Subscribe
Share
Share
Embed
Summary
In this episode of Alt Investing Made Easy, hosts Roland and Sarah, along with guests Mary Elizabeth Heard and Eddie Martin, delve into the world of distressed assets. They explore the definition of distressed assets, particularly in real estate, and discuss the current market cycle, highlighting the opportunities and challenges investors face. The conversation emphasizes the importance of having the right advisors and understanding the investment process, including the critical decision between investing in debt and equity. The episode also touches on the potential for repurposing distressed assets in various sectors, including commercial real estate and other industries. In this conversation, Roland, Mary ELizabeth, Eddie and Sarahdiscusses the complexities of distressed assets, their potential for repurposing, and the importance of understanding the underlying value of these investments. THe participants emphasize the need for education and advisory support in navigating the intricacies of bankruptcy and restructuring. The discussion highlights the risks involved in investing, particularly with personal guarantees, and the necessity of being informed to achieve better outcomes in alternative investing.
Takeaways
- Distressed assets present opportunities to buy low and sell high.
- Understanding the definition of distressed assets is crucial for investors.
- The current market cycle has led to an increase in real estate bankruptcies.
- Investors need to assess their risk tolerance when considering distressed assets.
- Having the right advisors is critical in navigating distressed asset investments.
- The decision between debt and equity can significantly impact investment returns.
- Investors should evaluate opportunities on a case-by-case basis.
- Repurposing distressed assets can create new value in various industries.
- The role of financial advisors and tax implications are essential in investment decisions.
- Understanding the market dynamics is key to identifying investment opportunities. Distressed assets can be repurposed for various uses.
- Investors need to understand the underlying value of distressed assets.
- Bankruptcy can provide a fresh start for businesses.
- Education and advisory support are crucial in investing.
- Personal guarantees can significantly impact investment decisions.
- The balance between securities law and real estate investing is important.
- Investing requires a thorough understanding of risks.
- Market trends can influence the value of distressed assets.
- Investors should approach opportunities with caution and awareness.
- Knowledge is essential for successful investing.
Chapters
00:00 Introduction to Distressed Assets
03:01 Understanding Distressed Assets in Real Estate
06:08 The Current Market Cycle and Opportunities
09:11 Navigating the Investment Process
11:57 Debt vs. Equity: Making Investment Decisions
14:48 The Role of Advisors in Distressed Asset Investments
17:59 Analyzing Investment Opportunities
20:46 Exploring Other Types of Distressed Assets
28:21 The Evolution of Distressed Assets
31:08 Understanding Distressed Assets and Their Value
34:40 Navigating Bankruptcy and Restructuring
40:50 The Balance of Securities Law and Real Estate Investing
46:29 The Importance of Education and Advisory in Investing
Creators & Guests
Host
Roland Wiederaenders
Co-founder of the Alt Investing Made Easy podcast, investment advisor, and corporate securities attorney with expertise in private investment funds, corporate/securities issues, mergers and acquisitions, partnership structuring, and federal income tax matters. Roland is also a member of Grable Martin PLLC.
Host
What is Alt Investing Made Easy?
Join attorneys Sarah Florer and Roland Roland Wiederaenders as they navigate through the maze of market jargon and reveal the secrets of diversifying your portfolio. Whether you're a seasoned investor or taking your first step toward financial freedom, we empower you with the knowledge and insights you need to thrive in the dynamic landscape of alternative assets. Get ready to transform how you invest, inspiring a new way of thinking about your finances, and discover how to make your money work harder. Dive in with us, and let's make investing in alternative assets easy, giving you the confidence to navigate the financial landscape, one episode at a time.
Roland Wiederaenders (00:00.266)
I'm always fascinated about the idea of distressed assets because I kind of have this idea that it's sort of an opportunity to buy low. Is that accurate? Welcome to Alt Investing Made Easy, where we explore the complex world of alternative assets.
I'm Roland, a securities attorney, investment advisor, and your co-host.
And I'm Sarah, an investment advisor and corporate attorney and your other co-host.
We'll guide you through real estate, private equity and more, making complex topics accessible. Tune in for insights that empower your financial journey. Let's make Alt Investing easy, one episode at a time. Welcome everybody to Alt Investing Made Easy. We have a really special episode today.
Roland:
We're joined by two of our law partners, both of whom have appeared on a previous episode. First, Mary Elizabeth Heard.bankruptcy attorney. And we talked with her last time about kind of the basics of bankruptcy law and what restructuring is. Eddie Martin is here. Eddie's an expert in securities law. And I'm always really so indebted to Eddie because of his particular knowledge with respect to public securities. It's an area that I'm not as experienced with. And whenever that issue comes up,
I get on the phone immediately with Eddie because there's a lot of many traps for the unwary there. But today we're bringing them together. And again, I think it's going to be more obvious. There's a specific topic that we're going to talk about. And it's what's relevant to our audience as investors and maybe a deal sponsor as well. But we're going to be talking today about distressed assets.
Mary Elizabeth or Eddie, I'll just ask either one of you, let's define terms. What is a distressed asset?
Roland Wiederaenders (02:03.502)
Mary Elizabeth:
Well, I used to think of the Longhorns as a distressed asset, but now things have improved, so I'm feeling a bit better. We should probably hear from Eddie about his background and what he does before we dive in.
