This was an incredible event -- the Florida Second Distressed Real Estate Symposium. I moderated one panel discussion on which Stephen Rosenberg, member of the North Carolina Banking Commission and I debated the impact of the shadow inventory on absorption, sales prices and rental rates.

1. By:
Scott L. Podvin, Managing Director
The Crest at Waterford Lakes, LLC
spodvin@post.harvard.edu
www.TheCrestLife.com
Tel: (305) 793-5762
Fax: (305) 665-3971
Scott L. Podvin: 2nd Florida Distressed Residential Real Estate Symposium

2. Capital Market Conditions Drive Outlook
• EU, as whole—27 countries
in all, 12 of them using local
Severe dislocations across
currencies-- faces 1st
most parts of the credit
recession & are lending less
system – not limited to real
estate • UK appears most vulnerable
with the twin problems of
• Limited availability of debt • Borrowing becomes
having the most highly
capital increasingly difficult
indebted consumers and
and more costly
• Abnormally wide spreads business services sector
• Japan’s Aozora Bank,
• Securitization trusts hold $1.5T • Germany plunges into
1st major Japanese
of subprime and alt-A loans, recession after a steeper-
bank to forecast a net
$400B of which are delinquent than-expected 0.5% fall in
loss for the full fiscal
economic activity in 3rd Qtr
• Heightened risk of maturity year, as Japan slides
• Italy sees 2d qtr of economic
defaults into a recession
contraction, while Spain • Global financial
• Dramatic reduction in
experiences its 1st qtrly tsunami batters Hong
transaction volume
contraction
2 Kong, as it falls in to
Scott L. Podvin: IMN’s 2d FL Distressed Residential Real Estate
recession

3. Buy a toaster and get a free Bank
Scott L. Podvin
IMN’s 2d FL Distressed Residential Real Estate Symposium, Dec 8-9, 2008
spodvin@post.harvard.edu

4. Lender’s Brace for Global Cooling
Spreads are
widening as
PRE-CREDIT CRISIS TODAY 2008
lenders seek
to ration MAX LOAN TO VALUE/
70%-75% 60%
LOAN TO COST
capital for
the year MIN DEBT SERVICE
1.05x 1.20x
COVERAGE RATIO
Loan
NOI UNDERWRITING Borrowers Pro forma NOI Current in-Place NOI
proceeds
reduced by SPREADS 85-125 bps 250-350 bps
as much as
Sized using
LOAN PROCEEDS
30% by Sized using Amortizing DSCR
I/O DSCR
tightened
standards 3 Years I/O on
AMORTIZATION 10 Years I/O
10 Year Loan
Much greater
Requires Structuring (holdbacks,
LOAN REQUIREMENTS
likelihood of Minimal
earn outs, TI escrows)
maturity
SYNDICATION RISK
defaults Underwritten, Lead Bank Lender Best Efforts, Borrower
(Large Loans)
MAC and
recourse are
back Scott L. Podvin: Florida’s 2d Distressed Residential Real Estate Symposium –
December 8-9, 2008
spodvin@post.harvard.edu
4

5. Recapitalizing the Banking System
Total losses now as big as the impact of RTC

There is a difference between a lender and an

originator
Desperately Seeking SWF

Scott L. Podvin
spodvin@post.harv

6. • Growth slows and region
may fall into recession
• Is it different this time or
is Asia in denial?
Obamanomics Sparks Hope?
• Warnings signs from Hong
Kong & Vietnam, slower
growth showing in Australia
and Japan, although China
and India forge ahead
Recession is here. How • Economic risks spike for
Germany, Spain, UK, Irelan
deep and how long?
d & certain ―emerging‖
• Housing markets plunge – no states
clarity yet as to whether we’ve hit
• ECB starts to ease, but
the ―bottom‖
more is needed
• Volcker puts on superman outfit
• BOE cuts rates by 1.5% to
at ULI
3% earlier this month
• Consumer confidence
• Europe to hit bottom? UK
plunges, as unemployment rises
to go V-shaped recovery?
to 6.5% -- highest level since
Spain in for a U-shaped
1994-- in October and may go to
recession?
8% by year end
Scott L. Podvin: Florida’s 2d Distressed Real Estate Symposium December
• Future growth: Is it a V, a U, a
8-9, 2008
double-dip or a frying pan? spodvin@post.harvard.edu
6

