Bruce Nelson, Situs

Bruce Nelson is the COO of Situs, the premier provider of commercial real estate advisory services. Situs was founded in Texas in the late 1980s to deal with the wreckage of the real estate crash during that era and has since grown to become the premier third-party commercial real estate loan advisory firm supporting the financial markets both in the US and Europe. Here, Bruce Nelson explains to Europe Real Estate why the recent Debussy DTC PLC CMBS transaction might kick-start the financing of challenging asset classes.

Tell us a little bit about your company and your services.

 Our unique platform offers a real estate centric end to end solution that can be strategically leveraged and customized to meet short-term project requirements or support long term operational objectives.

We partner with our clients to provide due diligence, credit administration, loan underwriting, loan portfolio and CMBS asset management, primary and special servicing, REO disposition, and staff augmentation solutions. One of our most innovative recent successes is providing financial institutions bespoke outsourced platforms to take on existing employees in wind down business segments and incorporate those businesses into our organization. This is a win/win for everyone.

We reinvent and reinvigorate the wind down business providing longer term employment for many of the staff members, our client enjoys the benefit of having an outsource provider with legacy knowledge of their books, and the new platform provides additional capability and capacity for other clients.

Situs has been in Europe since 2004 and now has over 50 staff members located in our offices in London, Frankfurt, Dublin, and Copenhagen. We are currently very active in evaluating the sale of debt portfolios on behalf of buyers and sellers, are a rated primary and special servicer, and are now among the top two or three third-party loan servicers in Europe.

Why is the recent CMBS on the Toys R Us portfolio significant for the real estate investment market?

The recent Toys R US securitization was significant to the market on a number of levels. On a macro level it represents the continuing evolution of CMBS structures to address some concerns by bond buyers that might inhibit their interest in buying CMBS bonds. As an industry, securitization is an integral and necessary component to the recovery of real estate markets. I think this transaction is notable because the parties involved work long and hard to create a structure that worked for this transaction and contains provisions that may be adapted as new standards on future transactions.

Generally, basic concerns centered on dealing with bond investors have to do with transparency, poor or limited reporting, and lack of consultation on major decisions. Some of the specific items contained with the transaction related to the servicing and special servicing that might be different from past securitizations include (i) significantly enhanced reporting on with report forms pre-agreed, (ii) the Servicer or Special Servicer is taking on additional responsibilities in potentially exercising certain functions if other parties fail to do so, (iii) the Servicer and Special Servicer have direct obligations to the bondholders rather than just the Issuer, (iv) the Servicer can be replaced easily if bondholders feel they are not doing an appropriate job, (v) there are restrictions on the hiring of certain financial advisors, (vi) the Operating Advisor and Bond Holders have more significant consultation rights on certain issues, and (vi) the Servicer and Special Servicer are restricted in the collection of fees from the Borrower and the Trust.

Other notable elements include the fact that the collateral in this securitization would be generally described as secondary assets compared to other recent securitizations and the structure included a Liquidity Reserve due to the lack of banks willing to provide Liquidity Facilities.

With the introduction of the Debussy DTC PLC CMBS transaction, hopefully we will see this kick-start the financing of other challenging asset classes, and show an evident recovery in the European securitization markets.

How has the global crisis affected Europe’s lending and securitization markets?

The challenges faced by the global economy over the last few years have had a profound effect on Europe’s lending and securitization markets. With approximately €550 billion of CMBS debt maturing in the next three years, banks pulling back in lending on CRE, and the current projected issuance of CRE CMBS being only 20% of its peak in 2006, the lack of debt is going to have a continued and significant impact on any recovery in the CRE space.

The good news is that we are seeing a number of new funds entering the debt markets, a record amount of capital (both debt and equity) is currently being raised, we are seeing very encouraging signs in loan and REO sales, and the new Toys R Us transaction, while somewhat unique, does reflect that the market would consider non prime-real estate as collateral.

All of these factors will help the market but until the banks work through their troubled real estate portfolios and more debt is generally more available for secondary properties we are still going to see a material funding gap. This is where we, as an industry, need to help resurrect, through structural improvements, the CMBS market in Europe.

You mention that “the shift will focus from prime assets to secondary assets”. What is the reason for this shift and why is it occurring now?

Simple math and economics. In our role as Trusted Advisor to the CRE community, we get calls virtually every week from new potential entrants to the European debt market. They all are looking for the same thing – prime assets located in London. While that represents a significant market component, it pales to the number of properties in the UK, Ireland, Germany, and other locations that need financing.

While the flight of capital to safety is certainly helping prop up certain primary markets, the liquidity gap for the rest of the market is profound. With the amount of capital being raised, investors will have to recognize that they may need to consider other options in order to achieve the volume and yield hurdles they need. We are already starting to see this occur with some of our clients.

In the US, CMBS was the perfect vehicle for such properties due to the desire to mitigate risk through loan portfolio diversification in terms of product type, geography, and lower average loan size. Our market would be best served if CMBS could be reinvigorated by providing financing for on such a basis. Naturally, the quid pro quo would be higher rates but the liquidity provided would be critical to seeing a market recovery.

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