Eddie:
So in addition to practicing law, as you all know, I do as a developer, real estate development. And so in the real estate world, we see distressed assets all the time. And that is generally financial distress. And it can be caused anything, a project that has not gone well or one that because of the financial markets, you can't refinance. But effectively, it's a situation where you have to perform some kind of financial restructuring. And I think that's what leads to the opportunities. And as Mary Elizabeth knows, know, oftentimes that will be in bankruptcy court. It doesn't have to be, but that's...is often where this work is done.
Roland:
I'm always fascinated about the idea of distressed assets because I kind of have this idea that it's sort of an opportunity to buy low. Is that accurate? Right, and then hopefully later sell high.
Mary ELizabeth:
Yeah, right. It can be. So in the particular environment we're in, well first I should say, know, Eddie and I visit a lot because our world's sort of not collide but intersect. And his real estate experience is so deep, not just on a practitioner level, but also as an entrepreneur, as a developer, and as a business owner. so we often, I get his expertise on deals all the time, and it's been incredibly rewarding. should thank him. We had a great conversation yesterday on the...I guess the coattails of the real estate conference we just went to at UT. And one of the things that we were talking about was what is this cycle, right? Here we are, September, mid September 2024, a lot has happened. We can remember all the way back to the 80s and that cycle.Roland Wiederaenders (04:21.23) Which we don't want to go back to.
Sarah:
Interest rates really were high.
Mary Elizabeth:
When it was for real high at 18 % or certainly nothing lower than 12. And today, and there's all these news reports about commercial real estate being the distressed environment and these buildings like in San Francisco and New York that a couple of years ago or maybe pre-COVID sold.
for 20 multiple, even a 50 multiple of what they're being sold today and why is that? And the obvious answer of course is COVID brought a lot of people back into their homes and working from home and not everyone has gone back to the office. But it's more than that, right? It also has to do with this changing interest rate environment. And we're all trying to figure out, I talked earlier about how this year, we've had tons of, I don't know the exact figures, but I'm just gonna say a lot of real estate bankruptcies. We've had a lot of complex 11s filed and reorganizations that are taking place. So a lot of that is the interest rate creep that's been for the last two years. so...there are people who want to invest on the buy side, then there's some who might call me who need to be on the sale side. And I just wrapped up two cases where we had to restructure the loan for a variety of reasons. And now those properties are going to go to sale. And hopefully we're going to have parties come in and offer well above the debt price. So that's been my experience. And in this next cycle, we're all a little bit fearful because we don't know where interest rates are going to go. There's a lot of talk. There's probably going to be a cut of some kind, but we don't know what's going to go on.
Eddie:
I think if you look back and we really, since the early 2000s, we've had, as everybody knows, very low interest rates for, I guess, 20 some odd years now. Roland Wiederaenders (06:35.853)
And when I look back again on some of my real estate projects and I go back to my models, we just started the projects three years ago and I have, you know, four and a half, 5 % interest rates. And you know, now they're double that almost. And I think where you see so much distress are exactly projects that were set up to be a low rate environment. And they just simply do not have the income stream to service the debt now. You have distress there. And I think you also candidly have a lot of people who have just never lived through this cycle. You know, it's that, as we talked about, going back to the eighties, but if you've come into the business world in the last 10, 15 years, you don't know what a down cycle looks like in real estate. so I think it's creating a lot of opportunity. If you're smart, mean, there's, you know, there are some properties are in trouble and they should be in trouble. But I think it does provide many opportunities for an investor's example, whether you want to come in and buy a property that's in distress or potentially come in as a capital source to help in the restructuring with the existing ownership. There's a lot of different ways to participate there.
Sarah:
Now you've defined what a distressed asset is, particularly in real estate. And maybe a little later we can talk about other kinds of distressed assets because they're probably some war stories and also famous examples of big companies and whatnot that were distressed assets at some point that then continued on in new reincarnation. for now, in... Eddie, we were talking about before that there's this process. For our viewers or our listeners, if you're going to start to look at a distressed asset as something to potentially join as an investment, or you want to build an investment around it, or if you want to join as an investor in some level, then you really do need support. And that's why it's really useful and not useful. We would consider it really critical.
Roland Wiederaenders (08:41.633) that you have the right kind of advice. And of course, lawyers need to be involved in that. And that's what I think you bring to the table, Mary Elizabeth, as you were saying, you kind of view yourself as on the process side, you know how to get in and out of bankruptcy and how to shepherd the process and make sure that a party that might be interested in that distressed asset is going to be taken care of and do the right things to have access to that asset. And then I think, Eddie, sounds to me like you know the part from the other side of things, which is that if you have your eye on a distressed asset,
there's a certain amount of support that you need to make sure you approach it correctly, you build it correctly into an investment opportunity, et cetera. So, I think you both kind of represent two different parts of the cycle of engaging with a distressed asset really. And maybe you'd like to speak a little bit more to where we could break down what that cycle would look like. Let's say I'm an investor, I'm interested in this big piece of commercial real estate. I have an investor group that I want to bring with me into this. Eddie, I come to you. What do we talk about?
Eddie:
Well, I think first you want to talk about so where is the first question is how do you want to participate? Are you looking to try to acquire the asset itself? Conversely, are you looking to step in and provide capital, whether to the existing owner, whether in equity or possibly in debt? And I think a lot of times people you think about investing and everybody thinks, equity, that's how you invest. But there are tremendous opportunities on the debt side where you have returns that are 13, 14, 15%. And one of the advantages you have in that situation versus being in equity is you're a secured lender. And so you actually have protection versus an equity position where you're at the bottom of the barrel. So I think that's the first thing anybody needs to decide is what's their risk tolerance, what are they trying to return on from their investment. And then once you decide where you want to go, then you have to see where the process is. And like anything, as we said, you really need somebody that can help guide you because obviously in any kind of distress situation, you're going to have probably a commercial bank involved. They will have...
