Distressed Asset Mastermind Groups

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Distressed Assets Mastermind Groups, The 90’s and Now, and

How Banks Can Minimize Commercial Real Estate Losses

Brecht Palombo & Ken Hecht

PODCAST

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BrechtPalombo:: Hey,goodmorning.ThisisBrechtPalombo:,andthanksforjoiningusonthiscallagaintoday.IhaveKenHecht;Kenissomewhatfamous…orhehadasomewhatfamousdealhereintheNewEnglandarea,calledtheWangTowers—which,hopefully,we’llhearaboutaliGlelateroninthecall.Kenisknownfor…he’sputtogethermorethan4,000,000feetindealsforWal‐MartsallthroughoutNewEngland.And,beforethat,KenwasabrokeratCBRE,whereheactuallystartedandrantheirretailgroupforaPme.Ken,we’repsychedtohaveyouthecalltoday.Thanksforbeinghere.

KenHecht: You’rewelcome.Greattobeonthecall.

BrechtPalombo:: And,Iknowyou’reabusyguy,soIwanttojustcutrightintoit,and…whydon’tyoutellusjustaliGlebitaboutwhatyou’vebeendoingduringtherun‐uppre‐crunch,ifyouwould…orifyouevenwanttogobackaliGlebitfurther,andgiveusacareersummarysopeopleknowwhothey’retalkingto,orwhothey’relisteningto.

KenHecht: Wellthat’llbegreat.Brecht,thanksalotforgivingmetheopportunitytobeonthecall.Basically,IwenttoworkwithCBRichardEllis—atthatPmeitwasColdwellBankerCommercialin1986—in1988,IwontheRookieoftheYearawardfortheNortheastininvestmentsales;Isold13buildingsmyfirstyearinthecompePPon.And,thenthewheelsfell offthebusin’89,whichisapropos,which…withrespecttotheWangTowerdeal…

BrechtPalombo:: Right.

KenHecht: …andthen,reallyaZerthat,IwenttoWhi[erPartnersforfiveyears,whereIbecameapartner.Andthen,basically,Iwas thelastpartnerin,andwesoldhalfthecompanytoCB;itbecameCBRichardEllisWhi[erPartners,whereIthenfoundedtheretailgroupandrantheretailgroup—whichwasreallyaveryinvestment‐orientedgroup,includingBillMoylanandChrisAngelone,whoaresPlloveratCBRE;goodfriendsofmine.Then,IdevelopedaliGleclientcalled,“Wal‐Mart”whileIwasthere,basedonareferralfromanoldcollegebuddyfrom20yearsago.And,basically,onceI…aZerSeptember11,2001,IrePredfromthepartnership,andreallyrolledoutaprograminMaine,MassachuseGsandRhodeIslandforWal‐Mart,andendedupdoingabout4,000,000feetforthem.But,both…mainlyacquisiPonsandground‐updeveloping,andafewdisposiPonsthrowninthere.Then—reallyinthemid‐2000s—westarteddoingourowndevelopment,andwebuiltdrugstores,andwebuiltshoppingcenters,anditwasreallythefleajumpingontheelephant


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approach,whereweknewwheretherewassomegreatacPvitygoing,sowewouldbuythelandacrossthestreetfromsome…eitherWal‐Martorothermajordevelopment,thenpopupasmallershoppingcenter.So,what’shappenedis…intherun‐up,wereallydevelopedallthroughoutthehighPmes,andnowwe’reinaverylowPme.But,fortunately—knockonwood—forus,we’vepickedgreatlocaPons,andwe’rebasicallyverycloseto100%leased,andwesoldsomeassetsandmademoney,andit’sactuallyapreGygoodstory.And,nowwe’rereadytojustbuyupastorm;we’reloadedwithaddiPonalcapitalandlotsofexperPse,andwe’rereallyoutthererightnow,workinghardtoacquireotherassets.

