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Optimizing Recovery Values in the Face of 504 Liquidations Due to the COVID-19 Pandemic

By Steve Katz, James Keith (guest), Hollis Carter (guest)
Home / Perspectives / Optimizing Recovery Values in the Face of 504 Liquidations Due to the COVID-19 Pandemic

James Keith and  Hollis Carter join Steve Katz on the Hilco Global Smarter Perspectives Podcast Series to discuss optimizing recovery values in the face of 504 liquidations due to the COVID-19 Pandemic.

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Steve Katz  0:08
Hello again and welcome to the Hilco Global Smarter Perspectives Podcast Series. I’m your host, Steve Katz. Today we’re pleased to have James Keith, Managing Director of Hilco Real Estate with us. And he’ll be speaking with Hollis Carter, a 23 year veteran with a small business administration and a Hilco strategic alliance partner about a very timely topic, “Optimizing recovery values in the face of a wave of 504 liquidations that many industry insiders now believe may arise from the Coronavirus pandemic.” Just a little quick background, Hilco Real Estate is a unit of Hilco Global, providing strategic advisory and transactional services that minimize costs and maximize the value of real estate assets for both healthy companies and companies in transition. Since it’s inception over 25 years ago, the company has been involved in repositioning more than 35,000 leases, and then the disposition of over 200 million square feet of retail, industrial, and office properties. With that said, I’ll turn it over you, James.

James Keith  1:06
I appreciate it Steve, and Hollis and everybody that’s involved in the podcast. I appreciate your time today. As we start to get into this interview. I just want to let you know Hollis and I got introduced it was about 2007. I was running some foreclosures actually in South Carolina for a bank and I kept getting this phone call from a CDC and I was really confused by it. And after the foreclosure, which actually turned out really, really well for everybody involved, it’s then I was introduced to Hollis, he actually called me so about right there Hollis, I’m going to actually turn it over to you and you can reflect a little bit about how you took over in 2006 and what happened after that.

Hollis Carter  1:47
Okay thanks, James. I had been with SBA for 23 years and retired in September of 2014. Started with SBA in the Louisville Kentucky office back in around 1991. As James said, we got to know each other initially, back in around 2007.  I had been running the liquidation division, which pretty much consisted of me at that time at SBA Servicing Center at Little Rock. And we had a hotel deal up in Bardstown, Kentucky, that had gone sideways, the bank had initiated foreclosure, we were interested in trying to get something done on that property, although we were a little reluctant to bid at the sale, because there was a very large first mortgage ahead of us. So somehow, I got in touch with James, and discussed how we might approach this situation. And what we ended up doing or what James ended up doing was, he’s the one that actually did all the legwork. He got with the borrower, the borrower was cooperative and wanted to sell, got with a third party lender or the bank that was ahead of the SBA. Actually, they wouldn’t stop the foreclosure but they did agree to hit the pause button if SBA would agree to make some payments. So to make a long story short, we paid the loan current. James handle this as a private sale, property sold, and SBA got a recovery as I recall, upwards of $400,000. So, it far exceeded our expectations, and turned out to be a really, really good recovery on a loan that as I said, we had some concerns about it really did totally, really didn’t know what we might recover.

James Keith  3:30
SBA is very heavily involved in hospitality. And they really don’t want to take title to one of them simply because they don’t have the staff to operated it.  It just really, really worked out well with this. And I’m glad everybody was compliant. I think it was about a 75-80% recovery. The key to that fail Hollis and even today is really what we want to talk about is you know, I got into the deal. early enough, you brought me the deal early enough where I can actually communicate with the borrower, communicate with the TPL. Can you elaborate a little bit about some of the CDCs when they start seeing a troubled loan about the importance of being very proactive? Can you kind of open that a little bit?

Hollis Carter  3:32
Yeah, sure. I mean, I think with the SBA 504 program, of course, SBA is always in a junior lien position, always behind a substantial first mortgage. So given that, in many cases, particularly if the property was acquired in the recent past and the loan has not been on the books very long, we’re normally not gonna in many cases, at least not going to be in a position where if the thing does go bad, and the first mortgage holder moves to foreclosure we very well may not be in a position where we’re gonna be able to get it to sale. So timing is very critical in that if the situation is recognized early on, and I think more importantly, you bring in someone to take a look at the property we’ll also communicate with the borrower and see if perhaps something can be worked out before the thing gets to a worst case scenario where the third party lender is going to actually foreclose. And we’re looking at then at a bid or no bid decision. So I would say the best thing you can do is to be very proactive with these cases typically with what we may have coming down the pike here in the next year, to be very proactive, recognize these situations, don’t delay, get someone in to take a look at it, the whole liquidation process moving as soon as possible. They normally say your first loss is usually your best loss, so the quicker the stage the SBA reacts to these situations, the better the outcome is going to be.

James Keith  5:45
What I would like to ask you is, “What’s the first steps that a CDC does?”

Hollis Carter  5:49
Basically, there’s a couple of different ways that an SBA 504 Loan can end up in liquidation.  Obviously payment default on the SBA, the 504 Loan, but probably the most common thing that we saw was a payment default on what we call the third party lender loan that the first mortgage holder, there’d be a payment default, they would move the thing to foreclosure. As I said, SBA would then be in a defensive posture to have to determine whether or not they make a credit bid. So once the loan is put into liquidation by SBA and the CDC, the first step after you notify SBA is to buy back the debenture. That actually was the funding mechanism for that loan. In other words, SBA purchases this loan back from the secondary market. It becomes a direct asset of the SBAs.  The loan is placed into liquidation status and the very next step for the CDC with a matter of days is to submit a liquidation plan to SBA.  The plan is going to basically contain a kind of a synopsis or summary of the current condition of the loan, an estimate of collateral situation based on current information. But the most important step, I think, at that point is for the CDC to order an appraisal or a broker’s opinion of value. So the CDC SBA can get a good handle on what that property is worth, what what their course of action may be. Now, of course, SBA and the CDCs, first thing they would prefer to do would be to come up with some type of workout plan to keep that business going. And that is the primary goal in any liquidation of an SBA Loan. But again, if that is not possible, then the next step is for SBA to assume the defensive posture and do whatever they can to maximize recovery on the loan. That’s why that appraisal or BOV is so critical. And then once that’s received, the CDC would prepare a protective bid analysis, which is essentially a collateral analysis and then deduct all the liens cost, estimated cost, etc. to see exactly how much the equity net property on liquidation value basis.

