseback transactions and providing creative asset management and financial solutions to hotel owners and investors struggling in current markets, and assisting owners and lenders in developing asset value creation and recapitalization strategies for underperforming investment properties.
Jones Lang LaSalle Capital Markets is composed of a broad range of real estate investment debt and equity specialists, and corporate finance experts, working on all property types and in all the major national markets on behalf of major institutional and local investors and developers, as well as corporations.  The firm's Capital Markets professionals are highly skilled at pinpointing and tailoring the right capital solutions for each of these client's needs.   The Investment Sales teams assist investors in developing and executing asset recapitalization strategies for office, industrial, retail, hotel, multifamily, healthcare and seniors housing product. The firm’s Real Estate Investment Banking experts raise debt and joint venture equity for investors and developers, and provide derivatives structuring and loan sale advisory services.  The Corporate Capital Markets professionals help corporations develop and execute strategies that bridge their occupancy, capital deployment and financial reporting objectives for their facility portfolios.  The Development and Asset Strategy team specializes in the sale of non-income-producing properties in their various forms from vacant buildings to raw land to entitled parcels and partially completed subdivisions.  The firm's Value Recovery Services assist clients affected by the current financial crisis by creating value while managing risks through evaluating operational and occupancy needs, assisting with challenged assets and liabilities on their balance sheets, providing receivership services, asset management, raising capital through sales-leasebacks and providing leasing and recapitalization strategies for distressed assets. In the past two years, the firm’s Capital Markets team handled $117 billion of transaction volume. 
About Hunton & Williams LLP
Hunton & Williams LLP provides legal services to corporations, financial institutions, governments and individuals, as well as to a broad array of other entities. Since our establishment more than a century ago, Hunton & Williams has grown to more than 1,000 attorneys serving clients in 100 countries from 19 offices around the world. While our practice has a strong industry focus on energy, financial services and life sciences, the depth and breadth of our experience extends to more than 100 separate practice areas, including bankruptcy and creditors rights, commercial litigation, corporate transactions and securities law, intellectual property, international and government relations, regulatory law, products liability, and privacy and information management.  For additional information visit our website at
About Jones Lang LaSalle
Jones Lang LaSalle (NYSE:JLL) is a financial and professional services firm specializing in real estate. The firm offers integrated services delivered by expert teams worldwide to clients seeking increased value by owning, occupying or investing in real estate. With 2008 global revenue of $2.7 billion, Jones Lang LaSalle serves clients in 60 countries from 750 locations worldwide, including 180 corporate offices.  The firm is an industry leader in property and corporate facility management services, with a portfolio of approximately 1.4 billion square feet worldwide. LaSalle Investment Management, the company’s investment management business, is one of the world’s largest and most diverse in real estate with more than $41 billion of assets under management. For further information, please visit our Web site,
1 Jones Lang LaSalle, REIS, Federal Reserve
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3 Realpoint