BrechtPalombo:: Okay.Well,Iwanttogetinto…Iwanttogetintoallaboutwhatyou’redoingnowasyoureposiPoned,asalotofpeoplehavereposiPoned,but…takemeback,justforaminute…thisdeal…Iknewaboutthisdealyearsago,before…Imean,I’ve…I’vebeenhearingaboutthisdealfromanybodywho’sbeeninbusiness…intherealestatebusinessinNewEngland...aslongasI’vebeenaround,I’vebeenhearingaboutthisdeal.And,thenIrecentlyhadtheopportunitytomeetyouatatalkIwasgiving,and…and,youannouncedyourselfasthe…thebrokeronthisdeal,andso,it’stheWangTowerdeal…justtakeusbackaliGlebit,and…whatwasit,andhowdidit…howdidyougetit?Howdiditworkoutforyourbuyer?And,justlayitoutforus,ifyouwould.

KenHecht: Well,it’saninteresPngstory,andIthink,fromaPmingperspecPve,it’sinteresPngtonotethat…aswetalklateron—maybe—inthecall,we’lltouchon…howdoesthismarketrelatetothatmarket?In1987,thestockmarketcrashed.In‘89,aswediscussed,thewheelsfell…begantofalloffthebusinthecommercialrealestatebusiness.And,it’sinteresPngtonotethattheWangTowersoldin1994,whichwasgenerallylookedatastheboGomofthemarket.Thepropertywas1.3millionsquarefeet,anditsoldforfivehundredtwenty‐fivethousanddollars.

BrechtPalombo:: Wow.

KenHecht: Now,thatwasaroundthirty‐somethingcentsafoot.But,whatyouhavetorememberwas:Wangwasgoingtodoashort‐termleasebackonthepropertyonaporPonofthebuilding.So,you’dhavetheminaporPonofthebuildingfor,say,ayear,andaZerwhich,you’dbeluggingthewhole1.3millionsquarefeetofemptyspacetothetuneofaboutfivemillionayearoftaxandoperaPngexpenses.



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KenHecht: So,itwasarealChinesefiredrillto…toleasethatthingupasquicklyaspossible,andyoureallydidn’thavetogetthatmuchrentforit.WhatyouwanttodoiscovertheseoperaPngexpensesand,ofcourse,getasmuchrentasyoucould.


KenHecht: Also,inthatdeal,theactualpropertythatsoldforfivehundredtwenty‐fivethousanddollarscamewithaparkingraPoofonecarperthousandparking.YouhadanopPontobuytheremainderoftheparking—whichwouldgetyouuptoareasonableofficeparkingraPo—butthatopPoncamewithasix‐million‐dollar‐pricetag.


KenHecht: So,youreallyhadtothinkclearly.ThebuyerswhoboughtthatwereBrianKelly,ChrisKelly,DanDohertyandLouAlvarado;theyeachthrew…Ithinktheythrewtwenty‐fivethousanddollarsinaheadforthetotalofonehundredthousanddollarsattheaucPon…


KenHecht: …andresultedinalotofworkontheirpart.But,Ithinktheysoldprobablythree,fouryearslater,andeachmadeprobablyaroundfiZeenmilliondollars.

BrechtPalombo:: Geez!

KenHecht: So,itwaspreGy…preGyniceleverage.

BrechtPalombo:: Yeah,that’s…

KenHecht: But,whathappenedis,theyalsohad…rightnow,there’saNaPonalAmusementsTheatreupthere…

BrechtPalombo:: Yeah.

KenHecht: …so,theyhadNaPonalAmusementsTheatreintheirpocket.And,onsomeoftheexcessland,theyactuallyputthetheatre,anddidatheatredeal.



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KenHecht: So,itwasavery…itwasdrivenbyhavingthistenantintheirpocket,typeofthing.


KenHecht: So,it’sprobablythegreatestrealestatedealthatI’veeverknowninNewEngland,intermsofbuyingattheboGomandsellingatthetop.