Roland Wiederaenders (11:03.197) lots of legal representation, lots of advisors. They do this all the time and they're not your friend. You're my friend. Especially that's why it's so important to have the proper representatives on your side to help you navigate the process and make sure you get the best result.
Sarah:
So, Roland, what would you do if a client came to you and said, this is what I'm interested in? You'd be like, I'm calling Eddie. And then he's calling Mary Elizabeth. Exactly.Can we just spell out what that would look like a little bit, just like a hypothetical?
Roland:
Well, I guess, you know, it's just really, I mean, I always sort of fantasize that as attorneys, maybe we have special insight or special abilities to uncover investment opportunities because of our involvement in the process. And I don't know if that's accurate or not, but I was always...that's one of the things that we had talked about previously while I was always interested in bankruptcy law, because I always thought, well, you know, again, there's this event that occurs where, you know, the debt is restructured or, you know, accounted for differently. But in the process, there's something that emerges. But again, like the opportunity to buy low. I don't know if that's accurate or not.
Mary Elizabeth:
So I can answer that. think what you're dealing with is you've got people who wanna invest, they call you up, they, like with your example, they've got what I would call a consortium of lenders who are individuals or perhaps individual companies, private equity or money from a family office perhaps. Exactly. And they see an opportunity, right? And so the first question I think you need to...the first sort of advice you need to give them is, okay, we probably need to run title. We need to get a title commitment of some kind or at least figure out what in the world is going on at the property. If there's been any environmental analysis or anything like that, if you're on the buy side and and Eddie was addressing some of that is make sure, you know. Roland Wiederaenders (13:19.985) Whatever it is that you think you're gonna do with this property you can do it I mean, maybe there are restrictions where you can't build a 30-story condo or what?
Sarah:
Well, maybe it's distressed for a reason right right and somebody didn't do a proper due diligence, right?
Mary Elizabeth:
So there's always that or there's this shifting sands of interest rate Changes that we were talking about because and on that front for a long time, you know Eddie's right, I'm a little older. We're all a little older than the crowd that is coming through now. They haven't seen the younger group, the 35 and under, haven't seen a.(Sarah:.. I'm not sure who you're talking about. Who are you?) But we were talking about this at the conference, the bankruptcy lawyers that haven't seen a big cycle shift since the..Great recession, right? They just got involved there after that, but they weren't there for the lead up. And we of course saw this sort of, you know, false pipe dream that everybody's house was gonna continue to be worth more into infinity. And then that all came crashing down and we can talk about that some other time and why that happened. But when you're talking to, you pick up the phone, somebody calls you and this is what they wanna do. Those people are gonna need financial advisors. They're gonna need to understand the tax implications of what they're doing. And I know you have an LLM in tax and we have others in the firm who have advanced legal knowledge about federal tax implications, but they also need to have entity formation advice, right? So are you going to be buying this? Either on the debt side or on the equity side, are you going to be buying this property or loaning money to others to buy the property and taking a lien, right, a voluntary lien on the property, you know, have you formed the right entity? Do you need a series LLC or something like that to figure, know, do you know what you're doing? Okay. Roland Wiederaenders (15:38.609) And even those who know what they're doing have financial advisors, tax accountants, and lawyers. And you're right, having been on both the lender side and on, I guess you could call it the borrower side, the bank is not your friend and they are going to be very well equipped to be protected, right, with all of their advisors.
But on the bankruptcy side, just to address where you want to be in the capital stack and whether or not you want to consider a debt position versus an equity position. And of course you've talked in your prior episodes about what's equity management versus non-participating all that. So if you just sort of think about it in that same perspective, you're an investor who's not really there for the day-to-day management or operations, but you're hoping that the asset, the company, whatever, becomes more valuable, right, down the line. So, but you're not gonna be there. Well, you might wanna consider being on the debt side because if that entity ever files for bankruptcy, let's say in the context of a single asset entity, a single purpose entity, or single asset real estate deal, that you're gonna have to, you will be, if the entity files bankruptcy, you're gonna be paid back if you're a lender and you'll have a better position. If you're on the secured lender side, you have a lien on the real estate. So worst case scenario, this is very common, but there will be deals where the asset is given to the lender, and when we think of a lender, we think of a bank, Frost Bank, or whatever your local bank is, but if the lender consortium is a group of people or a group of family offices and private equity groups, it's the same concept generally. So these are all things you gotta watch.
Sarah:
So Eddie, if you were wearing your real estate investor hat and...Roland Wiederaenders (17:59.569) you were going to go through this process and assuming that you get the support that you need, which would probably include Mary Elizabeth or someone like that, how would you analyze that opportunity? Do you think you would go through the debt analysis because of this maybe better position you get under bankruptcy? Or, know, I know you've done a lot of different deals, so I don't know, you know, if you're more comfortable on an equity side, maybe that it's worth the risk because you're more comfortable with the analysis and knowledge that you have coming in. Do you have a process for that or is it more like every opportunity is different and you need to be flexible and deal with that?