7. Year-Over-Year Employment Growth
METRO EMPLOYMENT MOMENTUM
Pockets of
strength in
Pacific
Northwest, T
exas and
South
Central
Weakness in
Industrial
Midwest, So
uthwest and
Florida
Illegals
leaving
Arizona in
response to
collapsing
housing
markets and Scott L. Podvin: IMN’s 2d FL Distressed Residential Real Estate
Source: AEW Research, economy.com
anti-illegal 7 Symposium, December 8-9, 2008
spodvin@post.harvard.edu
legislation

8. Housing Is The Lynchpin To Recovery
Scott L. Podvin: IMN’s 2d FL Distressed Residential Real Estate Symposium
December 8-9, 2008
8
spodvin@post.harvard.edu

9. Affordability Is Barely Visible: Long Way to Go
TARP not 70%
Percent Change From Minimum Affordability
going as
DET
planned? 60%
No Jobs, No
See next CLE
Appreciation
50%
(Trough-to-Current)
slide Prices Adjusting, Affordability Improving CIN
40%
IND
SAC
COU
WES
RIV
30%
Owners have LOS
FTW
SAN
benefited from Endless Land DEN
TAM KAN
elevated 20% LAS
FOT More Price Decline Coming STL
values, although PIT
ORL MIN
NEO PHO NAS BOS
DAL
declining MIA SNT ATL
WAS CHI HOU
US
NEY SEA
10% JAC
SAY
precipitously in HON CHR COS
SAF
OAK AUS
BAL POT PHI
most markets NEA SAZ
SAJ
RAL
0%
-50% -45% -40% -35% -30% -25% -20% -15% -10% -5% 0%
Recent buyers are
in a very bad
Percent Change from Maximum Affordability
position in many
(Peak-to-Current)
markets.
Improved land being
dumped by builders
in most of the ―hot‖ Source: AEW Research, NAR
markets of the past
Scott L. Podvin: IMN’s 2d FL Distressed Residential Real Estate Symposium: December 8-9, 2008
few years
spodvin@post.harvard.edu
9

11. Lender’s Brace for Global Cooling
PRE-CREDIT CRISIS TODAY 2008
MAX LOAN TO VALUE/
70%-75% 60%
LOAN TO COST
MIN DEBT SERVICE
1.05x 1.20x
COVERAGE RATIO
NOI UNDERWRITING Borrowers Pro forma NOI Current in-Place NOI
SPREADS 85-125 bps 250-350 bps
Sized using
LOAN PROCEEDS Sized using Amortizing DSCR
I/O DSCR
3 Years I/O on
AMORTIZATION 10 Years I/O
10 Year Loan
Requires Structuring (holdbacks,
LOAN REQUIREMENTS Minimal
earn outs, TI escrows)
SYNDICATION RISK
Underwritten, Lead Bank Lender Best Efforts, Borrower
(Large Loans)
Scott L. Podvin
IMN’s 2d Florida Distressed Residential Real Estate Symposium, Dec. 8-9, 2008
spodvin@post.harvard.edu

12. U.S. Sneezes, World Catches
Pneumonia?
Spreads are widening as lenders seek to

ration capital for the year
 Loan proceeds reduced by as much as
30% by tightened standards
 Much greater likelihood of maturity
defaults
 MAC and recourse are back
Scott L. Podvin
spodvin@post.harv