BrechtPalombo:: Right.Well,it’snotoveryet,so…

KenHecht: No.

BrechtPalombo:: …we’llseewhathappens.

KenHecht: That’sright.

BrechtPalombo:: So…so,youboughtthatataforeclosureaucPon,justtoclarify?

KenHecht: No,thatwas…thatwasnotaforeclosureaucPon;itwasanaucPonagreedto…Aetnahadthedebt—theinsurancecompany,Aetna…


KenHecht: …and,theywererepresentedbyMeredith&Grew,and…excuseme,werepresentedAetna,andWangwasrepresentedbyMeredith&Grew.WangwasthreateningtogivethebuildingbacktoAetna;Aetnadidn’twantit,sotheybothagreedtohiretherespecPvebrokers,andworktogethertoaucPonthisthing.So,itwasnotaforeclosureaucPon;itwasacoupleguyslookingthemselvesintheeyeballssaying,“Whydon’tweworktogethertogetridofthisthing?”

BrechtPalombo:: Right,soit’saconsensualsale…

KenHecht: Correct.

BrechtPalombo:: Okay,allright.

KenHecht: That’sright.


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BrechtPalombo:: That’sinteresPngtonote.And,so,tellmealiGlebit…let’smoveforward.Nowit’s15yearslater;how…howisthisdifferent,orhowisthisthesameaswhatwewentthroughthen?

KenHecht: Ithink,duringthatperiod,therewasalotofoverbuildingthatoccurred—inoffice,parPcularly.And,inthismarket,wedon’thaveasmuchoverbuilding.The…theeconomybackthenactuallywas…itkeptgrowing.And,oureconomy,ofcoursewe’vehitunemploymentratesnotseenforaverylongPme—sincetheearly70s.

BrechtPalombo:: Yeah.Right.

KenHecht: So,there’sadifferencethere.And,Ialsothink—atthatPme—theFDICandtheRTC—theytookoverassetsfairlyrapidly…


KenHecht: …andbegantocleansethemarket.


KenHecht: And,theyshutdownalotofbanks,includingouthereinNewEngland.And,theygrabbedtheseassets,andtheyjustturnedaroundandstartedsellingthem.Rightnow,wehaveaverydifferentapproachthatthelendersaretaking,whichis—everyone’scallingitdifferentthings—kickthecandowntheroad,extendandpretendontheloans.And,Ithinkthatit’sastrategythatisoccurringrightnow,butIthinkitcanonlysolvesomanyoftheproblems.


KenHecht: So,Ithinkwhat’sgoingtohappenisit’sgoingto…it’sgoingtodelaysomeoftheissues,butit’snotgoingtosolvemanyoftheissues.

BrechtPalombo:: Sure.

KenHecht: So,Ithinkthatit’sacompressedsituaPon;there’sjustmoreandmorecompressionbuildingupinthesystem.

BrechtPalombo:: Right.Allright,wellIwantto…Iwanttoaskyouaboutacoupleofthings;Iknowyou’reaveryacPvenetworker,andyouhavedifferentgroupsandwhatnot,andI…Iwaswonderingifyoucouldjusttell


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usaliGlebitabouthowyoubuildyourgroups,andhowtheyfuncPon,whoyouinviteintothem.Because,oneofthethingsthatI’mhearingfromsomeofmymembersisthatthey’relookingfordeals,andthey’relookingatthenetwork,andI…itseemslikeyouhaveapreGyefficientmachine.CanyoutalkaliGlebitaboutwhatyoudo?

