In my latest interview with Mountain Capital Group (MCG) partner, Ellen Bellandi Alexander, I was really impressed not only with her understanding of her area of influence, but also with her ability to see the larger picture and incorporate others into it.

MCG is a private boutique equity lender providing Capital and Mezzanine Loans to real estate developers utilizing private equity sources. MCG provided about $200 million in private equity and Mezzanine debt for the development of real estate projects in California, Nevada and Colorado; funding the development of more than 6,800 housing units.

Since Mountain Capital’s inception in 1996, Alexander’s responsibilities have been mostly in the area of project due diligence and lending/underwriting and funding with her partner focusing on raising capital for developers who were building almost exclusively residential tracts, although MCG funded some value added apartments.

 After the market turned south in 2007, Alexander had to devote her attention from funding new projects to exclusively spending one hundred percent of her time attempting to restructure debt and equity not only their developers and their attorneys but with the senior construction lenders while attempting to quell investor’s apprehension concerning the declining value of their equity.

The impact of the troubled housing market has been devastating and beyond anyone’s initial comprehension of the problem. One of MCG’s major developer clients has filed Chapter 7 bankruptcy which impaired 34 properties and $560 million of bank debt.  Another one of their developers has walked from $200 million of bank debt and is in default and/ or foreclosed out on all its projects.  According to a recent distressed real estate conference it is estimated that there will not be one residential tract loan that will not have to be written down severely in the next 6 to 12 months when the FDIC is fully staffed and enforcing mark to market.  

In an attempt to negotiate with the banks and requesting them to modify existing loans for a long enough period of time for the market to rebound she encountered resistance.  She found that the banks were not in a position to take discounts due to their own impaired capital situation and could not extend the loan at all or past a one year period due to banking regulations. Most banks wanted a substantial principal pay down (from an already dying developer or now fearful investors who had already lost their initial capital) or did not understand the grim reality of what was going to happen going forward preferring to foreclose instead.  Some banks indicated that they would rather foreclose rather than modifying the loan and felt that they would not take a loss because they had a recent appraisal that indicated they were well capitalized. 

Another banker told her that they could not make any decisions as the auditors were running the bank. Other bankers told her they were selling the notes in bulk and were not going to deal on an individual basis. One Texas bank simply quit funding at 50% of its construction loan commitment which in turned caused liens which then caused the banker to declare the loan in default and foreclose on the project!  On another of her projects the bank indicated that it has received FDIC capital but still has not commenced with project funding. 

In short, the various scenarios do not bode well for a rebounding residential market.  This is in addition to the lack of buyer loans to move existing product that is out there and the abundance of bank foreclosed homes that are driving down pricing even more in certain markets.

Ms. Alexander says the problems with this route are exponential, as many banks aren’t staffed with experienced real estate work out lenders or REO personnel and therefore don’t have the time or the experience to manage the assets in house.  As a result many banks are facing vandalism, squatters and stolen materials from half-completed worksites and model homes. So many sub-contractors never received money from failing builders and as a result are hoping to receive some kind of compensation, whether honest or not. Unlike the recession in the 1990’s, our present situation is compounded by many other problems in every area of the economy.  The banks are already strapped for cash and appear to be at a standstill on which way to go.  Due to the potential for insolvency the bank cannot afford to throw more money after bad nor can they afford to write down the project. She adamantly believes that the situation is more dire than the general public knows.

A few months ago she had a scenario established with a lender who was willing to take a loss and continue with a building project hoping to recoup their losses in the future.  Unfortunately, the FDIC stepped in and took over the bank and now everything has been at a standstill for months. In the meantime, no surveillance has been established at the property and the copper wiring has been stolen and all the model furniture. They either don’t want to or cannot afford to pay the ongoing expenses of taking over and running a project.  This means as an example paying the $15 an hour for security or putting in an experienced receiver to manage the property or building out and selling or renting those homes in that phase. The alternative is to sell the project at a deep discount to a builder who can take it over for them.  Either way, the bank stands to lose millions now or at a later date.
 

Alexander is not waiting for the future to find her, but has plans for a new company to offer consulting services for repositioning projects. She admits that others are doing the same, but with her background, contacts and experience, she is confident it will be successful.

As far as the tools of the trade are concerned, Alexander says, "When the market comes back and we continue to work with developers, we will have them buy Tract-PIE so that we are all using the same software.  This will eliminate operator error as opposed to using custom designed Excel programs which are different for every developer. 

Tract-PIE’s effectiveness as a system, the ability to track actual versus budget and the ability to generate comprehensive management reports and the reasonable price and responsive service, make it the top software among its competitors today. " 

For additional information, you can visit www.mountaincapitalgroup.com  or contact Ellen directly at ellen@mountaincapitalgroup.com