BH Properties, a Los Angeles-based investment management company, believes there will be a big jump in demand for its niche mid-market commercial real estate debtor-in-possession strategy in 2022.
Although the company has only completed three or four DIP deals this year, Andrew Van Tuyle, chief acquisitions officer, says an expected increase in foreclosures and other distress means that BH Properties could see $200 million or more of transactions over the next 12 to 18 months.
“Over the past 18 months, bankruptcy transactions have been slow. We’ve seen the lowest level of bankruptcies in the US that we’ve ever seen over the past five or six years,” Van Tuyle says. “This has had to do with the moratorium on evictions and foreclosures that didn’t allow landlords to pursue remedies for defaults or other issues.”
According to the Administrative Office of the US Courts, commercial bankruptcy filings fell 17.7 percent to 18,511 from June 2020 to June 2021, the lowest level since 1985.
While there is ample financing available for DIP financing of $50 million or more, BH Properties realized a few years ago that there is a dearth of available capital for mid-market bankruptcies. What’s more, DIP financing for these situations was much more expensive to put into place and the process was more time-consuming.
“There are plenty of providers doing DIP financing, but they won’t get out of bed for less than $50 million,” Van Tuyle says. “If you’re in a situation where there’s a $500 million or $1 billion DIP, the markets react efficiently, and a large bank will step in and provide financing at 300 [basis points] over LIBOR.”
It’s a different story for a $5 million DIP, with Van Tuyle estimating that pricing would be in the low teens over LIBOR plus two to four points. Additionally, the company saw room to provide additional services around the financing, including offering stalking horse bids to start the liquidation process and sales under Section 363 of the US Bankruptcy Code that allow debtors to sell assets to settle their debts.
“We saw a mismatch in how the small- to middle-market companies were being catered to when compared to the larger companies,” Van Tuyle adds. “We realized that if we could undercut the cost of financing for smaller or middle-market companies, and also provide stalking horse bids and participate in 363 sales, we could create a more efficient, less expensive situation for borrowers.”
The company has spent the past 12 to 18 months laying the groundwork to expand its DIP strategy, with Van Tuyle already seeing opportunity in retail or hospitality development deals that might have gone south.
“In early- to mid-2022, we are expecting to see lenders acting to pursue remedies, which means that borrowers will become debtors and will be trying to shield their equity from lenders.
“We are still in the marketing stage and are still planting the seeds rather than doing the harvesting. But we’re talking to the restructuring groups, the FTIs, the Alvarez & Marsals of the world and the bankruptcy attorneys who are the sources of our leads.”
Notable transactions include the acquisition of a portfolio of industrial assets owned by RadioShack after the retailer filed for bankruptcy. The company acquired a roughly 1.8 million-square-foot portfolio of five warehouses in Fort Worth and Sacramento and worked with RadioShack on a sale-leaseback that gave the retailers flexibility on timing and lease rates.