KenHecht: Sure.Well,firstistobuildrelaPonshipsoveraverylongperiodofPme.So,whatyouwanttodo,Ithink,is…we’revery,verygoodaboutmakingsurewehaveourcontactdatabaseup‐to‐date;thatwehavedifferenttypesofproduct…prospectcategorizaPon.So,wehavearound6,000folksinourdatabase,butthey’reallcoded—retailbroker,owner,banker—whatevertypeofthing.So,that’sreallyimportant,to…tobuilda…aninfrastructure,sothatwhenthisinformaPonyouget,youcan…youcandealwithit.Andthen,onasmaller,morenetworkingbasis,whatI’vedoneis—inbothProvidenceand…Providence,RhodeIslandandPortland,Maine—I’vepulledtogetheragroupofthehighestlevelofprofessionalsinthosemarketsthatarein…allintherealestatebusiness,butindifferentpartsoftherealestatebusiness.So,we’vegoneaheadandsetupagroupineachofthosemarketsthathasatopaGorneyfirm,atopcommercialrealestatebrokeragefirm,topaccounPngfirm,topmortgagebanker,and—asitturnsout—topaucPoneer,and…andthenus,whowouldbecapitalproviders—


KenHecht: —capitalprovidersmeaningbuyers,orbuyersofdebt,orprovidersofcapitaltocertainsituaPonstomakeitallworkbetweenalender,andperhapstheborrowers,andneedstohaveasoluPon.


KenHecht: And,I’dsaythosearethekeycomponents,andtodeveloprelaPonshipswithinthosenetworkinggroupssothatpeoplefeelcomfortableandconfident.And,thepeopleinthosegroupsshouldbepeoplewhoknowwhattodowithinformaPon;certaininformaPonneedstostayinsidethosegroups,andcertaininformaPonwouldbeavailabletobeusedoutsideofthosefourwallsofthatgroup.And,peoplehavetobethekindofpeoplethatknowwhichinformaPonisconfidenPal,andwhichinformaPonyoucanuse.

BrechtPalombo:: Yeah,okay.And,howoZendoyoumeet?

KenHecht: Probablyaboutonceeverytwomonths…


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BrechtPalombo:: Okay.

KenHecht: …ineachgroup.

BrechtPalombo:: Okay.And…andso,it’sabreakfastthing,generally?

KenHecht: Generally,it’sbreakfast;we’vethoughtabouthaving…havingitwithaZernoonoreveningcocktails,etcetera,buteveryone’sagreedthat—let’smakeitpurebusiness,andlet’shavebreakfast,andlet’s…let’sgetworkdone.And,it’sworkedoutpreGywell,anditcanmovepreGyquickly.

BrechtPalombo:: Yeah.Well,Iappreciateyoule[ngusinonthataliGlebit.IhadanotherquesPonherethatIwanttoaskyou,whichis:whatdoyouseeas…Iknowyou’reclosetoalotoflendersandreallyclosetoalotofpeopleinthedistressedmarketplace,butwhatdoyouseeasthebiggestchallenge,really,that’sfacingbankstoday?

KenHecht: Well,they’vegotthissituaPonwherethe…theassetsthatthey’veloanedagainst,ofcourse,havedeclinedinvaluetovaryingdegrees,andthey’vegotissuestodealwith,andthey’rejustreallytryingtosolvetheseissues.So,oneoftherealtrendsrightnowistoreally,if…iftheborrowereitherhasequity,orhasaplan,orhasafriendwithequity,theycanputmoremoneyintothedeal,theycanrewritetheloan,andinsteadoftheloanbeinginwhat’scalled,“nonaccrual,”itcanbebackintothegoodcategoryofloans.So,that’sreallytheirprimaryobjecPve.And,somePmestheborrowermaynothavetheequity;theymaynothavetheabilitytogettheequity,andifthat’sthecase,thenthey’reprobably…thebanks,intheirfirstinstance,aregoingtowanttosellthedebt.Ithinkthatthat’stheireasiestandquickestsoluPon—toletsomeoneelsedealwiththeproblem—and,that’s…ifyoulookatitlikeastheNavySeals,MarineCorps,thentheArmyshowsup…


KenHecht: …we’reintheNavySealpart,wherethat’sreallytheirfirststopof…ofpotenPalsoluPons;iftheycan’tsellthedebt,thenIthinkthattheyarefacedwithtakingbacktheproperty…


KenHecht: …anddealingwithalltheissuesthatcomewiththat.