Eddie:
I think you need to evaluate it. It is case by case because first you want to look at it and say, what is the opportunity and how much upside is there in total? I mean, that's your first question because as we all know, when you think about trying to get a return on an investment, it's all about...return for the risk you take. So...
Sarah:
And we've talked about that. Yeah, for sure. At-length. For everyone who's watching, if you watch that.
Eddie:
And that's really the first place you look. Because if you think about it and you say, I can lend money and I can make 15 % or I can be the equity and I can make 17%, why in the world would you want to be the equity? Because you have a very incremental return for a lot more risk. So I think that's one of your first questions you want to look at. The other question, of course, is if you're the equity, then you've got to roll up your sleeves and go to work. you're the lender, you monitor and you certainly are involved, but you're not out there doing the labor. We have a real estate project and two weeks ago we had tenants coming over and it had rained and I couldn't find a landscape. So I was the guy out there mowing at the day before they came.
Sarah:
You told us that story with your son, right? He's about to start his own practice or his own life as a lawyer
Eddie:
And he is very, very happy that he made the choice to be a lawyer after that too. But yeah, so I mean, so that's, that's another consideration is if you're the equity, you are, you're the tip of the spear, you've got to make it happen. Right. And so that is one consideration for people of do you, either do you have the skillset and the time and the inclination to do it, or do you have somebody that can do that?Roland Wiederaenders (20:19.243)
Sarah:
Right. And so think those are your two really big analysis of these decide equity versus debt. What do think, Roland? I mean, you're obviously also an expert in all of this.
Roland:
So. Well, yeah. And I guess, you know, the thing that I have to remind clients of frequently is have you ever heard of the usury laws when you're talking about debt versus equity? our audience probably understands that concept. But it's an important point about what Eddie said that you know, really in Texas, what we're capped out at 18%. That's right. And so if there's so much risk that the deal really demands a higher return than 18%, you know, the client says, well, I'll just let's do a debt deal. It'll be simpler, but we'll offer 25%. And I said, well, you would have a defense if the investor ever goes to enforce that debt. You could say that the interest rate that you agreed upon was usurious the investor would only be able to get that 18%. So a smart investor is not going to agree to that. A smart investor, they want, that 18 % doesn't compensate them enough for the risks that they're taking, then they need to be equity. And then the risk increases, potential for return increases, but it's just like what Eddie said, you might be stuck out mowing the lawn to get a deal done.
Eddie:
You know, that's really, it is what it takes. so, you know, these are really important considerations and that risk in relationship to how it relates to use, the usury llimit, I think is one thing that we could really point out in this discussion. And I think the other thing to consider is, if you're, if you're talking about the context of a group, and so this goes back to just structuring an investment, an equity investment with a group of investors.
So if you have a group of people and they're all putting money in, well, you've got to decide who's going to do the work. You know, within that group and how are they going to be compensated Service members, right? Exactly, we were talking about that. You know, but those are also very important considerations because if you, you know, if you do put a group together to do some type of investment, you've got to make sure everybody understands their roles.
Sarah:
Well, this ties back to the fundamental point that we've discussed, which is what is a private, what is a security? Roland Wiederaenders (22:37.909) What is a private security versus a public security? But what is a security deals with the question of the division of labor between those investing in those working in the managerial efforts of others, which goes all the way back to our first episode, really, right? But this is it in action. If you're on the managerial, if you've been assigned managerial tasks and a certain investment, you're the guy mowing the lawn in the rain or whatever it is. Right.
Eddie:
And you know, I was thinking about my other partners who were not out there with me moving, too. So that's exactly what it's a little ill will. Right.
Roland:
Or wait, maybe I need a better compensation than what we agreed. Well, that's why we have those termination provisions in the company agreement. What constitutes cause? If I call you up and ask you to help me mow the lawn and you say no, that constitutes termination for cause.
Sarah:
Right. Well, we're talking about real estate because that's, think, what we all have a lot of experience in. We also think it's relevant for our viewers. But what about other kinds of distressed assets? Maybe that'll also make sense to people in general.
Mary Elizabeth:
There's a, know, a distressed asset is an example of probably any of the big public companies that have gone into bankruptcy. It's there's a whole bunch of different distressed assets. Pretty much any airline that's ever been in existence. That's exactly what I was thinking. Right. And have a client who he's also very old friend who is in the business of finding companies that are not really maximizing the use of their equipment and their, how do I say it, the entire enterprise, right? So if you can just imagine a world, for example, where, I don't know, you make a food product, right? But if you're making a food product, you've got the pipes and...I don't know all the widgets that go into doing that. But let's say you're only making the food product from nine to five. Well, is there more value that can be extracted from this operation? Assuming the pipes don't have to be cleaned once a day or whatever, okay? But you're making, I don't know, ketchup. I'm just gonna try and think of something, right? So can you be making ketchup all night long, right? Or could you...Roland Wiederaenders (25:02.117) use this entire factory for something else, like, I don't know, making toothpaste, whatever. But there are people out there who are really, really smart, who are looking for these opportunities to repurpose, either buy a sort of a stressed company and repurpose the site, the equipment. But then you gotta think, okay, who's gonna run these things? Do the people who know how to make ketchup, or is the same group of employees gonna make toothpaste? You know, whatever. But the idea is that there are very smart people out there who are looking for opportunities where you can potentially repurpose or extract more value out of however the thing is being run, the operation.
