Crafting Stability in Chaos: How We Worked with Banks Post-GFC

Dale Wills

Last Updated: March 20, 2024

During the 2008 Global Financial Crisis (GFC), we, like many others, faced significant challenges caused by market conditions. Despite difficulties, we managed to maintain our success and profitability by continuing to build and sell assets through 2009 and 2010, following the wise words of the late great Warren Buffet by being “greedy” when others were fearful.

It was during this period that a regional Midwest bank began reaching out to us with a persistent interest in collaboration. Initially hesitant due to our own workload, we were focused on managing our existing assets and, initially, we did not entertain the idea of taking on additional challenges.

However, persistence paid off, and the bank's continuous efforts eventually convinced us to consider their proposal. We agreed to sit down with them and examine their portfolio. After understanding their situation, we returned with three proposals for partnership.

Our pitch was straightforward: leveraging our expertise with their financing support could create a mutually beneficial relationship. One of these proposals resonated immediately with them; they wanted us on board without hesitation.

Starting Small Has Real Value

To ensure that this potential partnership would be successful for both parties, we proposed starting small, working on just a few assets before committing fully. This 'dating' phase was crucial because it was imperative for us that any partnership be founded on trust and confidence.

Our collaboration began smoothly as we worked through the initial set of assets, developing and building effectively. The bank noticed our success and proposed expanding our efforts to encompass all their distressed assets—a proposal we gladly accepted. Our work together proved not only enjoyable but also highly profitable for both parties.

An interesting turn of events occurred when the bank underwent a routine federal audit—a process designed to protect consumers by ensuring banks are healthy and not overleveraged. Typically, when banks acquire real estate through foreclosure, they are required to set aside cash reserves relative to the asset values—an obligation that can strain their cash flow significantly.

Much to everyone's delight, upon reviewing these specific assets under our management, auditors questioned why they were still classified as distressed given that they were actively performing under our agreement and generating profit. This reclassification by federal auditors meant that vast amounts of cash previously locked in reserves could now be utilized effectively by the bank, freeing up significant capital and improving their financial position dramatically.

Through this experience, it became clear how valuable strategic partnerships can be during times of economic distress, not only for individual businesses but also for financial institutions struggling under regulatory burdens. Our ability to transform distressed assets into performing ones not only benefited us but also provided relief and opportunity for our banking partner amidst one of the most challenging economic climates in recent history.

Unlocking New Opportunities

Our successful partnership with the regional Midwest bank discussed above, unlocked a significant opportunity not only for us, but also for the banking sector at large. The bank, thrilled with our work, could now deploy millions of dollars previously tied up in reserves into lending and other ventures. Word of our expertise quickly spread within the small world of banking, leading to an influx of calls from other banks seeking similar assistance.

The landscape at that time was bleak; many banks were succumbing to the pressures of the financial downturn and being taken over by the FDIC. While we were open to forming partnerships, we exercised caution, preferring to align with banks that demonstrated strength and resilience rather than dealing directly with federal entities.

Over the next three to four years, we partnered with about a dozen different banks on their distressed assets. In each case, once an agreement was in place and we began working on their assets, they were reclassified as performing instead of distressed by federal standards.

This process showcased how creative collaboration—bringing together smart people with diverse experiences—could find solutions and turn opportunities into success stories. It was both fun and rewarding; it is amazing what can be achieved when you're willing to think outside the box.

One particularly interesting case involved a hard money lender that found itself in trouble when their borrower defaulted due to market collapse. This company had foreclosed on numerous properties that were then not performing well, prompting them to approach us for help.

They presented us with a portfolio containing 450 varied properties—from single lots to multiple-acre parcels and large buildings. After careful consideration, we proposed two options: either we could work out something similar to what we did with the banks or make them a cash offer if they preferred a quick exit strategy. They opted for the latter.

Closing on 450 properties within 30 days was an exhilarating challenge that required meticulous underwriting. One particular property eluded our attempts at valuation due to its obscure location; ultimately, we decided to assume its worth as zero in our calculations. However, after acquiring it along with others in the portfolio, we did manage to locate it and figure out its potential value.

We also worked with various kinds of real estate—from half-built structures and partially developed lands to raw grounds. One particularly memorable project included developing over 90 parcels from land initially intended for condos—highlighting both our adaptability and ability to thrive amidst distress.

During this period up until around 2015, there was little incentive for market participants to acquire new development properties since banks held so many distressed assets offering better returns. As the markets improved and these assets were resolved by financial institutions, around 2015-ish, we pivoted back into development business full throttle.

