November 2012

TheMReport — News and strategies for the evolving mortgage marketplace.

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Page 17 of 79

TAKE 5 Brent Truscott on Innovative Investment Initiatives As a principal with Bloomfield Capital, a finance firm focused on originating and purchasing commercial real estate loans, Brent Truscott offers a unique perspective on market regulation and housing's recovery. M // What nationwide invest- ment trends—both constructive and adverse—are you observing throughout the mortgage bank- ing industry? TRUSCOTT // As more homeown- ers are losing their homes and being forced into foreclosure, there has been a significant increase in multifamily occupancy rates. According to REIS, Q2 2012 multifamily vacancy rates dropped to 4.7 percent, a number not seen since 2001, and down from a re- cent high of 8 percent in Q1 2010. This significant increase in occupancy and the continuing high cost of new apart- ment construction have driven up the value of Class A, stabilized multifamily properties. That said, there contin- ues to be opportunities to acquire B and C class value-add properties at reasonable prices. We have seen that markets continue to be inefficient for fast-moving B and C property acquisitions in secondary and tertiary markets across the country for inves- tors willing to put in the time and effort to understand them. M // Among the wide array of new policies and regulatory changes, what critical initiatives have had the greatest impact on Bloomfield's business? TRUSCOTT // We're concerned about the current lack of available capital in the traditional commercial lending environment, yet it's also our biggest opportunity. Given the over- leveraging of overvalued properties pre-2008, there is a large valuation gap that will not be filled by organic value growth, increasing rental reve- nue, or inflation. The near-term expira- tion of nearly $2 trillion in legacy debt originated in the mid-2000s (at least half of which is presumed to be "under water") will require a broad-based deleveraging, for which there are limited capital providers today. This 16 | THE M REPORT represents a strong opportunity for Bloomfield to provide bridge and gap financing to these property owners and developers. Bloomfield's capital will see them through the deleverag- ing process and provide them with the time and ability to refinance at a later date with a conventional lender at more appropriate debt-to-value levels. M // What innovations and adap- tations are emerging within the company to address key issues in housing finance? TRUSCOTT // Today, there are sev- eral investment initiatives for our busi- ness, with the main focus being the origination of bridge loans to borrow- ers who are either taking advantage of a discounted payoff opportunity or buying real estate opportunistically. Beyond this, we are focused on buying notes directly, as well as providing financing to others seeking to buy notes. Bloomfield has also taken a strategic initiative to finance borrowers that are purchasing real estate assets through online auction platforms, such as We also believe that as the market continues to evolve, and in some cases improve, there will be more opportunities for JV equity and direct real estate investment. M // What are your "big picture" projections for commercial and residential real estate markets during the next 12 months? TRUSCOTT // Over the next year, Bloomfield believes the vast majority of secondary and tertiary real estate markets will continue to tread water and that bank capital for commercial real estate developers will be in limited supply. On the residential front, we anticipate that interest rates will most likely remain at or near all-time lows, but only to strong borrowers with high credit scores that fit the GSE borrower "mold." However, we still believe that single-family housing starts will remain well below recent highs and that many people will either choose or be forced into renting an apartment versus owning a home. As a result, demand for apartments will continue to be very high. On the supply side of that equation, we see a common scenario in which a multifamily developer that financed a retail project in 2005 now finds that the property is worth less than the face value of the debt owed on the asset, creating a need for capital to pay for tenant improvements and leasing com- missions. To add to the complexity of the situation, perhaps the existing lend- er has recently called a maturity default and is not willing to offer any extension or forbearance options. Since this loan may be non-recourse, and currently not covering debt service payments, there is little incentive for the operator to make interest payments out of pocket or inject a large amount of fresh capital into the project to "right-size" the loan and find a new conventional lender. It is common instances such as this that Bloomfield Capital has been able to step in and provide transitional financ- ing to preserve the asset. Traditional real estate lenders—banks, conduits, and insurance companies—are simply not able to provide the responsiveness and creativity these scenarios often demand. M // Specifically, what strate- gies is Bloomfield deploying successfully now to meet chal- lenges related to the provision of small-medium balance debt op- portunities and unconventional financing? TRUSCOTT // As a niche capi- tal provider, we are most likely to invest in opportunities where there's a strong likelihood of success for both Bloomfield and our borrowers. Recently, we've found that borrowers receiving discounted payoff opportu- nities on legacy debt have provided some of the most value-rich opportuni- ties for our lending portfolio. On the loan acquisition side of our business, we're finding that many banks and lenders are willing to package up and sell their small and medium balance real estate loans that have caused them some heartache over the past several years. Though most of these loans and borrowers are not "distressed," they may have been in workout or restruc- turing at the bank due to covenant or other technical defaults triggered by the market downturn. These loan acqui- sition opportunities provide banks with needed liquidity and allow Bloomfield to deploy capital into right-sized real estate loans with the ability to bring them back to a performing status. M // What technology tools are emerging in the current mar- ketplace to facilitate greater efficiency for investors? TRUSCOTT // Technology has certainly changed the way many real estate investors find and purchase their real estate investments. Online sales portals such as have become one of the de-facto ways in which large institutions dispose of not only commercial and residential REO assets, but also performing and non-performing real estate loans. Also, technology has allowed near real-time performance monitoring of real estate investments, which can allow both GPs and LPs immediate insight into the performance of a certain real estate asset or asset-backed security. M // In an unpredictable lend- ing and investing environment, what leadership initiatives are in place to ensure that Bloomfield remains future-focused? TRUSCOTT // Bloomfield is always focused on the immediate invest- ment and asset management tasks at hand, but we like to think that we're also keeping an eye towards what the future may bring. A good example of this is our historical focus on bridge capital and note acquisitions, and our current efforts to ramp up our JV Equity platform for both existing and ground up-development projects. As the real estate markets slowly climb out of the hole and some conventional debt sources begin to re-emerge, we believe that more JV equity opportuni- ties will present themselves. Though JV equity is not the focus of our cur- rent platform, it's one of the ways in which we're working to stay as nimble as possible and keep looking towards the next market opportunity.

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