1. There is approximately $90 billion in real estate funds on the sidelines waiting to be invested in distressed assets.

2. The bid ask spread is still as wide as the grand canyon.

3. There are $45 billion in defaulted CMBS loans.

4. CMBS special servicers have sold or liquidated very few defaulted CMBS loans.

5. A number of panelists, some who attended the CRE MBA conference in Las Vegas the same week, stated that financing is coming back from banks and insurance companies, however, I don’t agree except for apartment loans from Fannie, Freddie and FHA.

6. The FDIC is the defacto RTC of this crisis.

7. There are a lot of new debt and equity funds and new players waiting for the deluge of distressed assets.

8. Leased and performing assets that come on the market are bid up to 6%-7% cap rates, due to the lack of product and volume of funds with nowhere to go, Déjà vu all over again?

9. Most panelist believe we are in the third to sixth inning of the downturn and some stated that it may be a doubleheader.

10. The Starwood acquisition of Corus Bank assets included a loan from the FDIC at a zero interest rate.

11. Banks and CMBS hold approximately $1.45 trillion in real estate loans and if marked to market the discount would be about 40% or $580 billion.

Commercial real estate owners, whether a developer, high net worth individual, private equity firm or local investment group, with current or long term bank debt should analyze the bank financing and determine if the loan can be acquired from the bank at a discount. This may be a great strategy to create value and increase equity even in this tumultuous real estate market. The strategy is referred to as a discounted payoff of the loan. Many developers and property owners have short or long term debt from a commercial bank and due to the decline in value of all commercial real estate that debt may be discounted in the right situation. If the loan is current but the value of the property is less than the loan, the owner should approach the lender and see if the debt can be purchased at a discount. If the bank is itself in trouble or under some type of FDIC supervision then it will be more eager to agree to some type of discounted payoff. If a discounted payoff is agreeable, then the trick for the owner is where to obtain the new funds? In many cases, if the property is cash flowing and the discount attractive, it may be possible even in this environment to obtain new funds. It will probably be a combination of new debt and new equity. There are a number of hard money and fund lenders that may fund this type of deal with bridge, mezzanine or short term financing. There are also many new private equity funds that may provide the equity piece. If the new debt can replace the existing debt dollar for dollar then that is the best deal. If it cannot, the owner will also need a separate equity infusion which is difficult but not impossible.

A discounted note payoff can add value to real estate, however, there are some important tax issues that real estate owners should be familiar with. The tax discussion of debt cancellation is very complex and this is only a brief introduction to the general issues. Debt purchased and retired at a discount creates cancellation of debt income or COD. A property owner that acquires its debt at a discount creates COD, which is equal to the amount of debt forgiven and in most instances must be included in gross income. However, there are certain exclusions to including the COD as taxable income. If the property is held by a partnership or LLC and the individuals partners or members are insolvent or in bankruptcy, then the COD income is not included in taxable income. When COD income is excluded from the taxable income of an insolvent or bankrupt debtor, certain tax attributes of the developer are reduced dollar for dollar to the extent of the excluded COD income. This includes, but is not limited to, net operating loss carryforwards, general business and minimum tax credits, and possibly most important for developers, basis reductions of other real estate property. The American Recovery and Reinvestment Act of 2009 provides some relief for COD income by allowing the taxpayer to defer the income recognition of income to 2014 and then spread the income over the next five years through 2018. Although a discounted note payoff may have some negative tax issues, overall it is an excellent strategy to create value in a difficult real estate market

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