You know, one of the things that I've heard people talking about, and I know this probably sounds a little out there, but you get these, these really smart people who have out there ideas are the ones who make all the money, right? Because they take the risk. So I've heard for, it's been a while now, about the last 10 years, we've got all these malls that are like indoor malls. Right. Right. So, nobody wants the fancy stores aren't in the malls anymore. They're in these sort of outdoor kind of creative looking spaces with little parklets where you eat in a cute little corner with your domain here. the domain or in San Antonio. the Galleria. Well, the Galleria is still indoors, but I mean, and the gallery is sort of a bad example because it's so fancy.
Sarah:
Well, we just drove by last night on the way to dinner. We drove by the Hermes store in Austin, which is a standalone store that's just on in the hip part of...you know, South Congress, right?
Mary Elizabeth:
So, right. So people are going back to these single stores or these, if they do a mall, it's this outdoor mall, right? So then what do we do with all of this other space? What can we do with the old malls, right? Well, one idea that I've heard, people will call me and say, hey, I got an idea. What if we buy that mall in Harlingen that's decrepit and we turn it into this completely abandoned and worthless and,Roland Wiederaenders (27:22.559) it's there still. It's still a functional building that needs some love and attention. Right, I'm not trying to pick on Harlingen. I just happened to be there the other day and saw a lot of empty malls. But it's had a for sale sign on it for a decade. Clearly, it's not going to turn back into a mall. You know, there's this idea that someday if Texas decides to legalize cannabis, could that be an indoor grow operation based on the level of electricity? And water that can come through there, which I know nothing about, by the way. But there are all these people thinking these thoughts, right? And how do we buy something and either put something else in it rather than spending the money to tear it down?
Roland:
Well, I mean, there's an example here in Austin Highland Mall for a long time when I was growing up. That was a really cool place to go. I'm really dating myself. I remember when we were in college, it was still...and now they converted it to a college. ACC has their offices there and it's really cool. I went over there and that was a great success. I never knew that was the mall.
Eddie:
Well, it's interesting when you talk about malls, so you have different ways to think about distressed investing. So everybody knows JCPenney, of course. JCPenney went into bankruptcy and was distressed company. And the people who bought JCPenney were the, I believe it's one of the big mall owners and they bought it solely because they didn't want their malls empty. So that's an entirely different, but again, it's just a whole nother twist of why does somebody have an interest in a distressed asset? And I think there are, you know, for every distressed asset, there's multiple answers of what could be done with it.
Sarah:
Well, and from the perspective of the work that, for example, that Roland and I do, you know, you support, we talk about supporting investors, but you do fund structuring. And so there's a whole category of fund that's dedicated to this concept of what you can buy, whatever you want and do whatever your business plan is, right?
Roland:
Well, yeah. And then a couple of years ago, and you know about who I'm going to talk about, but I won't name their name, but in Fort Worth, there was a project where a large downtown building was purchased and it was office space and it was repurposed to residential, you know? And so we, we help Roland Wiederaenders (29:42.849) the client to a securities offering to raise the money for that. And that's a perfect example of some of this repurposing of an asset that, know, it's, anyway, maybe it shouldn't be too specific, but it was in the newspaper.
Sarah:
Right. So you can repurpose for another use of real estate. That's one way to repurpose the distress asset. Or you can repurpose real estate for a completely different business operation, which I find really fascinating, this idea about cannabis or whatever. I mean, I don't know if you're familiar, in the United Kingdom, they have a huge housing shortage. So they're repurposing stables and churches into condos because they have all these old buildings, nobody's going to them as stables and churches anymore. So they turn them into condos.
Mary Elizabeth:
That's real estate for another real estate use. then using commercial property that's committed or dedicated to something like retail space and then..converting it into manufacturing basically is really kind of interesting. And of course those people are going to have have advisors on the business side to make sure they have the energy requirements and the water requirements and the wastewater requirements, et cetera. And then Eddie's talking about basically a if you can't beat them, join them theory. so right now, sometimes you'll see bankruptcies in a series. There'll be a whole lot of healthcare for a while and we've had some of those lately. Or commercial real estate, which we're in a bit of that. I personally think it's going to get a lot worse before it gets better. I think the people at the conference we were at largely seem to suggest that we're near the bottom. I think the bottom has further to go.
Sarah:
You would have a different perspective also, right? Because you know what the bottom really looks like.
Mary Elizabeth:
It's all going to turn on debt maturities. And what we learned from that conference, I believe that over the next three years, there's something like close to one and a half trillion in commercial real estate debt that's going to mature. It's an almost unfathomable number. But for a while, you saw the airlines all...Roland Wiederaenders (31:57.067) going and so then..
Sarah:
You know, but yet they're still here and I think that's exactly just to break it down a little bit more simply, you know, this is what maybe is confusing about a distressed asset is that an asset can be distressed for a while go through a bankruptcy procedure and emerge under the same name that it had. so you're like, well, that airline never went away, but actually it completely changed underneath the surface. Right? Sure. And so this is exactly what we're talking about. And this is why investors can take these opportunities really, because underneath it, we still have a space that we need the business in our economy or the real estate is there. It can serve a purpose.