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KenHecht: In…and,thisisallwithinanenvironmentwherethey’retryingtokeeptheirPer1capitalraPosup.


KenHecht: So,theirPer1capitalraPoisdecliningastheyaccruefortheselosses,andthen,IthinkthattheyconPnuetoaccruefortheselosses.Andthebank,then,cangetweakerandweakeronpaper,anditputsmorepressureonthemfromthegovernmenttoincreasetheraPos.So,they’re…they’rebetweenarockandahardspot.

BrechtPalombo:: Right.Now,IknowyourprimaryfocusisnowacquisiPon—and,Iwanttotalkaboutthatinaminute—but,justtostayonthechallengesfacingthebankstoday,ifyouwereworkingforlenders,whatwouldyoubeadvisingthemtodo,asageneralstrategytoday?

KenHecht: Iwouldbeadvisingthemtoreallyhireconsultantsarevaluead‐oriented,andwhoarecapitalpreservaPon‐oriented,andtheyshouldbethinkingaboutpreservingvalueandenhancingvalue,butonthelow‐lyingfruitbasis.Weknowthatthere’s…nobankisgoingtoretrofitanenPre100,000‐footbuildinganddoacompletelease‐up;thatwouldbeararebank.


KenHecht: But,there’snoreasonwhyyouwouldn’tgetconstrucPonesPmates,makesureyourpermitsaresPllineffect,perhapsgetacoupleofleGersofintentsignedwithtenants;dothingsthatdon’tcostmuchmoney,butthatcanhavesignificantreturnforthelender.Ifthere’sthreemilliondollarsofupsideonsomedealaZersomedeveloperspendsyearsandmillionsofdollarsincapital,ifthere’sthreemillionthere,wellthebank—Idon’tthink—isgoingtogothrougheverythingithastogettothatthree‐million‐dollar‐“profit.”But,iftheycanfindcertainlow‐lyingfruitareasbydealingwiththerightprofessionalsthat,perhaps,theycangetfivehundredthousanddollarsofvalue…


KenHecht: …and,increasethevalueoftheexisPngpropertybyfivehundredthousanddollars.So,it’sreallypu[ngoutveryliGlemoney,


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butjustbyreallyknowingwhatthey’redoingandposiPoningthepropertycorrectlyforsale.

BrechtPalombo:: Right,okay.And,IknowI…Isawyouspeakaboutthisrecently—infact,weprovidedaliGlebitofthedata—but,Ithoughtthatyouhadalotofinsight,andactuallywentmuchdeeperonthedatathanjustwhatweprovidedyou.But,intermsofaforecastasyoulookout,whatdoyousee,when?

KenHecht: Well,itreally…alotofthiswholegameisdependentuponwhenloansexpire.


KenHecht: Whenisatermofaloan?So,ifsomeonedidaten‐yearloanintheyear2000,thenthatloanisupintheyear2010,whichwouldbenextyear.So,alotofthiswholegameisaroundwhendotheseloansexpire?And,so,whenyoulookatthedata,you’llfindthat—inthenearterm,rightnow—therearealotofbankloansexpiring.


KenHecht: And,thenasweproceedthroughtheyearsupunPl2017,you’vegotmoreandmoreWallStreetCMBSloansexpiring.So,rightnow,Iseeit…ifwelookatintermsofwaves,thefirstwavetodayisreallyinthecommercialbanks.And,whendothoseloanscomeup?And,somePmesthere’s…thereareproblemscreatedwellbeforealoancomesup,ofcourse,inmanycases,becausethere’seithervacancyorcovenant_____(0:17:40.4)ofsomesort.But,let’sassumeitgoesfull‐term,totheexpiraPonoftheloan;oZenPmesthereis…somePmesmillionsofdollarsofnew,freshequityneedtobepumpedintodealstogetthatloantobeconforming,ortobringinotherkindofdebt.So,thePmingis…I’dsay,between…inthenextcoupleyears,Iwouldsaythatit’sreallygoingtobelargelyamarketwherewe’reallgoingtobedealingwiththecommercialbanks,andthenrampingupwithinthatwouldbetheexpiraPonandavailabilityofcommercialmortgage‐backedsecurityloans,whicharethe…theWallStreetloans.