James Keith  8:03
And Hollis, I got a question for you. When you took over in 2006, we had a recession. Can you kind of elaborate what happened in that 2008, ’09 and ’10? And how it caught really the whole United States upside down?  Tell us what happened there and what happended up there in Little Rock?

Hollis Carter  8:19
Sure James. That was a period of a few years that I’ll probably never forget.  As I said, I’d just taken over the liquidation function at the Little Rock Servicing Center in 2006. And then, of course, they had the financial crisis, financial meltdown, whatever you want to call it in 2008. And very quickly, things started going south with our portfolio. I’d say particularly hard hit were restaurant, hospitality in particular. And at the beginning of this, my staff was, I think it was maybe two people, myself and one other about the time we got through this and maybe 2010-2011, my staff built up to about maybe 10 people besides me. So what we really got into that I think we the CDCs need to really work to avoid what we may have coming at us here in the next 12 months is to be prepared for it. And to be proactive and to prioritize so as not to get overwhelmed. Back in 2008, the liquidation portfolio and Little Rock peaked at 650 liquidation cases totaling 350 million dollars. I think our peak was in 2011. And it was absolutely overwhelming that the SBA has such a small staff. There’s absolutely no way they can do it alone. There was no way that we could do it alone though, the experience I had was basically many days just putting out fires every day at work and pretty much going home at the end of the day and wondered what the world did I get done. So I think that we all learned what SBA and CDCs learned a lot from that experience where we were in a complete reactive mode, I would even go so far as to say that we missed several opportunities for recovery, simply because the volume of liquidation cases was overwhelming. We were late to get geared up for it. And the CDCs, in many cases, were not prepared for it and really didn’t have the experience to deal with it. So, I think we do have the advantage of that experience going into this potential recession or really downturn that we’re obviously going to get into. So, I would say the most important thing that I took from that experience was to be proactive, don’t wait. If you’ve got think you’ve got a problem. CDC should contact SBA make arrangements to purchase that debenture, and very quickly get someone out whether prior or someone like Hilco to get out and do a deal. They do let you know where you are on that property so we can get things moving and get the process moving. Whether it’s the workout or a liquidation. So just be proactive and get things moving as early as you can.

James Keith  11:20
And Hollis, as we wrap up, I got one more question for you in the area that we’re all facing and living in every day, which we’ve entered into an era we call COVID-19. It has totally affected every business in the United States, hotels and restaurants, daycares, you can pretty well name it. What’s your thoughts on how this might play out and government stepped in to help and you can kind of talk a little bit about that. But I’d like to have your final thoughts on that.

Hollis Carter  11:46
Sure, James. Yeah, I mean, you’re exactly right, the government did, through this Cares Act, effectively made six payments on 504 Loans. And that is all pretty much coming to an end this month. I can tell you that SBA has given approval for a pretty much automatic deferments through the end of this calendar year on SBA service loans. So those would be the 504 Loans, those would be loans that the interest and purchased and SBA has taken over servicing and then on the loan for the debenture is still out there at the CDCs have been given authorization to deliberately approve deferments through the end of the year. So I think at least from the standpoint of pressure from SBA on these 504 Loans, they bought the CDCs a little bit of time till the end of the year to kind of get prepared for what may be coming. So I think the important thing that I would stress during this three month period is that CDCs need to be in very close contact with their borrowers, they need to use this time to try to get current financials kind of analyzed where these borrowers are and how they may ultimately be affected by this pandemic crisis that is caused. So once we get into early calendar year 2021, they will be in a position to react quickly. As I said earlier, that’s key because if there is a flood of cases as we had in 2008-2009, perhaps there may even be a bigger flood any of the economist people that track this kind of thing are saying this could far outstrip what we faced in 2008-2009. So I always say during this next three months between now and the end of the calendar year, it is critical that the CDCs take a close look at their portfolio and try to identify which are the most vulnerable businesses, put them on a watch list.  All these CDCs do maintain watch lists and monitor those that they have their loans are doing again so you get they will be in a position to react very quickly, if and when those loans do default.

James Keith  13:55
Very good.  That’s great information to have Hollis.  For those that are joining us on the podcast are picking this up, we’re going to be doing several of these podcasts. Some of them will elaborate on the type of workouts, whether it be a debtor workout, which we got to talking about right here. Some will be actually operating a foreclosure for the SBA when that is to be utilized. And then the last is working through a bankruptcy. Steve, I’m going to hand it back to you and I appreciate it.  Hollis appreciate your time on this.

Hollis Carter  14:31
So very good, James anytime. Very glad to do it.

Steve Katz  14:35
Alright guys. Well thanks, James and Hollis for that great perspective for our listeners, I think during this challenging period. And for those certified development professionals, those from the SBA and others who joined us today if you’d like to learn more about proactively optimizing recovery values in the current pandemic environment, getting in touch with James and the Hilco Real Estate team would certainly be a good first step. James’s email is that’s And with that said, we hope that today’s Hilco Global 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. Until next time for Hilco Global, I’m Steve Katz.

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