13. What Should An Investor Do?
Don’t panic.
•
No one moves into and out of stocks and
•
bonds in response to valuation cycles;
don’t try to do it in real estate either.
Opportunistic investing has been very
•
difficult in recent years as the ―wall of
capital‖ overwhelmed risk pricing. There
will be more ways to earn opportunistic
returns going forward.
Scott L. Podvin: IMN’s 2d FL Distressed Residential Real Estate Symposium, Dec. 8-9, 2008
spodvin@post.harvard.edu
13

14. What Should An Investor Do?
Core funds, particularly newer vintage funds, will
•
begin to see more attractive pricing for acquisitions.
Existing core assets will begin to see the benefit of
•
slowing development as we move into 2009-10.
REITs in US, Europe and Asia take a beating during
•
2007-08. So, we are approaching the time for pension
funds, endowments, REITS, and other qualified
investors to rebalance/add to positions.
Scott L. Podvin: IMN’s 2d FL Distressed Residential Real Estate Symposium

December 8-9, 2008

spodvin@post.harvard.edu


15. 2009 is Going to be
Painful for Many
Source: Cartoonbank.com
Scott L. Podvin: IMN’s 2d Distressed Residential Real Estate
Symposium, Dec. 8-9, 2008
spodvin@post.harvard.edu

16. Development models
“Our vision is to become the premier innovative
property developer in Florida‖
While we focus on large-scale mixed-use LEED certified communities, primarily
of the following types:
Strategically located developments, located in the centre of a city, being large-scale
City-Core
and multi-phase developments typically consisting of residential, office, retail,
Development entertainment and cultural properties with a blend of historic restoration and modern
Projects architecture
Integrated Large-scale, multi-phase urban residential developments targeted at China’s growing
Residential middle and upper-middle classes, and which offer high-quality living conditions in
convenient urban locations with easy access to transport facilities
Development
Projects
Broken Condos There will be tremendous opportunities in busted condos and conversions. Likewise,
& Conversions there will be many projects that where construction is almost complete that we will be
able to pick up and complete the construction and reposition the asset to create a
or Partially
vibrant working and living community for working class people
Constructed
Communities
We are now focusing on distressed real Scott L. Podvin: IMN’s 2d FL Distressed
estate, opportunistic and value add Real Estate Symposium, Dec. 8-9, 2008
opportunities
spodvin@post.harvard.edu

18. Why Concern Ourselves with Non-
Core Assets?
Consider the explosive growth of RE-oriented private equity firms:

 Apollo
 Blackstone
 Colony Capital
 Ramius
 Bain Capital
 SAC Capital
Source: Kingsley Associates and Institutional Real Estate, Inc.

Scott L. Podvin: IMN’s 2d FL Distressed Residential Real Estate Symposium

Dec. 8-9, 2008

spodvin@post.harvard.edu


19. BLUE HORESHOE LOVES
VALUE-ADD/OPP PLAYS
Consider the dramatic tilt in institutional investors’ (2007)

allocations:
 $44.5 billion targeted to domestic real estate
 $36.3 billion to private real estate
 $24.7 billion to non-core (i.e., value-added and
opportunistic),
 $11.6 billion to core (i.e., stabilized apartment, industrial,
office & retail)
Scott L. Podvin: IMN’s 2d FL Distressed Residential Real Estate Symposium

Dec. 8-9, 2008

spodvin@post.harvard.edu


20. The Ultimate Hand: Busted Condos and Conversions-
Purchase Checklist
 Kick the dirt
 Talk to the maintenance crew
 Understand the reserve capacity
 Review and Revise Budget
Scott L. Podvin: IMN’s 2d FL Distressed Residential Real Estate Symposium

December 8-9, 2008

spodvin@post.harvard.edu


21. $$$SHOW ME THE MONEY$$$
Maximize Rental Income

 Run axiometrics
 www.rentometer.com
 How „Bout Them Comps
Create detailed Pro Forma based on foregoing variables and

reserve for contingencies
Scott L. Podvin: IMN’s 2d FL Distressed Residential Real Estate Symposium