We successfully navigated through an era reminiscent of earlier economic challenges by staying flexible and responsive—the hallmark traits that saw us through from 2009 through 2015—and provided wins all around: for finance companies, banks, consumers buying developments from us, and certainly for ourselves as well.

Working With Banks

When we proposed our collaboration with the banks, we presented them with three different options. The first was a straightforward cash purchase, where we would buy all their distressed assets for immediate liquidity but at a significantly reduced price.

The second proposal entailed the bank providing some financing for us to develop these properties over time, holding onto the assets as they were gradually improved and sold. The third option, which ultimately won their favor, involved the bank providing 100% of the financing necessary both to acquire and improve the properties—offering them the highest potential return.

This arrangement meant that our company did not have to invest any initial capital; instead, the bank funded everything from incomplete building constructions to undeveloped land parcels. This was particularly crucial during a time when liquidity was scarce and banks were extremely cautious about lending. With 100% financing on both acquisition and improvement costs, we could move forward with projects that might have been unfeasible otherwise.

The banks saw this partnership as triply advantageous: they received returns on their loans, their assets shifted from non-performing to performing status, and they saw an appreciation in asset value as we progressed through development. Such deals are ideal when everyone involved perceives themselves as winners—and those are precisely the kinds of deals we strive for.

We didn't just sign agreements; we built partnerships based on mutual trust and confidence. The banks trusted in our expertise and fairness in pricing, while it was equally important for us that they supported our endeavors when needed.

During this period of collaboration, most assets we dealt with were located in Wisconsin and Minnesota. There were exceptions like some dealings in Florida, but primarily our focus remained within those two states.

The global financial crisis predominantly affected residential real estate with rampant overdevelopment leading to numerous vacant homes nationwide. Today's scenario is markedly different; there's a housing shortage rather than an excess, which changes the dynamics considerably.

Inflation adds another layer of complexity that wasn't present back then. Now we see housing shortages coupled with inflationary pressures making it unlikely for housing markets to experience issues similar to those during the global financial crisis. Homeowners today may be reluctant to move due to higher interest rates compared to what they currently hold—a stark contrast from previous years where flipping houses before completion was commonplace for quick profits.

A Market in Flux

In today’s market, the dynamics of real estate have shifted significantly. For instance, consider a homeowner with a $500,000 house looking to upgrade to a $700,000 one. With interest rates having more than doubled, the financial leap becomes daunting.

Consequently, many homeowners are choosing to stay put rather than move up, which results in lower turnover and fewer listings available for buyers. This scarcity in the existing home market is pushing buyers towards new construction as one of their few available options.

Yet even within this segment of the market, there is hesitation. Those who might have considered moving into new construction at that $700,000 mark are also staying where they are due to the higher costs associated with increased interest rates. These trade-offs significantly impact our approach to housing development and investment strategies.

Untapped Value in Office and Multifamily

Looking ahead at potential opportunities beyond residential real estate, we see office spaces and apartments as areas ripe for attention. A key factor in apartment investments is the capitalization rate or cap rate—a metric used to estimate potential returns on an investment property based on its income-generating ability.

Historically low cap rates have recently meant that investors accepted very low returns on such investments. However, with interest rates on loans used to purchase these properties also being low in recent years—often featuring balloon payments that come due after a set period—the scenario could become financially precarious if those interest rates rise sharply.

If an investor's return suddenly turns negative because their financing costs exceed their income from the property when it's time to refinance—well, that puts them in a challenging situation where refinancing options may be limited or non-existent due to being upside down financially on the asset.

Our Near Term Forecast

Economists offer varying predictions about where interest rates are headed. Regardless of whether they rise, fall or hold steady, each outcome presents different kinds of opportunities for us—as opportunists focused on making things better and improving communities—to step in and be part of solutions that address these challenges.

We are prepared for distressed assets potentially coming onto the market due to unprofitability under new economic conditions. Our goal is always to be ready with solutions whether we face continued economic downturns or shifts toward recovery, whatever it takes to make a positive impact through our work in real estate development and partnership with financial institutions.

There has been an observable shift within office classes post-COVID-19; while Class A offices maintain demand due to their high quality and amenities, Class B and C offices struggle more significantly as remote work capabilities reduce the need for physical office space.

The difference between this downturn and previous ones lies not only in its underlying causes but also how we emerge from it will undoubtedly vary. Our strategy remains consistent: be agile problem solvers prepared for whatever comes next—even if predicting specifics is not our forte—and ensure we continue creating value through strategic partnerships and savvy real estate practices.

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