What is your vision for IAG Florida as we move into the second half of 2008?

On the advisory side, there will always be a market for the insights and opinions of trusted advisors, who by definition can “talk the talk and walk the walk”. At IAG Florida, our principals bring years of financial, construction/development and operations experience to any particular asset or problem. There is indeed truth in the old maxim “understanding the problem is half the solution”. Our vision at IAG Florida is to help our clients diagnose problems and bracket the action plans from which new opportunities emerge.

In this column at the beginning of 2008, I noted this year would present challenges because of market imbalance and credit restrictions. Candidly, I failed to comprehend how pervasive the problems would become, migrating out of the residential lending space, into commercial credit.

There’s significant interest among the well capitalized investors to brush off their “grave dancing” shoes, but I think that will be more prevalent in 2009. The FDIC is just beginning to tackle the regulatory and compliance issues associated with the commercial banking sector. They’ve simply been too busy dealing with stabilizing the financial markets in general, to be focused on the 8,000 plus banks spread across America.

With the collapse of IndyMac, however, that shoe has fallen. I think the balance of 2008 is going to be a period when paper equity in banks and busted real estate deals finally is marked down and/or written off.

For the remainder of this year – and certainly into next year - our focus will be on acquiring troubled loans from smaller banks, on a one-off or portfolio basis. I believe the institutional memory of the federal government that dates to the RTC days will change the tempo of this cycle. The federal government knows how to play the game, and there simply are a lot of banks that have poorly underwritten and now poorly performing loans in their portfolios that need to be flushed out for capital adequacy reasons. On the other side are what I call the “country club” bankers who organized thinly capitalized small banks, with relatively inexperienced young talent, and peppered their portfolio with high yielding high risk commercial and construction loans. And now the music has stopped. There’s just a great opportunity emerging to have these banks begin the process of selling off their loans to private investors who can play the foreclosure game with a different set of rules. And the feds control the time clock!

What is your vision for IAG Florida as we move into the second half of 2008?

First, we have set up IASG – Interlink Asset Solutions Group. We’ve spent the first half of this year getting familiar with the regulatory mechanics of the banking world and drilling down on the raw performance data of each Florida bank. I might add, its refreshing to be in an investment sector where there is so much financial data compiled and sorted for consumer use. There really are few secrets in the banking world.

Now the FDIC is doing more than issuing guidelines – it is establishing new compliance policies regarding the concentration risk of commercial real estate loans.

IASG is a asset advisory team, comprised of in-house individuals and select outside professionals such as appraisers and attorneys, all of whom are familiar with South Florida real estate. We intend to promote our services to banks and financial institutions that need to create an additional firewall between themselves and the regulators when the matter of workouts become more topical.

Not only can we perform the analytics that many smaller banks may not be capable of performing internally, the IASG team is also a platform to acquire distressed term loan debt. As such we can go into any institution with three clubs – as an advisor, as a broker of debt, and as a buyer of paper. That’s a winning tri-fecta for the 2008 and 2009 racing season.

What types of "distressed debt" interests IASG ?

We’re focused on leveraging our experience. First, we know South Florida. We know the markets, the dynamics, the politics and the like. Second, as developers and real estate mangers, we know how to deal with the things that complicate a commercial real estate lender’s life – permitting, entitlements, property management, construction lien law and the like. Finally, we know a lot about the most complex real estate sector known as hospitality – hotels, resorts, condo-hotels, marinas, restaurants and that sort of product. Put those skill sets together, and I think we have a compelling story to focus on distressed debt of “management” intensive real estate deals in South Florida. And of course, there’s a lot of that throughout southeast and southwest Florida.

What’s your view of the residential sector?

Generation 3 night binoculars. Seriously, you need military issue equipment to answer that one. Too much inventory, too little demand. That much is obvious. Paradise Lost? No, it is not. It will continue to be cold and snow up north. Taxes everywhere will continue to go up, so we here in Florida will continue to have a comparative and relative advantage. Couple that with the realities of a huge demographic bulge working its way through the US population, and there’s ample evidence that demand will flourish. And then, add the international factor. Over the next five years, I don’t see any change in the weakness of the dollar, so US real estate will continue to be cheap, and may get cheaper. For those who were disciplined enough not to have invested their savings in speculative residential real estate ventures, for those who want that place in Florida on the beach or on the golf course, and for those who have Euros to spend, there’s a great sale going on in Florida residential real estate. The buyers are there – it just takes them a long time to work through the massive inventory. Its simply a matter of underwriting the time for this demand to absorb supply. Fortunately, we don’t have to worry about any meaningful new supply coming on line any time soon.

Are you recommending investment in unsold condos ?

Until recently, I have not been a fan of this investment space. We have a major overhang in both single family and condominium inventory that empirically will take years to absorb, and the market was simply not prepared to reprice unsold inventory to a level where a return can be had. I believe that has begun to change.

Look, there’s a lot of investment capital in the market. Much of the large institutional money is positioning to participate in the restructuring of billions in commercial real estate loans. The development market is moribund. So we’re left with acquisition of “shadow” residential real estate as a great play for individuals and smaller institutions. The transformation of home ownership dynamics during the next five years as the mortgage crisis plays out will drive sustained residential rental demand.

Bulk inventory deals require an entrepreneurial zeal, given the implied execution of a rental management platform nested within the dynamics of HOA regulations of a typical condo or subdivision. Bulk inventory is a commodity investment today. There’s a lot of generic inventory. But like any commodity, there’s a quality component, and quality always costs more. The key is finding a quality offering that’s fairly priced. The market will always buy quality first, maybe not at your immediate price expectation, but certainly if you can accept a minimal or negative return to “buy occupancy”, then you’re protected. As we say in the hotel business – “can’t raise rates on an empty room”. Same goes for holding for-sale residential inventory as a rental investment.