December 8-9, 2008

spodvin@post.harvard.edu


22. :
Hidden Landmines
 Pre-foreclosure and
Foreclosure in various stages of
foreclosure process in
community and
surrounding community
 Foreclosed Units
 Short Sales

23. Pitfalls: What To Look Out For?
ARE YOU A DEVELOPER?
The definition of “developer” in the FL Condominium Act is

quite broad and appears to include any person or entity
who offers condominium parcels for sale or lease in the
ordinary course of business.
Rule 61B-15.007 of the FL Admin. Code provides that for

purposes of filing, there are three types of developers:
1) a creating developer,

2) a successor or subsequent developer; and

3) a concurrent developer.

Scott L. Podvin: Art of the Deal:

Distressed Real Estate Summit 2008

spodvin@post.harvard.edu


24. Did you unwittingly agree
to pick up the tab?
Whether a person or entity is a “successor developer” for filing purposes

has created much discussion over the past year or so within the
condominium development community.
Under the Regs, a person or entity is a developer for filing purposes if the

person or entity is offering condominium parcels for sale or lease in the
ordinary course of business (meaning most commonly, offering more than
7 parcels within a period of 1 year), unless the person or entity falls within
the exception set forth in Rule 61B-15.007(3) of the Regs (commonly
referred to as the bulk purchaser exemption).
Therefore, a lender or any other entity who simply offers and

conveys all units which it owns to a single purchaser in a single
transaction is not a developer for filing purposes.
Scott L. Podvin: IMN’s 2d FL Distressed Residential Real Estate Symposium

December 8-9. 2008

spodvin@post.harvard.edu


25. Walk Softly & Carry a Big Stick
The answer may become a bit more convoluted if the lender or

other entity, while offering all units to a single purchaser,
implements or continues a leasing program while in the process of
attempting to sell the asset.
It would be a reasonable position to take that the lender or other

entity is not a successor developer for filing purposes if all that is
being offered are short term leases which are not subject to the
actual filing requirements of Section 718.502 of the FL Condo Act
(entitled “Filing Prior to Sale or Lease”, which filing requirements
apply to offers of condominium units for sale or for leases for
more than 5 years).
This conclusion is not clearly addressed in the FL Admin Code and

as such may be challenged by the Division or members of a
condominium association.
Scott L. Podvin: IMN’s 2d FL Distressed Real Estate Summit, December 8-9, 2008

spodvin@post.harvard.edu


26. HOA issues – Due Diligence
Review recorded Condo Docs and understand all CC&Rs

 Foreclosure Sale Trigger Turnover Requirements
 Lender Liability
 Lender/Bulk Purchaser Required to Register with DBPR, if only
intent is to lease up and operate units
 Pension Fund/Endowment/Bulk Purchaser Responsible for
Budget Shortfalls
 Hedge Fund and Private Equity Liability for Warranty Claims
 Rental restrictions
 Special assessments
Scott L. Podvin: Art of the Deal:
Distressed Real Estate Summit 2008

spodvin@post.harvard.edu


27. HOA issues – Due Diligence
Perform detailed review of Association financial records

and minutes from all Board and member meetings
 Adequacy of reserve funds?
 Delinquent HOA payments?
Any legal claims or threatened legal causes of action

against Association?
Scott L. Podvin: IMN’s 2d FL Distressed Real Estate Summit

December 8-9, 2008

spodvin@post.harvard.edu


28. Legal Issues
Negligent Conversion – Liability for not making proper repairs prior

to resale of Condo units
 i.e., known / should have known of construction defects, etc.
Fiduciary duty to Association

WARRANTY OBLIGATIONS UNDER THE ACT

TURNOVER OF THE CONDOMINIUM ASSOCIATION

OBLIGATION TO PAY ASSESSMENTS

Assignment of contractual rights from original converter

 i.e., claims against builder or architect
Indemnities provided to original converters still in place?