Mary Elizabeth:
That's right. I think that's essentially maybe what a distressed asset is, is an asset that has a purpose that needs new people to do something with it. Continuing value. It has continuing value. Right. And Austin is a great example because Austin has been a boom bust since, well, I don't really know beyond maybe the 70s, but it's been, you know, there's been a number of real estate booms and busts in Austin. We had the concept of glass buildings for a while where they would build this building or almost finish it - where the current federal district court is located on, now I can't really remember, it's on like fifth and... Colorado? Maybe Colorado, or one or two over, but near there, yes. It's on sort of west Sixth, think is where it is. And it's this beautiful courthouse. It is beautiful. But for those of us who've been in and out of Austin for over 30 years, we can remember at one point there was that big just empty structure that was just...skeleton a little more than rebar, but you know Just hanging out for a cool decade and and I think ultimately rather than finishing the building They just tore it down and built this courthouse, which is a beautiful courthouse. actually never been in it, but I know but it's not the same as the bankruptcy one, which is not as pretty but that you know back to this idea of You're going to needRoland Wiederaenders (34:12.713)advisors to help walk you through this.
Sarah:
Perhaps one could say that a distressed asset is slightly riskier just by the nature of why it's distressed, who had problems with it before, and what kind of procedural limitations there are in the acquisition process of that asset. So that's why you need support from the planning side and the advice side in terms of structuring, and then also from the process side in terms of acquisition.
Eddie:
And I think also worth noting, so if you kind of...completely back away from the real estate side, just with operating businesses. are times where you may be an investor in a business or you may be running the business, but there are issues with the business. So sometimes restructuring and bankruptcy is the appropriate way, whether it's dealing with contracts or in bankruptcies, as you know, and you can explain, there's a lot of things you can do in a bankruptcy process that in...out in the world in general you can't do. And that allows you to just reset the entire business and then move it forward.
Sarah:
It's the fresh start.
Mary Elizabeth:
So two things that are, you made me think of, Eddie, there's one thing we hadn't talked about in the earlier episode, which is what you can do with executory contracts. So all executory...
Roland:
What is an executory I'm going to tell you. So all an executory contract means is there is...
a bilateral obligation, so an obligation in the future on both sides. So if, for example, during the airline bankruptcies, I mean, which kind of had various iterations, but the price of fuel for a 747 or any of the planes, right, is very expensive. Fuel is very expensive. But let's say you negotiated your contract as the airline negotiates the contract for I don't know a two-year period. I'm just making these terms up with the distributor of the fuel at a price that was extraordinarily high I mean it was correct at the time, but it is now very high because the price of oil has gone down and so if you can get rid of that onerous obligation Roland Wiederaenders (36:35.307)
then you might be able to redeploy the capital that would be required to pay, continue paying on that contract. You could redeploy it to some other need in the business or back to your shareholders.
Roland:
Bonus to the CEO.
Mary Elizabeth:
Right, or bonus to the CEO. Right, the first place we look. But so that's one example when you see the price of oil coming down as opposed to going up. Now, the interest rate example. In bankruptcy, if you go back to late 80s, right? So we're looking at interest rates between 12 and 18%. And when you go into bankruptcy, then let's say you negotiated some long-term debts for 20 years, okay, at that rate, at 16%. Right? Well, you march along and then interest rates start coming down. Well, they've got to come down from 18 if 18 is the absolute high, right? But historically speaking,you know, anything I think below 8is pretty good. But, you know, we've been in this false environment, but that's neither here nor there. So let's say the interest rates go down to eight, 10 years later, 12 years later. Well, if you file bankruptcy and your note terms, they fall into a certain rubric, then you can, quote, cram down that interest rate to the present value plus a little bit for risk associated. So we call that the till rate. And so when I'm on the lender side, certainly with more mom and pop lenders, they'll, or a private equity company that's hired me to go into a bankruptcy, they'll be shocked to hear that this interest rate that they negotiated based on these people not being able to get money for this hard money loan or what have you. So they had to go to an alternate lender. Let's say they were getting 17 and a half or 16. And then they go into the bankruptcy. Well, the interest rates in the last couple of years, like two years ago, you're looking at four and a quarter. Now, what happened to their profit? Now for the borrower, Roland Wiederaenders (39:01.729)That's great news for the lender.
Sarah:
Well, that's the interesting part, isn't it? Is that we've talked about distressed assets from the point of view kind of a borrower's really. But then what about businesses that base their model on earning some of these interest rates that then, you know, or investing actually, because if you're going to be an equity investor and you get wiped out at the bottom of too many of your investments, then you're going to have a problem.
Mary Elizabeth:
Right. Well, the banks were getting killed for a while because if you're borrowing money, and then lending it out, you've got to have some profit there between the federal funds rate and what you can lend out. And of course, there's various regulatory regimes you have to fall under for residential and what have you. But I'm sort of talking about in the alternate loan environment, which is just the free market, right? What do you want? What can you get? Who can you find to do whatever it is that you want to lend money to? But It can change a lot of things and the price of oil is particularly. Yeah, I think probably here people are not that sensitive.
Sarah:
I can't say for here in the United States. But the price of oil and other parts of the world determines everything at all times at all pretty much everything at all times like in the Middle East obviously, but also I think other countries you can see that and how bad the recession the interest rate impact all this inflationary period has been in Europe for example.
Well, just sorry to change the topic a little bit because we're talking about distressed assets and maybe there's, you know, it's very interesting on a one-on-one case basis, isn't it, to hear about war stories and that kinds of things with specific distressed assets. But I just want to ask a totally different question to kind of freshen things up. And that is Eddie, what do you like better, securities law or real estate investing?
Eddie:
It depends on the day. Is it good to have both? it is. It's good to hedge either way. I think they're very different. Securities law, of course, is very precise. It's statute and regulatory and you work within that. And real estate investing is a lot more of the Wild West sometimes. Literally here in the beginning of the West. Right.Roland Wiederaenders (41:18.029) So no I am enjoying both. They're a nice yin and yang to each other.
