TAMPA – June 1, 2009 – Some consider them good capitalists. Others see them as opportunists. Still others call them vultures.
Whatever the name, hedge fund investors likely will be major players in Florida real estate in the next few years, buying up mortgage notes – troubled or not – for a fraction of their original value.
Often, the funds are passive investors. But here in Sun City Center, Jim Biggins is fighting to protect his family business, Cypress Creek Assisted Living Residence, from a Greenwich, Conn.-based hedge fund called Silver Point Capital.
Shortly after buying Cypress Creek’s mortgage note from M&I Bank, the hedge fund moved to foreclose. Biggins filed for Chapter 11 bankruptcy protection to fend off the investors and he said he’s confident a judge will give him time to find new financing.
Now 44, Biggins grew up helping out at his family’s assisted living facility in Manatee County, delivering dinner to seniors and cleaning floors before running home to finish his homework.
“I’m a little disappointed that they didn’t give us terms, because we could get them paid off if they would just give us time,” Biggins said. “They could get their money without destroying a family business.”
Silver Point declined to comment.
In Florida, the next wave of loan defaults and foreclosures is expected to hit the state’s battered commercial real estate market. Investment funds are forming to capitalize. While some investors also target distressed home mortgages, many hedge funds – private investment funds that aren’t regulated by the government – prefer the multimillion-dollar mortgages common in commercial real estate.
Local bankers and commercial real estate brokers report getting cold calls from hedge funds inquiring about distressed mortgages for sale.
At the moment, funds holding as much as $300 billion are looking to buy distressed real estate debt, said Pat Blount, an Oklahoma-based consultant who has advised banks on asset sales. Florida is high on their list of targets.
True impact may be felt later
It isn’t clear how many funds are taking aim at Florida. But one investment banker who advises banks, Russ Hunt of the Kendrick Pierce firm in Tampa, said he’s aware of at least 200. Blount said the real impact of hedge funds may be felt in coming months and years as some banks grow more desperate to sell troubled assets.
At the moment, there is a gap between how much banks want for their troubled loans and how much hedge funds are willing to pay, Blount said.
If a borrower can’t pay off the mortgage, the investor might foreclose and hold the property until the real estate market improves, said Chris Moench, an executive at Directed Capital Resources, a small St. Petersburg-based private equity firm that buys performing and distressed mortgages. Unlike hedge funds, Direct Capital sticks to buying mortgage notes and doesn’t venture into other investments, he said.
In some cases, the investors don’t have to wait long for a big payoff.
Last year, the real estate market came crashing down on homebuilder Peter Bennett. Several of his multifamily development projects have gone into default, and his bank, M&I Bank, sold off the mortgages to hedge funds including Silver Point Capital and Chicago-based Lincolnshire Associates.
One of the projects, a proposed multifamily housing project along MacDill Avenue in Tampa, carries a $1.4 million mortgage note that Silver Point Capital bought from M&I in March 2008.
In three months, Bennett was able to sell the MacDill Avenue property to another builder and pay off the hedge fund. It isn’t clear how much Silver Point paid for the note, but banking consultants said it isn’t uncommon to pay 50 cents on the dollar for a defaulted mortgage.
If that’s the case, Silver Point might have made an $800,000 profit in three months.
Today, Bennett is concerned less with the behavior of Silver Point Capital than M&I Bank. He had hoped his bank would renegotiate his loan.
“To me, if they’ve come to the decision to sell this note at cents on the dollar, why not work with the developer?” Bennett said.
M&I does not comment on customer matters, a spokeswoman told The Tampa Tribune.
In Sun City Center, Biggins, too, wonders why M&I Bank sold his mortgage note. Unlike Bennett, Cypress Creek Assisted Living Residence wasn’t in financial distress.
His problems started in 2007 when his $4.9 million mortgage was set to mature and a balloon payment for the remaining balance was coming due.
M&I Bank originally acquired Cypress Creek’s mortgage when it acquired Gold Bank three years ago. At first, it seemed M&I was willing to renew the loan for a year until he could find new financing, Biggins said. But before he could sign the papers to renew the loan, a FedEx letter arrived revealing that the bank had sold his mortgage note to Silver Point Capital.
“To be candid, I didn’t really know what that meant,” Biggins said. “After I spoke to Silver Point it was clear that there were no terms and they were just looking for the lump sum payoff.”
Hoping to avoid foreclosure
Today, Biggins continues to operate Cypress Creek. He worries some residents will leave the center because of its bankruptcy case, but he’s hopeful a bankruptcy judge will extend the terms of its loan and keep Silver Point from foreclosing.
“We need more than just a couple of months,” Biggins said. “We need potentially years to get this accomplished with the way the current market is.”
On a recent weekday morning, the assisted living home appeared serene and friendly.
A handful of seniors sat in the home’s front drive area, enjoying the midmorning sun and waving to strangers. A group of seniors was readying for the 10:30 a.m. prayer session.
Biggins appears to know many of its 94 residents by name.
His family built Cypress Creek in 1998. Despite its challenge, Cypress Creek is profitable, he said. But a huge mortgage note looms and for now he can’t pay it off.
While Silver Point Capital wouldn’t comment, Moench of Directed Capital Resources said many such funds are not just looking to foreclose and take property. His own firm, he said, generally tries to work with borrowers so they can make payments on their outstanding balance.
However, he acknowledged he occasionally has to foreclose if the borrower can’t or won’t make payments.
Moench said he doesn’t take offense at the term “vulture fund.” But he insisted such funds perform a service. Banks are swelled with troubled loans and someone needs to take the loans off their hands, even if it means foreclosure, Moench said.
“We need to make money,” he said, “but we do it in a way that we can hold our head high.”
What are hedge funds?
Hedge funds are private investment funds that are exempt from Securities and Exchange Commission regulation, unlike mutual funds, which are regulated and report their holdings to the SEC. This gives hedge funds more freedom to invest in risky assets using different techniques. For example, a hedge fund may buy stocks it expects to fall in value, profiting through a technique called “short selling.” Hedge funds also often buy currencies, real estate and other assets.
“Vulture funds” are investment funds, including many hedge funds, which invest in distressed companies or distressed mortgages, hoping to buy low and sell high.
Sources: Hedge Fund Association; Investment Company Institute
Copyright © 2009 Tampa Tribune, Fla.
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