How Receivers Help Guide Successful Office-to-Residential Conversions

Steve Katz 

Hi everybody, and thanks for taking time out of your schedule to listen into our Hilco Global Smarter Perspective podcasts. I’m your host, Steve Katz. And this might be your first time with us. If so, welcome. We’re really glad that you could tune in. Today we’re speaking with Mitch Vanneman. And Dan Miggins about a bit of a real estate conversion phenomenon that’s taking place in major metropolitan areas around the country right now. It’s no secret that there’s quite a bit of office space sitting vacant or about to become vacant. So we’ll be discussing that as it pertains to TIF funded office to residential conversions. And more specifically, the role that a court appointed receiver like Hilco Real Estate can and really should be playing in that process on behalf of a lender. So Mitch and Dan, we’re really excited to dig into it today. Welcome to the podcast

Mitch Vanneman 

Good to be on here with you, Steve.

Dan Miggins 

Great to be here, Steve. All right.

Steve Katz 

Great. So I want to get us rolling. Dan, maybe you can explain first, what a TIF funded conversion is? Why we’re seeing it’s used so much these days in office to residential conversions, and also how it’s being used differently in various geographies around the country.

Dan Miggins 

Yeah, thanks Steve. So from a very high level, different cities recently have been taking initiative relative to implementing TIF funding relative to office properties. And for those that don’t know TIF funding is tax increment financing, which is a public financing method that is used as a subsidy for redevelopment, infrastructure, and other community improvement projects all throughout the country. The original intent of the TIF program is to stimulate private investment in a blighted area that has been designated to be in need of economic revitalization. And what’s pretty different nowadays versus how kind of TIF funding has been used in the past is office right? Office has been on everyone’s mind in every headline, on the news network. And everyone trying to figure out what are we going to do with all this vacant space because it doesn’t seem like people are going back to the office and work from home or hybrid models are here to stay. And so some geographies have been faster in terms of implementing resolutions using TIF funding for these office assets, while some have been a little slower. Right now, Chicago has the LaSalle street reimagined program, which we’re involved in, and Mitch is going to speak a little bit more about later. But New York has the M core program that I think came into initiation in January of 2023, San Francisco and California has passed or proposed a bill within the last month, and we are in June right now. And so depending on the city, depending on the geography depends on how quickly the program has been initiated. And for something like Chicago, what has been awarded. What’s unique right now about this situation is the supply and demand of the under supply of housing, and what’s needed from a day to day tenant of where you live, and the oversupply of Office stock. And this is probably the first type of reset for the office market that’s occurred to this capacity, I think, kind of ever in the office market. I know there have been different cycles in the GFC. And the RTC had different kinds of tenancy or occupancy but nothing at this magnitude or level before. So local agencies are doing their best to try and initiate these TIF conversion projects so that they can provide more housing. What’s also unique is that there’s a affordable housing component to a lot of these programs, specifically, the one in Chicago requires a 30% mix of affordable housing as well, which is defined as 60% of the median income. The other thing that’s pretty unique right now is who are the lenders, right? Who are the owners and how are they making their decisions relative to whether it’s to a point of receiver, whether it’s consensual foreclosure versus a non consensual foreclosure? And depending on the age or class of the office, is it a Class B office? Is it a C office is an A minus? Is it an urban core? Is it in the suburbs? All depends on A: whether or not that municipality will actually look to award TIF funding or start a TIF program and B: whether or not the market will have actually absorb that conversion. And so we’re already seeing right now, sort of the winners and losers shaking out. There are some lenders that are choosing to appoint a receiver, there are some lenders that are choosing to foreclose. And there are some lenders that may, depending on, like that same lender may choose one city that they believe is going to be a winning city or winning asset to foreclose on take title to, and then they’ll work it out in house for that same lender in a different city, can actually make a motion to appoint a receiver. And that’s where we can kind of come in and help them a little bit better, specifically to Chicago. And the matter that we were handling at 30 North LaSalle, there were only five applicants that have been awarded TIP funding thus far, there were three in the first round. There were two in the second round. And right now there was a change in the new mayor. And so the awarding has occurred, and whether or not the funds will be granted are to be determined at the moment.

Steve Katz 

All right. Thanks, Dan. You know, clearly these are very complex undertakings. So, Mitch, can you talk us through a bit about why it’s such a good idea to get a receiver involved in these efforts and the role that the receiver can play? And also how this really benefits the lender?

Mitch Vanneman 

Yeah, Steve, right, these versions can be quite complex, there’s a number of pieces that all have to fall into place. And one of those, once the TIF funds have been awarded, is that you want to make sure you select good partners. So that includes both architectural and construction firms, as well as a property manager to continue to manage the property on a day to day basis. On behalf of the Office tenants. One of the things that we’ve seen going through the tip application process and prior to conversion is that there’s a lot of easiness around the existing or there can be some uneasiness, I should say, around the existing tenant base in the office, they’re concerned about having a portion of the building as a residential facility as well. But what we’ve been able to do, and we’ve been able to alleviate some of those concerns is that a number of these buildings that are being converted from a portion of them that are being converted from office to apartment, have the ability to have separate entrances. So what you may do is you may take out an existing ground floor space, and then have that as an entryway for the residential while continue to use the existing residence or entry space for Office. And it would be separate elevator banks. So there’s really no interaction between office and residential tenants. The other thing that the receiver needs to focus on is the overseeing the day to day management. And that can be anything from the execution of new leases to granting tenant rent relief in certain scenarios, to collection of rents. And also, most importantly, the oversight of insurance coverage, making sure that’s current and up to date with the proper amounts of coverage. Buildings such as these that we’ve seen with the class B, class A Office product, really haven’t had the deferred maintenance issues that we would have seen, say in the great recession with B or B minus shadowing group retail centers. For the most part, there’s the buildings have been well maintained and maybe slightly dated, but we’re not experiencing life safety issues. And then Steve, actually, I’ll just turn it back to you at this point.

