Andrew Farkas, chairman and CEO of New York-based Island Capital, has built giants in the past, buying troubled real estate limited partnerships back in the ’90s and eventually amassing 350,000 units of multifamily housing and in excess of 250 million square feet of office, retail, and industrial space. Now, it looks like he’s at it again. In March, his new company, through its affiliate C-III Capital Partners, bought Centerline Capital Group.
“With C-III, we are seeking to acquire real estate-oriented debt derivatives and to build special servicing and ancillary businesses to manage those,” Farkas said in a press release.
Farkas is not the only one who covets special servicers. Needham, Mass.-based CWCapital was recently acquired by New York-based Fortress Investment Group. Last year, Berkadia Commercial Mortgage, a joint venture between Berkshire Hathaway and Leucadia National Corp., bought Horsham, Pa.-based Capmark Financial Group’s North American loan origination and servicing business. And, to top things off, Miami-based LNR Property Corp. is seeking a $400 million recapitalization. Demand, including interest from investors such as New York-based Cerberus Capital Management and Warren Buffet, seems to be there for these servicers. In fact, CNN recently reported that “the biggest play in the future might well be CMBS investors trying to get close to these special servicers.”
Why the sudden interest in these firms? Because in many cases, these companies’ special servicing divisions are thriving, even as their parent companies aren’t. Acquiring special servicers, who come in and take over troubled loans made with commercial mortgage-backed securities (CMBS), could present Farkas and others with a significant opportunity to amass distress portfolios where others have failed to see traction. For instance, acquiring Centerline gives Farkas access to the servicer’s approximately $110 billion of loans across 81 assets. “Special servicing is a good platform for people who want to buy distressed assets,” says Michael Carp, head of Horsham, Pa.-based Berkadia’s asset management and special servicing business. (Carp emphasizes that Berkadia is a strict third-party servicer and not interested in buying assets.)
The numbers tell a more compelling story. If Multifamily Executive had included special servicers in its annual ranking of the country’s Top 50 Owners of multifamily units, the landscape would have been quite different this past year, according to information culled exclusively for MFE by New York-based commercial real estate research firm Trepp. That’s because, of the industry’s 18 primary special servicers, several would have placed in the top owners list—CWCapital, with 104,867 units, would have been No. 4; LNR, at 99,139 units, would have been No. 5; Midland Loan Services, a Pittsburgh-based PNC Real Estate company with 40,572 units, would have been No. 29; and Farkas’ C-III Capital Partners, with 32,194 units, would have taken the No. 35 spot. Overall, Trepp says the major servicers control 342,885 units.