Background

 

For seven years REIS had been the property manager for a Class “A” rehabilitated office building in the CBD of Philadelphia. The building was developed as an office condominium, with most of the 28 units being leased and then sold to investors, often passive investors. The principals of REIS were investors in the building as well as property managers.

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With the depression in real estate during the 1990s many tenants left and the condominium units, unable to meet debt service or condominium charges, fell into deep default. The savings and loan association that issued all of the underlying mortgages went into receivership, and the mortgages became the property of the Federal government through FDIC. FDIC refused to expend funds to protect its investment, and the property began to fall into disrepair. Since the sale of the units in each case was heavily tax leveraged, and the investors had achieved the bulk of their returns through the tax benefits, they in many cases simply elected to do nothing.

 

Financial Restructuring

 

REIS realized the opportunity, and embarked on a process that exceeded four years to cause the FDIC to offer the mortgage notes at public auction whereupon we enlisted the help of a money partner. The partner, the real estate arm of a wealthy, old line industrial family, quickly saw the benefits of the situation and pledged funding for the note acquisition and the needed rehabilitation.

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At our urging, FDIC offered the notes at auction, three times. The first two were declared invalid, but on the third time we and our partner were successful in acquiring the notes at $.20 on the dollar.

 

Ownership Consolidation

 

Pursuing a strategy we developed, we immediately advised all unit owners in arrears of impending default proceedings, followed by foreclosure suits for over 60% of the building. Units were taken back, the building’s common areas repaired, and the reclaimed units were re-leased in a very difficult market. Because of the lower cost basis, however, leasing went quickly, and the property was returned to robust health.

 

Leasing, Asset and Property Management

 

We continued to be the asset manager for the investor, and for many years were the property manager and leasing agent. This arrangement has benefitted the investor and all of the tenants of the property, and REIS turned the building around to be positioned from a Class C building to a Class A- building.