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Ayres Buys Real Estate-Backed Portfolio at Fire-Sale Price

A San Diego firm has purchased a loan portfolio backed by distressed real estate properties in one of the first major deals among private investment funds, also known as vulture funds, trolling for bargains.

In a deal that closed July 24, Ayres Advisors LLC paid $44.2 million on a portfolio once worth $127.5 million from Central Pacific Bank in Honolulu.

The portfolio’s original value was based on $122 million paid for 16 loans and $5.5 million paid at auction for one property.

The 16 loans are backed by hundreds of parcels of land , including three condo complexes in Northern Los Angeles, unfinished building projects and undeveloped real estate.

The package also includes a foreclosed 14-acre parcel zoned for commercial and residential uses in Palm Springs that was slated to be an artists colony. It includes a former home of movie legend Greta Garbo, said Keith Horne, one of Ayres’ three partners.

“If walls could talk,” said Horne, who drove by the home and found it to be in good condition. “You can Google it and look down and see the main house, swimming pool and caretaker’s house.”

The deal essentially sheds Central Pacific of its entire residential holdings in California, apart from some revolving syndicate loans.

“That’s the idea,” said Clayton Gantz, a partner of Manatt, Phelps & Phillips, a national law and consulting firm that represented the bank on the deal.

Central Pacific has $5.7 billion in assets. By shedding its real estate, the bank can take the hit and get on with life.

Of the 16 loans purchased by Ayres, 13 were delinquent.

“Look, it’s no secret that there are a number of banks that would like to adjust their credit exposure to residential real estate in California or in other states to allow them to refocus on their core business and deliver value to their shareholders,” he said. “And selling assets is one way of achieving that objective.”

The bank, which posted an operating loss of $146.3 million last quarter, wrote down $94.3 million in good will “in the face of continuing decline in the California housing market,” according to filings with the Securities and Exchange Commission.


More Deals

The fire sale should be the first of many similar deals as banks bloated with bad real estate-backed loans shed their exposure.

Several private equity fund groups in San Diego have begun raising capital, but few have closed on large deals because prices appeared too high.

However, as the credit crunch drags on and the real estate market continues to fall, banks are facing more pressure to dump their portfolios.

“Like any other time, we finally had motivation from sellers that have to sell,” said Horne, who added that the firm has been hunting for such a deal for the past 12 months.

“A lot of banks are divesting because of regulatory pressure,” he said. “Other banks, after they clean up their balance sheets, might see opportunities for themselves.”

Like the savings and loan debacle of the mid-1990s, which saw hundreds of financial institutions go under, the stronger banks were able to buy up distressed assets and “make a killing,” said Horne.

“How many IndyMacs are out there in a smaller sense? I think we’ll certainly see more banks go under,” he said.

Horne said his group is searching for more deals like the one with Central Pacific, which they closed within a month.

“From signing the contract to closing, we did it in less than 30 days. We already have relationships with capital partners,” he said. “We would love another three or four just like this one, quickly.”


Work With Borrowers

Ayres plans to work with the borrowers to either restructure the delinquent loans or retain the property and prepare the land entitlements for the market’s eventual recovery. The properties are spread throughout California, and depending on their location and disposition, Ayres may end up sitting on them anywhere from three to eight years before selling the properties, Horne said.

In addition to the property in Palm Springs, the portfolio of loans are backed by assets in the upscale neighborhoods of Burbank, Studio City and North Hollywood, completed or nearly completed condominiums throughout Southern California, and nearly 2,000 residential lots in various stages of development in the state.

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