KenHecht: Butthat’sa…that’sasecondwave…



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KenHecht: …inmyopinion.

BrechtPalombo:: Okay.Allright,well,Iknowyou’rebusy,butIwanttogetintojustonefinalthing,whichis…whatkindofdealsareyoulookingforoutthere?Whatkindofdealsareyoudoing?Tellus…paintthatpicturealiGlebit.

KenHecht: Well,we’re…we’vereallygotaterrificpartnershipputtogether;we’reverycapital‐richatthemoment,andwe’reveryexperPse‐rich.We’vegotthreekeypeoplewithinourpartnershipthathave…probablybetweenus…probablyknockingonthedoorof75to100yearsofexperienceinretailacquisiPon,developmentmanagement,etcetera,sowe’rereallyfocusedonretail.So,we’rereallylookingfor…whetherit’sdebtonretail,orpurchasingtheproperPesoutright,orjustbringingfreshcapitaltothetabletosolveaproblembetweenaborrowerandalender—anywherefromprobablyacouplemilliondollarsuptofiZeenmilliontotwentymilliondollars.


KenHecht: Now,we’llalsolookatotherproducttypes;we’reveryentrepreneurial.IthinkourexperPseis…oursuperexperPseisinretail;however,we’vegotgoodexperPseinindustriallanddevelopment,alsothere’ssomeself‐storageexperienceinthebackground.


KenHecht: Sothere’savarietyofdifferentproducttypesthatwewouldbeabletoactupon,giventherightcircumstances.

BrechtPalombo:: Okay.So,butyour…itsoundslikeyourprimarygoalistwoto20millionretail;you’ll…you’llbuythedebt—ordistressnotes—you’llbuythedeed,you’llbuytheactualproperty,or…also,itsoundedlikeyou’llbeanequitypartner?

KenHecht: Yes,thatiscorrect.

BrechtPalombo:: Okay,andwhereareyoulooking?Whereareyou…

KenHecht: AllthroughoutNewEngland.



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KenHecht: AllofNewEnglandisgood.WealsoliketheAlbany,NewYorkmarket.OneofmypartnershasexperienceasfarsouthasPhiladelphia.Ireallydon’tthinkthat’sreallygoingtobeourmain…Ireallythinkit’sgoingtobeNewEngland,andthentheAlbany,NewYorkareawouldprobablybetheextremiPes.

BrechtPalombo:: Yeah,okay,great.Well,Iknowyou’rebusy;whydon’tyoutellfolkshowtheycancontactyou,andthenwe’ll…we’llletyougo.

KenHecht: Well,great.Well,firstandforemost,myphonenumberatworkis978‐369‐5011,oryoucan,ofcourse,e‐mailat…e‐mailmeatKen@thehechtcompany.com.Youcanalwaysgotoourwebsiteatwww.hechtdev.com–that’sshortforHechtDevelopment,andHechtisspelledH‐E‐C‐H‐T.

BrechtPalombo:: Okay,great.Thanks,Ken,Ireallyappreciateit.Ithinkthishasbeenagreatcall,andyouletusbehindthecurtainonacoupleofthings,so…

KenHecht: That’sgreat.

BrechtPalombo:: …Ireallyappreciateit.

KenHecht: Well,Brecht,thanksalotfortheopportunity,andIhopetohearfromyousoon,andthenwhomeverelseImightbeabletohelp.

BrechtPalombo:: Yeah,mypleasure.Okay.

KenHecht: Thanksalot.

BrechtPalombo:: Don’thangup.

KenHecht: Bye‐bye.



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