Sarah:
If you were advising like a younger person on going in a direction for their career, I kind of might know the answer to this already knowing a little bit about your son, but would you say pursue your career in law or pursue your career in investing, real estate investing? Well, I suggested my son not do it and he didn't listen. no, they're both very rewarding. are. I think it's just what you're...it goes back again to risk, honestly, to some degree. Are you comfortable if you're going to be a real estate investor? Are you comfortable getting out, putting out a bunch of money, signing personal guarantees, and hoping that one of 50 different things that can go wrong doesn't go wrong and crater your deal, and they'd have to come see you.
Mary Elizabeth:
Right. Since you bring up the personal guarantee concept.. So that is a big issue. And when I get a call from a small, typically a small business startup or a growing business where the lender required a guarantee from the owner of the business and sometimes multiple members of the business.And just so everyone knows, a lot of times when you go get a loan, what a guarantee is, is you go get a loan, think, this will be great because like if the business fails, it's no big deal. Well, the bank has figured that out, okay? And the bank will say, you know, this is all hunky dory. know, even if you show your, your, couple of years of success and your, let's say your receivables are, are looking pretty consistent.Sometimes you can get a loan with good terms where they're secured against your receivables or your inventory or something like that. But a lot of times, if you don't have a long history, and you know, it's like my parents used to always say, Mary Elizabeth, everyone who needs money, those aren't the people that the banks lend to Roland Wiederaenders (43:39.181) the banks only lend money to people who don't need the money, which I remember thinking, that seems really painful, but it's true. And so what happens if you don't have enough security to provide the bank in the form of a lien or they don't like the value ratio, the loan to value ratio, they're concerned about a potential downturn and the value of an asset, a real estate asset, for example going down, then they may require you to sign a personal guarantee. Right. And I think it's really common in real estate investing from what I understood. It is. And so if you... So what will happen is if the business that holds the debt fails, then you're going to have to potentially be on the hook personally to pay the bank whatever they're owed. And in Texas, I mean, I can't speak to every state, but the law in Texas, of course, is that the...the one holding, the lender holding the guarantee can go after, they don't have to go after the company first. They can go after whoever or whatever they think a fast and has the deepest pockets. So you flip that script and people come to me and say, you know, we came up with this widget and it was gonna be the, you know, the best new thing and it was for a while.But then the technology sort of went in another way and now we're kind of, we can't really get this back off the ground. It's just not gonna work out. Can you file bankruptcy and all these people who are asking to be paid money back will go away and stop calling me. And my first question is always, did you sign a personal guarantee? Because if you signed a personal guarantee, you're gonna have to file bankruptcy too, if you, or you might have to. But to completely eliminate, or the word we use is discharge, liability for all of this stuff, you're gonna have to go through a long process. And so if you've got an investment property, if you've got a bunch of stuff that you don't want a bankruptcy trustee to show up and take, then personal bankruptcy may not be an option for you. And so, sort of, where are we going now?Roland Wiederaenders (46:04.139)
Sarah:
Now you have to pitch an investment to somebody is what it sounds like.
Mary Elizabeth:
So you've got to really think through, like there's risk. You know, I think a lot of people just think, risk. Well, I maybe I don't make my 17 % or whatever, or, you know, it's fine. The property will always go up in value. Nothing could ever happen. No one's ever going to discover a superfund site under that property. Anyway, there's more to it and that's why you need advisors on the law this is what's so critical. Because what I've noticed is with some of our real estate clients, and Eddie, I think you could speak to this, there's the, you don't actually hear about the personal guarantee until later when you're working on the investment, building the security side out, right?
Roland:
That's a disclosure point.
Sarah:
It's a disclosure point, but it's not like it's not emphasized so much. And so I think this is something interesting for anybody because we're speaking to an audience trying to educate people about alternative investing. And we've talked about risks and we've talked about structure. We've talked about different things. Now we're talking about an asset class. might be a great asset class to participate in in one way or another. But when it comes back to how you do, you know, the democratization of capital issue and question.and how you start your process as an investor in this space, it's good to know that those who are more, pretty much more experienced and sort of further up the chain on the process are also probably giving some personal guarantees because I think you have to have net worth criteria that you meet for a bank to even consider whether a personal guarantee is worth anything, right?
Eddie:
Generally, the rule now is that you need to have a net worth equal to the debt and 10 % of that needs to be liquid. Right. Which is cash and marketable securities. Cash.
Mary Elizabeth:
Now, and the lenders are getting very strict. They want to see that cash in their bank.
Right. Because they may want to use their set off rights. Well, and the reason this is, yeah. But the reason this is, think, relevant for alternative investing and also the idea of democratization of capital that we've discussed in the past and, you know, we continue as an ongoing theme is if you're interested in starting to get more into this.
