Schatz Investments LLC is a Chicago-based alternative investment firm established to identify and purchase distressed real estate assets. Schatz Investments is an affiliate of Schatz Development, a real estate development firm with a 60-year tradition of building design-driven residential, commercial and hospitality projects.
What We’ve Done
Having concluded in February 2008 that the Chicago real estate market was not likely to recover from the slowdown that began in the second half of 2006 (at least not anytime soon), Schatz Investments identified more than a hundred failing or canceled condominium, hotel, and adaptive reuse development projects. For each project, we assembled a vast array of data points, including original acquisition prices, capital stacks, loan-to-value ratios, loan balances, maturity dates, zoning restrictions, and mechanic’s and architectural liens. Plugging this information into our own proprietary development models, we produced updated site appraisals based on long-term holds at opportunistic annualized returns and, if feasible, intermediate-term income-producing opportunities. These internal appraisals considered such external factors as the amount of unabsorbed inventory in the relevant neighborhood, the number of potential future development sites near the failed project, the highest and best uses for future development based on realistic projections of local economic demand, and the cost of debt, mezzanine, and equity capital in both the existing and recovered markets. Through aggressive outreach, we established favorable relationships with the workout groups at many of the financial institutions whose loans were collateralized, directly or indirectly, by the affected projects.
What We’ve Found
Throughout 2008 and into early 2009, most lenders holding acquisition or construction loans (comprised largely, though not exclusively, of regional banks) declined to sell their “paper” at a discount to par value. Instead, they extended maturity dates, instituted foreclosure proceedings, took deeds in lieu of foreclosure, or otherwise prolonged their ownership of the loan or underlying collateral. By mid-2009, some lenders began expressing a willingness to sell loans at a discount to par value, albeit at a “slight” discount. Todate, however, the bid/ask disparities remain substantial.
With respect to the Chicago condominium market, we believe that substantial product will remain available for absorption even after market demand resumes -- an event we do not anticipate for several years. The existing glut of inventory and the unexpectedly high number of investor-owned units, combined with restrictive underwriting standards, decreased leverage, and continuing economic uncertainty will (in our opinion) continue to exert downward pressure on prices and ultimately cause lenders to dispose of acquisition and construction loans (or REO’s) at steep discounts to par value. We intend to capitalize on lender liquidity needs by presenting opportunistic offers when the time arises.
What We’re Doing
At Schatz Investments, we continue to seek distressed-asset investment opportunities and have expanded our efforts to include bulk condominium purchases and income-producing commercial properties. In the commercial sector, we have mapped several Chicago neighborhoods on a block-by-block basis and used our access to public records to identify properties purchased during the boom years in highly-leveraged transactions financed with short-term debt. We believe that impending maturities, combined with little or no opportunity for refinance, will cause existing lenders to either extend their loans or declare defaults, both creating distressed acquisition opportunities -- the latter perhaps more quickly than the former. With office vacancies rising and landlords incented to lower their asking rents, however, we believe that the “amend to extend” approach merely “kicks the can” in a climate of declining asset values.
Schatz Investments will commit its own capital alongside the capital raised from equity partners, which include institutional funds, family offices, and high net-worth individuals with an appetite for opportunistic real estate investing.
If our investment strategy is something you would like to know more about, we would be happy to discuss our perspectives on the local and national markets. Please feel free to contact us for additional information.