ABL Advisor:  What should asset-based lenders bear in mind these days when seeking to dispose of real estate assets in their collateral pools, or for that matter, lending on real estate in the first place?

Schneider:  Once they have the property back, an ABL has to be very cognizant of the marketplace that property is in and they need to work closely with a service provider that will help them create a marketplace for that asset.

For example, even though we’ve noted that the industrial market is pretty healthy, you will want to be able to separate your particular property from the rest. That’s about implementing a sales process that casts the widest net possible and creates the greatest interest in the property. Ultimately, that’s what this game is about. Just putting a sign up in front of a property no longer cuts it … you need to have a multi-pronged approach and a lender needs to be creative in how to market that property.

Nagrani:  If you consider the traditional spectrum of the different types of collateral – inventory, accounts receivable, machinery and equipment and real estate – real estate is often the “slowest kid in the class.” It’s relatively illiquid and it’s important for the lender to understand the following points: First, when they get an appraisal, have they asked the appraiser to value the property assuming there’s a tenant in the property? Or, as is more likely the case when they take the asset back, is it valued with no tenant in place and have they asked the appraiser to look at the residual value of the real estate?

The second thing for an ABL to consider is rather than lending on the property initially -- or keeping it as “boot” collateral -- does it make sense to bring in a real estate investor and consummate a sale/leaseback transaction to improve the capital structure and provide more bang for the buck to the borrower? The third point to consider is whether to take the asset back if there are any known or perceived environmental issues involved. An alternative to a foreclosure in this type of scenario may be to find an opportunistic real estate group who would be willing to purchase the ABL’s term loan outright and thereby avoiding the process of having to take the asset back and being in the chain of title. 

These are some of the issues where a group like Hilco Real Estate can come in and bring solutions to the table.

Schneider:  The last thing I would add is this adage that I oftentimes use: “Nothing good happens to a vacant building.” ABLs need to be fully aware of what they are getting into by acquiring or taking control of a property. There are many issues that need to be addressed including appropriately “mothballing” the building, arranging for proper security and utilities and making sure the property is buttoned up properly to preserve the value of the asset. Lastly, as a borrower/tenant vacates the building, it’s crucial for the ABL to pay heed to ensure that there’s no damage resulting from the removal of machinery and equipment.