Sarah:
Roland Wiederaenders (48:12.225)
This is why coming in actually as an equity investor with a small tranche is pretty viable because somebody else, the sponsor of the deal is taking care of these things and choosing to do that and has met certain criteria and has done a sophisticated analysis. And then you come into the deal, I suppose it could be his debt too, but in any event, you come in as the limited partner or the silent partner, you have no managerial control and you have no voting rights, but also...one reason, you know, those, manager actually makes more on the carry and whatnot is because to purchase the property in the first place, they may have had to give a personal guarantee. And this is what's on line for them is potential bankruptcy that then bleeds into their personal assets, which they have to have to even qualify to buy the property in first place, right? So this is, think, something that's useful for people to understand about this whole alternative investing that we're talking about and ultimately promoting and supporting is a good...opportunity for people of all different levels of experience. And that is that if you don't have the net worth, that you can go buy your own property or whatever your business idea is, that you don't yet have all of that organized and all your ducks in a row, then you can come in and start building your wealth by participating in deals in a different way and essentially a less risky way.
Mary Elizabeth:
Well, and I feel like every time I get in these conversations, I bring it to this deep, dark place. I'm the Grim Reaper.
Sarah:
The thrill of the bankruptcy advisor.
Mary Elizabeth:
Right. And I don't want to scare people away from investing because there's so much opportunity. You just need to go in with eyes wide open. You need to have a solid team advising you just...it's like you've got to have a team of lawyers or at least one lawyer and you've got to just look at this with eyes wide open right, but you know in the event something were to go wrong, right? Okay, it's not just bankruptcy is one thing but sometimes you get into a situation where someone on the equity side does something unpleasant like take your money Roland Wiederaenders (50:34.381) Right and then you get into potentially litigation well our our law firm also has a team of litigators who are used to we have one person who's specifically in the fiduciary duty litigation and in the and then we have other litigators who are used to handling all this but but the reality is that There if someone does something with your money, it's not over you know, there are fiduciary duties that partners have to one another, and that's perhaps a discussion for another day. But really what we want to encourage people is to call you, get advice on all of these topics. Call us if you need legal advice as well, but to ask a lot of questions and be informed in your decision making and know that they're
Sarah:
This has always been our point, Roland, is that we want people to be as informed as possible because when you're more in the know, you can actually have a better outcome. So I think we might be starting to wrap it up. But I thought what might be interesting is that if you had one thing to say to people considering investments that touch on distressed assets, whether it's a debt side, whether it's participating in an equity deal, whether it's buying the property outright, what would you say? What would be your one word of advice or warning?
Mary Elizabeth:
Well, I think I just kind of said it, which is you really need to educate yourself on the topic. And you need to go to people you trust. You might need to go and talk to a lot of people. I mean, different groups on the tax side to figure out the implications to you personally in the, and where you're going to be slotting this purchase, whether or not it's, or this deal.
how that's going to affect your whole portfolio. That's a conversation that you need to have with your financial advisor and your accountant. And then on sort of the timing side, you need to figure that out with a financial planner.
Sarah:
So you're basically, need to educate yourself and you need advisors. Eddie, apart from that, do you have something else to add?
Eddie:
Well, not much. was... She got it Because the conversation started when I started practicing law, there was a partner I worked for.Roland Wiederaenders (52:56.685)and had the saying that was knowledge is power. Right. And that really is, as I've kind of gone through my life, both as a lawyer and investor and everything else, generally the deals that have gone poorly are the ones that I just jump into and I don't take the time. Because we always see people who seem like they're just flying by the seat of their pants and everything's great and wonderful. And I think the older I get, I realize that, you know,maybe it was just a good bluff game and they really weren't. maybe they got lucky but they don't tell you about all the ones that went south. And that's where I think as I look back over my life and career, when you don't put in the time, you don't do your diligence, you don't take the time to get all the advisors and everybody wants to look really smart and so you don't want to be that guy plotting in the corner asking for one more thing. But those are guys who generally turn out really well. And I think, so it's the same thing, but I think it truly is. It's take the time, know what you're doing, get the correct professional help so that you do it right.
Roland:
And this is what we've always talked about, right? Is that people can, you can learn these things if you're not a lawyer, if you're not a many years experienced real estate investor, you know, but it does take the time.
Roland:
Yeah. I mean, we have, you know, hugely intelligent clients, clients that have had success in whatever their...industry, software, technology. But when they come to us, they don't know about, they haven't gone to law school. And you can learn a ton, but it really does make a difference going to law school, passing the bar, and having all of us are in excess of 15 years legal experience. So any of us can really advise people in these areas and can't overemphasize the importance of.that experience, you know, it really, and I think the thing that stood out to me, Mary Elizabeth, and I still think of myself sometimes as like 17 years old, I can't believe I'm 53, and I did practice law in the 1900s. So did any, right? Seeing these, seeing the cycles, and we have been in a long cycle of low interest rate environment Roland Wiederaenders (55:13.833)
and understanding where we're at now. And I think it's an area of fascination for people because this idea, know, to make money and investing, you buy low and sell high. And maybe there are some buying opportunities with these foreclosures, but I think we could probably wrap it up and wrap up and call this one. But thank you both so much for being with us today is our guests, very informative and it's great spending time with both of you, like both of you personally and I respect your knowledge and experience.
Sarah:
If people want to get in touch with you, how can they reach you?
Roland:
Well, you can go to GrableMartin.com and I'm on the website and so is Eddie. I also have a LinkedIn profile and I'm on Twitter. Okay.
And Eddie, is it the same for you?
Eddie:
Same for me as well. OK. And we'll also include your LinkedIn links with this episode.
Roland:
And we call you Eddie, but your name is really Louis, right?
Sarah:
So, thanks for joining us today on Alt Investing Made Easy. If you enjoyed this episode, please like and subscribe.
Roland:
Remember, everybody, take aim with your alternative investing strategies.
Sarah:
See you next time.