Steve Katz 

Okay, so I’m very interesting. And, you know, obviously, a lot of different roles, and time get very time consuming roles that I think, you know, could could take the focus away from, from what lenders we really need to be focused on, in in having Hilco as a third party administrator for that, and really can not only save time, but allow that focus to be where it where it needs to be on behalf of the lender. What about the sale of these properties? Is that part of the receivers role as well, it can also touch on the other roles that an experienced firm like Hilco real estate can play as a receiver beyond specifically office to residential conversions.

Mitch Vanneman 

Yeah. Let me take the second part of that question. First. Hilco, by and large, and our parent company Hilco Global, really at the base of it was we’re a valuation and monetization firm. So we have deep experience in valuing all kinds of assets as well as selling all kinds of assets. And so one of the things that as a receiver that I bring to the table by working with Hilco or working for Hilco, I should say is that we have the ability to come in And stalled problems in a different manner than most organizations are receivers may. And so that may have to do with value. Looking at how to value the property, is the property investor being condo’d out and sold as a portion of these, the property as multifamily units and the other portion of the property is Office? Or is it better off being sold off as a portion being office and multifamily all in one sale? So there’s a number of different ways we can look at that. And there’s no true really easy answer to that question. One of the mandates that are included, quite often in receivership orders the ability of the receiver to sell the property. And what that does is, it can do a couple of things for a lender, it allows the lender not to step into the chain of title. So there may be transfer taxes involved. It depends on the geographic jurisdiction, but it could be sale transfer taxes involves that keeps the lender from paying a transfer tax on a couple different instances. What it also does, if there’s construction defects, it keeps the lender out of the chain of title for being liable for any construction defects. Another interesting aspect that we’ve discussed with a number of our clients is with a spike in interest rates a little over 12 months ago, a number of these these loans, these properties that are distressed have well below market interest rates. And the ability to assume those loans if they’re assumable provides additional value to these properties. So on the disposition side of our business, that Hilco we’re currently marketing a couple of properties that that have below market rate, interest rates with a fair amount of remaining term and this is attractive potential buyers.

Steve Katz 

Yeah, listen, all great points. Mitch. And, Dan, anything else you want to add to that?

Dan Miggins 

Yeah, Steve, really appreciate it. Piggybacking off of what Mitch said, the basis of Hilco is the ability to value and monetize assets. And so that exists, both in terms of valuing the actual real estate asset, as well as valuing the loan, and with the… our team primarily engages with credit, that’s credit at a bank, and the special assets group, that’s credit amongst the CMBS world and special services, that’s private credit, including private equity funds, whether they are involved in securitization or not. And we have a team that can handle pretty much any problem that somebody has when they’re dealing with a borrower. And so I have a colleague who specializes in UCC foreclosure sales. And we’ve seen some of those occurring both within CMBS as well as private credit. We have colleagues that are bankruptcy experts. And so let’s say you have a borrower file and you don’t know what to do. Give us a call, and we’re happy to have a conversation about how we can work through that problem. If you’re looking to appoint a receiver, I think you’ve met Mr. Mitch, who can handle anything that you need there. And if you’re a bond holder, right, we have a whole Hilco Valuation department that can help you either contest being appraised out or staying within a position. The point is, is that a lot of the conversations that I’ve had with attorneys and lenders in this space are, how come I never heard of you guys before. And most of the time, it’s because we haven’t directly engaged the senior secured lenders in the space. However, what really makes us different is that we’re not just another brokerage, we’re not just another service provider, we play in the space that others don’t. And when the largest companies have problems, they always end up coming to us. And so for us, it’s more so you have a problem, we can help you solve it.

Steve Katz 

Yeah, well, I’m really glad that, that you chimed in on that, because I think that is a big point of differentiation for Hilco. And it just seems to be getting, you know, broader and broader in terms of the scope. And the experience that you guys bring to lenders and others, companies, lenders, anyone really who needs assistance, either in difficult times or in when things are running smoothly, and companies are healthy. So listen, guys, thanks for joining us and for helping the audience, many of whom I know our lenders to better understand a bit more about what’s happening, not only with these conversions right now, but also the role that receiver can and really should be playing in many of these situations. And I’m pretty certain that some of our listeners are going to want to speak with you guys, which of course is the goal of of these podcasts to a large degree. So can you do me a favor and share your contact info so they can reach out?

Mitch Vanneman 

You bet Steve, my phone number, this is Mitch Vanaman, and my phone number is 303-641-0175. And my email address is [email protected].

Dan Miggins 

And my contact information this is Daniel Miggins is 646-984-4580 That’s my cell and my email is [email protected].

Steve Katz 

All right, perfect. Thanks again guys and listeners. As always, we hope that this Smarter Perspective podcast provided you with at least one key takeaway that you can put to good use in your business or share with a colleague or client to help make them that much more successful moving forward. And remember, you can check out more great podcasts and articles featuring timely insights from Hilco experts like Dan and Mitch at HilcoGlobal.com/smarter-perspectives. Until next time for Hilco Global I’m Steve Katz.