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Distressed Asset Finance

Overview of Distressed Assets

What Are Distressed Assets?

Distressed assets are those that are undergoing some form of financial hardship. This may be due to the owner’s financial standing, such as a foreclosure, bankruptcy, or default, or due to the property’s mismanagement. Purchasers of distressed assets are often offered a substantial discount, creating interesting opportunities.
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Common Types of Distressed Assets

There are a number of different types of distressed assets, but the most common are:

  • Foreclosures: This is where properties have been repossessed by lenders and sold. These properties are often sold at a discount and may require substantial repairs.
  • Bank-Mandated Sales: In this situation, the owner voluntarily sells the property with the bank’s approval, often at a price closer to market value.
  • Part Complete Developments: Developments that have not been completed due to funding issues or planning constraints can be purchased below market value.
  • Underperforming Assets:Properties with low rental income, increasing vacancies, or poor management may be sold on the open market at a discounted price.

Common Causes of Distress:

  • Owner Mismanagement: This may be due to neglect or poor maintenance of the property.
  • Unpaid Taxes or Missed Mortgage Payments: This may result in the lender or HMRC repossessing the property or forcing the property to be sold.
  • Economic Downturns: A decrease in demand for property may leave the owner with a poorly performing asset.
  • Personal Reasons: Divorce or financial pressures can lead to a quick sale.
  • Planning Constraints or Construction Issues: Delays in the property development process caused by planning or construction issues can put the developer under financial pressure, leading to a forced sale.

  • When Distressed Assets Become a Financing Opportunity: Distressed assets become an opportunity when they are sold at a discounted price. This gives the new owner the chance to make a healthy return once they have repaired the property and sold it at its actual value.

When Distressed Assets Become a Financing Opportunity

Distressed assets become an opportunity when they are sold at a discounted price. This gives the new owner the chance to make a healthy return once they have repaired the property and sold it at its actual value.

Challenges in Financing Distressed Assets

Time Sensitivity and Liquidity Pressure

When it comes to distressed assets, there is almost always time pressure. This pressure either comes from the seller, who urgently needs the proceeds of sale, or from the buyer, who urgently needs to take advantage of a limited-time opportunity. While traditional lenders can often take months to arrange finance, the lenders we work with can arrange finance in a matter of days.

Valuation Uncertainty

There will likely be some uncertainty around the valuation of a distressed asset. This is often due to the difficulty in establishing a valuation based on forced-sale assumptions. Moreover, distressed assets may carry hidden risks such as legal encumbrances, poor construction, or low marketability. With this in mind, it is important to appoint a skilled valuer when valuing distressed assets.

Limitations of Traditional Lenders

Traditional lenders, although the most readily available and easy to access, are limited by very strict underwriting criteria. This means that they may not be able to underwrite distressed assets. As a result, there has been an emergence of specialist distressed lenders, most of whom we work with regularly.

Financing Solutions for Distressed Situations

Bridging Finance

Bridging finance can be arranged for the purchase or refinance of distressed assets, enabling both owners and buyers to take advantage of limited-time opportunities. Bridging finance possesses the speed and flexibility required in order to fully capitalise on a distressed opportunity.

Rescue and Refinance Capital

For owners of distressed assets, rescue and refinance capital can be arranged, enabling them to protect their investment and maximise their returns.

Transitional Capital Ahead of Sale or Restructuring

Silver Oak Capital is skilled at arranging transitional capital, enabling owners to enhance their property ahead of sale or restructuring, maximising sale value.

Key Considerations for Clients

Valuation and Exit Strategy

When presenting your case to lenders, it is important to have a valuation from a reputable valuer, as well as a certain exit strategy in place, as both of these will be heavily scrutinised by the lender.

Asset Management Plan

When purchasing a distressed asset at below market value, it is important to have a clear asset management plan in place that will increase the value of the property above its purchase price.

Risk Management and Downside Protection

A good risk management plan will help both the buyer and the lender reduce their exposure to risk. When presenting your case to a lender, it is important that there is a solid contingency plan in place.

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How Silver Oak Capital Can Help

  • Access to Specialist and Niche Lenders

    Our vast lender network enables us to source the best loan products from the best lenders in the market, providing our clients with cheap access to flexible loan products.

  • Experience Navigating Complex Profiles

    Silver Oak Capital has an in-depth understanding of the real estate debt market in the UK, enabling us to advise our clients on the most suitable solutions, giving them peace of mind.

  • Independent, Client-Led Advice

    Client satisfaction is at the heart of what we do, so when we provide advice to our clients we ensure that it is correct and tailored to their situation. In doing this, we ensure that our clients have access to independent, situation-specific, sound advice.

FAQs

Distressed assets are generally sold at a price lower than their market value due to a pressured sale.
The process of arranging finance for a distressed asset is largely the same as for an ordinary asset. For the right distressed asset (and borrower), finance can be arranged within days, although generally we would allow for 4–6 weeks to arrange finance.
Almost certainly yes. Where traditional lenders face strict lending criteria, restricting them to vanilla transactions, Silver Oak Capital has a database of hundreds of specialist lenders who generally have much more flexibility

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