Ann Arbor., Mich.-based McKinley has developed a reputation for taking over troubled assets from banks over the past few years. It recently handled a Bethany portfolio from C3 Asset Management, and it’s working on another 1,110 units from servicer Helios AMC. Add in another an old Babcock & Brown Real Estate Investments portfolio of 3,704 units, and you can see why McKinley CEO Albert M. Berriz is staying busy. Still, Berriz knows this ocean of distress will eventually become a puddle. So he sat down recently to talk with Multifamily Executive senior editor Les Shaver about his plans for growth after his servicing business slows.
MFE: What does McKinley do today?
Berriz: We have three fundamental parts to our business. One is the assets that we own. The second part is the workout business and asset business. The third is institutional long-term management, which looks a lot like the assets that we own. In today’s McKinley, the long-term management is between 5,000 and 6,000 units. Assets we own is about 12,000 units. The workout business is the sum of the two. On a quarterly basis, we will run 16,000 to 18,000 units. It fluctuates that much because we resolve things. We have a 1,000-unit deal in Indianapolis. We will resolve that in the next quarter. So that will go. The turn in that business is pretty close to 100 percent in one year.
MFE: Where are you seeing CMBS properties come from?
Berriz: You have to look at the market today as a tale of two locations and a tale of two environments. When you look at most of the CMBS distress that’s out there, it’s not in the primary markets. It’s not in the markets that most people cover. It’s mostly in C markets. That’s typically an area that’s not covered [by institutional buyers] because it’s not a sexy location and a sexy asset class.
MFE: Are there ways you are looking to add business once this infill of distress trickles out?
Berriz: The institutional, long-term management business didn’t exist in our portfolio three years ago. We’re managing for institutions, pension funds, and family offices.
MFE: What types of products are you seeing in the CMBS world?
Berriz: We don’t get anything decent. When we get something, it has to be fixed. It’s not just physical. It has something in addition to that. There are legal aspects to that. It’s never easy. We’re often appointed in an adversarial scenario where we’re fighting with the owner, we’re working with the court, and we’re doing what’s in the best interest of the property. It’s complicated. Walking in weekly and monthly to petition the courts for funds in a contentious environment is a common occurrence for us.
MFE: What are you buying for yourself?
Berriz: We just completed 3,300 units of fractured condo acquisitions in central Florida. They were all distressed and all short sales. They were 16 properties that we purchased. We already put 13 together. I have a rule of thumb that I will buy at least 80 percent of the project going in. So I would buy a percentage of the fractured condos, and I would systematically buy the balance [of the property] back until I hit 80 percent.
MFE: How hard is it to buy a condo building where you only own 80 percent of the units and start putting that back together?
Berriz: My first rule is to be able to buy 80 percent. I have broken the rule a couple of times and went as low as 75 percent. The second rule that I’ve always had is to only buy if the other 20 percent isn’t owner-occupied. I don’t want the political risk, and I don’t want the legal risk. We’re buying the other 20 percent from special servicers. So that 20 percent is essentially an investor portfolio.