Scott L. Podvin: IMN’s 2d FL Distressed Real Estate Symposium

December 8-9, 2008

spodvin@post.harvard.edu


29. Real Estate Tax Issues -
Concessions Available?
Given the anticipated discount on purchase of individual units, how will

local Property Appraiser value the unit?
Local assessors under pressure to reduce assessments as little as possible and

as slowly as possible. To do otherwise would spell bankruptcy to the
communities in question regardless of the legality of their position.

30. Set Your Expectations Reasonably
For example, in year 1, Buyer purchases busted condos for

$75,000, but prior developer sales averaged $300K. What value
will tax assessor use in calculating real estate taxes?
20-33%
It may be possible to obtain a reduction of in YEAR

2, although greater reductions often can be achieved by appeals
litigation.
On the flip side of course, there are issues of cost, timing, and

unpredictability when litigation ensues not to mention attorneys fees.

31. So, How Should I
Price Non-Core Real Estate:
identify the components of asset-level

returns,
 understand the impact of financial
leverage,
 examine the effects of transaction
costs, and
 examine the effects of JV structures.
Scott L. Podvin: IMN’s 2d FL Distressed Real Estate Symposium

December 8-9, 2008

spodvin@post.harvard.edu


32. Pricing Non-Core Real Estate
Ventures: Conclusions
Understand how the property’s return is to be

generated (e.g., initial cash flow yield, growth in
cash flow and/or cap rate compression).
Understand how financial leverage alters the

risk/return profile.
compare the non-core property’s unlevered

risk/return profile to your alternatives (core and
non-core real estate).
Be mindful of the “drag” of transaction costs.

Scott L. Podvin: IMN’S 2d FL Distressed Real Estate Symposium

Dec 8-9, 2008

spodvin@post.harvard.edu


33. Post-Closing Issues for Purchaseing
Fractured Busted Deals
Organize maintenance providers

Schedule necessary repairs

Identify preventative maintenance opportunities

Change locks on all units not currently occupied by owners /

tenants
Arrange Leasing / Property Management duties, whether in-

house or third-party company
 If in-house Leasing, make sure all protections in place
regarding tenants (i.e., application form, background
check, security deposit, lease agreement)
Scott L. Podvin: IMN’s 2d FL Distressed Real Estate Symposium

December 8-9, 2008

spodvin@post.harvard.edu


34. How Do I Structure
The Deal – The Art
and Science
Scott L. Podvin: IMN’s 2d FL
Distressed Residential Real
Estate Symposium, Dec 8-9,
2008--spodvin@post.harvard.edu

35. Basic Characteristics of
Equity Investment
Shares in profit with NO Guaranteed return

Finances the riskiest portion of the capital

structure
More control over decision making

Equity Investor has less protection in event of

bankruptcy
Expected Equity Investor Return is Higher Than

Mezzanine Debt
Scott L. Podvin
IMN’s 2d FL Distressed Residential Real Estate Symposium
spodvin@post.harvard.edu

36. What to Look for in an Equity
Partner
Experience

 Skills
 Contacts
 Practical problem solving
 Reputation
 Team
 Capacity
 $$ Balance Sheet $$
Scott L. Podvin
IMN’s 2d FL Distressed Residential Real Estate Symposium
spodvin@post.harvard.edu

37. Alignment of Interests:
Equity Source & Developer
Fund Objectives

 Fund Life
 Leverage and Financing
 Guarantees
 Management Style and Control
 Tax Considerations
 Dealing with Unexpected Issues
Scott L. Podvin
IMN’s 2d FL Distressed Residential Real Estate Symposium
spodvin@post.harvard.edu

38. Key Issues in Negotiating an
Equity Agreement
Controls

 Define Major Decisions
 Key persons
Performance Standards

 Economic
 Non-Economic
Economics

 Promote structure
 Management & Other Fees
Buy-Sell – Many variations of ―shot-gun‖ and ―ROFR‖

