Smart investors continue to prove that when it comes to troubled commercial real estate, it makes a lot of sense to buy defaulted mortgages from the bank, rather than wait for the bank holding the notes to foreclose.

Once you own the nonperforming notes, then you become the lender, you're in the driver's seat, and you can foreclose and take over the property yourself -- often on unbeatable terms.

A San Francisco-based private equity investment group showed how that's done late last month, when it acquired ten prime, cash-flowing apartment buildings in or near San Francisco for just fifty cents on the dollar.

Tribeca Companies, a privately-held investment group, acquired nine buildings in sought-after neighborhoods like Pacific Heights and the Van Ness corridor, plus another building in Burlingame -from international banking firm UBS, which provided the original financing on the properties for Lembi Group.

Until recently, Lembi was San Francisco's largest apartment owner with a 300 building portfolio and 8,000 units.

Tribeca took over $62 million worth of nonperforming mortgage notes from UBS for an all-cash payment of $31 million. Immediately after closing, Tribeca filed for foreclosure against Lembi - effectively giving it control of the ten buildings.

A spokesman for Tribeca told Realty Times last week that the deal illustrates the company's "opportunistic" strategy of acquiring high-quality assets in prime locations by targeting defaulted commercial notes that lenders are prepared to sell at deep discounts to face value.

Lembi Group, which defaulted on $300 million worth of loans during 2008, handed over 50 buildings securing these loans to UBS, which has since been attempting to dispose of them in package deals.

Ironically, Lembi's strategy during the past decade had been opportunistic as well: It acquired dozens of buildings, persuaded or paid tenants to leave, then renovated units to produce higher rental revenues.

The problem with Lembi's approach was that its purchases were highly leveraged --sometimes with loan to value ratios of 95 percent. UBS was its major financing partner.

When Lembi ran into financial difficulty, it reportedly stopped making payments , triggering its default problems with UBS.

A spokesman for Tribeca told Realty Times that the ten buildings have a 95 percent occupancy rate, and "are in great condition." Though market analysts assume Tribeca will hold the buildings as rental investments, the spokesman said the long-term strategy has not yet been made public.

Whatever that strategy turns out to be, though, this much is certain: Anytime you can get prime, cash-flowing real estate in a magnet city like San Francisco for fifty cents on the dollar - you've done exceptionally well.

Published: January 8, 2010

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consumer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.