Setting Up the Scene
For almost 15 years, the real estate industry has enjoyed an unprecedented boom. Capital was abundant, credit was cheap, virtually all property appreciated, and the terms foreclosure, workout and restructure were largely absent from the vocabulary of the day. Securitization became the standard for debt financing, both residential and commercial, facilitating the origination of hundreds of billions of dollars of loans that perhaps should never have been made. Home prices soared, commercial properties traded at historically low cap rates, and the mortgage industry cranked out a never ending supply of new debt.

2008 began as just another good year in a continuing period of prosperity. While the sub-prime loan markets were already in trouble, most believed the issues that were emerging were self contained and would have little effect on the broader real estate market or the economy as a whole. A minority of market observers lamented the imminent bursting of the real estate bubble but those concerns were largely ignored.

As is the case in most cyclical downturns, it was as if a switch had been flipped. Almost overnight, the financial markets collapsed, credit seized up, and business as usual came to a screeching halt. Real estate valuations plummeted, bank capital eroded almost instantaneously as mark to market accounting rules forced a downward spiral of write-downs. Consumers stopped spending, unemployment soared, and uncertainty and fear ruled.

Thus, the stage was set for what may turn out to be the greatest financial crisis this country has ever seen. And the biggest challenge to capitalism in history.

Gearing Up for Change
As a real estate investor, owner, or lender you know that the ground rules have changed dramatically. The lack of debt and equity capital, scarcity of buyers, lower tenant demand, increasing vacancies, and reduced cash flows means tough times. In order to effectively manage your assets, you need to know precisely what you’ve got, what alternative actions will get you, and what obstacles will confront you along the way. Because we have enjoyed such a long cycle of prosperity, the data and information required for decision making is often incomplete, outdated, or erroneous. Moreover, the current economic climate has rendered obsolete many of the models used in the past. History alone may not provide all the insight needed this time around. Real estate portfolio holders, lenders, and managers need to be able to consider different problem solving approaches under a variety of environmental, social, economic, and demographic assumptions.

Many real estate industry participants are unprepared to take on the rigorous review and analysis required to survive the downturn. Complicating matters further, is the fact that the data systems of many real estate industry participants may not permit the manipulation or aggregation of critical information in a manner that facilitates proper analysis and study. The sheer diversity of the modern real estate industry means that unique perspectives exist, each requiring a focused and discrete evaluation. Pension funds, insurance companies, governmental agencies, mortgage conduits, owners and investors, and lenders and servicers all have their own point of view. However, each has the common need to understand the attributes of their holdings, the impact of changing conditions, their rights and priorities, alternative property values, legal restrictions and conditions, and more. Further compounding the decision process is the uncertainty pervading the financial markets – an issue that reinforces the need to be able to assess alternatives against a moving landscape.

Resolution Economics’ Real Estate Group can Help Today
Real estate workouts and restructurings are back in a big way. Most properties have sustained very significant declines in value and, in many cases, are no longer able to service their debt. As a consequence, many loans, while viable in the long term, require some current modification to avoid default. From single investments to the diverse holdings of large investors or the huge loan portfolios of major lenders and mortgage conduits, property attributes must be studied and evaluated before any meaningful remedial action can be taken. Typically this process requires preparing cash flow models for each property, analyzing loan documents and security agreements, studying relevant market and demographic factors, understanding regulatory impacts, and reviewing legal rights and remedies, all as a basis for determining asset values and assessing the ongoing viability of a property’s business plan. The data is then “rolled up” to provide an enterprise picture in order to develop an appropriate restructuring plan. In a static environment, where a stable economy exists and the primary goal is maximizing recoveries, this process is tedious and time consuming. Overlay today’s climate however, where the environment is unsettled, tension exists between the national social agenda and a speedy economic recovery, and asset values are fragile, a more dynamic approach is required. The demands of this environment require a more complex aggregation of information so as to permit analysis under a variety of differing macro-economic assumptions.

That is where Resolution Economics stands apart. We add another dimension to the traditional workout assignment by applying our skill in large scale data management, economic modeling, and alternative path evaluation. We are experts in utilizing advanced computer software and sophisticated modeling techniques to create an information tool that allows input changes on multiple levels thus enabling consideration of alternatives. For example, determining the case for a loan modification vs. foreclosure decision, where factors such as asset value and the probability of future default, are dependent upon differing economic, employment, or demographic assumptions. It is the combination of our deep industry expertise, which enables us to professionally analyze and evaluate underlying real estate assets, and our specialized economic modeling and data management skills, which facilitates complex information capture that results in a comprehensive and efficient approach to workout decision making.

Our Expertise
Our principals have extensive experience as investors, managers and advisers in the real estate industry. A significant part of our careers involved providing workout and financial restructuring services in complex insolvency assignments. Despite having to work through an entanglement of diverse rights, priorities and interests, we have successfully maintained the focus on maximizing recoveries for varying constituencies. We understand how to balance business needs with available capital, place a real world value on assets, and optimize the business’ financial structure. We have led over $5 billion of financial restructurings. We know how to sort through complex structures and create viable arrangements that satisfy a wide range of expectations and demands.

In the early 1990’s, the real estate markets were in crisis from the lack of capital, a severe credit crunch, product oversupply, and the savings and loan meltdown. While less pervasive and severe, those times were not that much different than what we are facing today Resolution Economics’ principals routinely guided debtors, creditors and investors through a complex maze of financial, tax and regulatory issues to maximize recoveries. Our clients included banks, investment funds, developers and government agencies such as the Resolution Trust Company and the Federal Deposit Insurance Corporation.

Today, Resolution Economics has a unique perspective from which to offer its financial restructuring and advisory services. Having served as advisors for many years, we now have the added benefit and knowledge accumulated from our more recent experience as investors, capital providers and managers. This blend of experience provides us with an intuitive knowledge of how to balance the many conflicting forces critical to survival during difficult times. We are pragmatic problem solvers, yet mindful of the complex legal and regulatory framework that surrounds restructuring and insolvency assignments. We are accustomed to working on complex matters with multiple parties and with a wide range of legal, financial and other advisors. We understand the need for consensus and how to get there. We have sufficient history to remember the rules applicable to survival in tough times while others have only enjoyed the last cycle of unlimited economic prosperity.

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