Scott L. Podvin
IMN’s 2d FL Distressed Residential Real Estate Sypmosium
spodvin@post.harvard.edu

39. Joint Ventures:
Some Observations & Thoughts:
Like leverage, JVs are neither good nor bad.

 Like leverage, JVs reshape the investor’s
return distribution
 Unlike leverage, the JV concern is how to:
 Protect the investor’s downside
 Motivate the operating partner to act
optimally
Scott L. Podvin: IMN’s 2d FL Distressed Residential Real Estate Symposium
December 8-9, 2008
spodvin@post.harvard.edu

40. JVs impose additional costs:
Monitoring and supervision,

 Additional legal complexities,
 Issues of control,
 Risk of a “bad” partner, and
 Operator’s “promoted” interest.
Scott L. Podvin: IMN’s 2d FL Distressed Residential Real Estate Symposium

December 8-9, 2008

spodvin@post.harvard.edu


41. Benefits of JVs include
Access to “off-market” deals,

 Access to asset- and/or market-
specific expertise, and
 Potential for excess risk-adjusted
returns.
Scott L. Podvin: IMN’s 2d FL Distressed Residential Real Estate Symposium

December 8-9, 2008

spodvin@post.harvard.edu


42. Joint Ventures:
Motivational Issues
If the operating partner has earned (but not realized) its promoted

interest, they tend to make “safe” bets in the future (i.e., they
become risk-averse), because of the fragile/volatile nature of the
promoted interest:
• For example, execute a lower-rate lease with a strong credit

tenant.
If the operating partner has not earned its promoted interest, they

tend to make risky bets (i.e., they become risk-seeking), because
the downside is completely underwritten by the investor:
• For example, execute a higher-rate lease with a weak credit

tenant.
Scott L. Podvin: IMN’s 2d FL Distressed Residential Real Estate Symposium

Dec. 8-9, 2008

spodvin@post.harvard.edu


43. Sharing Profits:
IRR Waterfalls
Objective

 Reduce downside risk to equity investor
 Increase upside potential to developer
Example

 First Tier—Developer Fee
 Second Tier—Return of Equity and 8% Pref
 Third Tier—50% to Equity, 50% to Developer Until Equity has
received a 15% IRR
 Thereafter, 40% to Equity, 60% to Developer
Summary—Higher Pref hurdles increase risk for developer/mitigate risk for

Equity
Scott L. Podvin
IMN’s 2d FL Distressed Residential Real Estate Symposium
spodvin@post.harvard.edu

44. Practical implication: How
To Strategically Structure
Preferences and waterfalls
If preference is too low, the incentive is too
generous.
• If preference is too high, the operator
either:
• Takes on very risky behavior, or
• Places its efforts on other projects (with
better likely outcomes).
Scott L. Podvin: IMN’s 2d FL Distressed Residential Real Estate Symposium

Dec. 8-9, 2008

spodvin@post.harvard.edu


45. The Market for Private Equity Funds:
Certain real estate funds use the

private equity model: “2 & 20”
 Promote is based on a (modified)
“catch-up” provision – see next slide
 Such funds look to generate 15-20%
returns to their investors
Scott L. Podvin: Art of the Deal:

Distressed Real Estate Summit 2008

spodvin@post.harvard.edu


46. Conclusions
When a JV structure is used, make sure that all the

costs (including the expected value of the operating
partner’s promoted interest) are identified; use the
investor’s expected return net of these costs to
identify favorably and unfavorably priced
opportunities.
Realize that JV deals create certain motivations in

the operating partner (an old economic axiom:
agents respond to financial incentives).
Scott L. Podvin: Art of the Deal:

Distressed Real Estate Summit 2008

spodvin@post.harvard.edu


47. Take Care of Your Family
Contact Information
Scott L. Podvin, Managing

Director of The Crest at
Waterford Lakes, LLC
www.TheCrestLife.com

spodvin@post.harvard.edu

Cell: (305) 793-5762

Fax: (305) 665-3971
