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OREO ‘Cleansing’ Helps Stabilize NWA Real Estate

6 min read

The OREO market has calmed down considerably in northwest Arkansas.

When the real estate bubble popped in 2008, it popped big time in northwest Arkansas. The result of the burst was a flood of OREO properties into bank portfolios. OREO — the acronym stands for “other real estate owned” — is property a bank reclaims when the owner defaults on the loan the property secures.

Northwest Arkansas, the hotbed of economic development in the state, generated more OREO than Little Rock because the area’s growth prospects attracted so many investors and banks competing for their business.

“It was a very hot market with a lot of financial institutions during the run-up and then a pretty spectacular crash,” said Ramsay Ball, a principal at Colliers International in Bentonville. “The hotter the market, the harder it falls. Northwest Arkansas was a speculative market, and everybody wanted to be a part of it.”

Ball certainly knows his OREO. He helped broker two significant post-crash deals that involved high-profile OREO properties.

The first involved The Chancellor Hotel, then known as the Cosmopolitan, in downtown Fayetteville. Sam Alley, the CEO of Little Rock contractor VCC, and Ike Thrash, president of Dawn Properties in Hattiesburg, Mississippi, paid $3.8 million for the hotel in October 2011, buying it from ANB Ventures.

Investors Richard Alexander and John Nock paid $9.92 million for the hotel in October 2006 before losing it to foreclosure.

Ball was also one of the brokers when Little Rock’s Whisenhunt Investment Group paid $19 million for three parcels totaling 375 acres in Benton County. Bank of America had collected the parcels from developers Bill Schwyhart, Charles Reaves and Gary Brandon. At the time of the sale in March 2012, Ball called it the “most significant land transaction since the bubble burst.”

David Erstine of CBRE Northwest Arkansas represented Bank of America in part of the deal while working for Sage Partners. He said the bank was owed more than $37 million on the original loans for the properties.

“It may have been the steal of the decade, but it wasn’t the deal of the decade because no one wanted it,” Erstine said. “People were still skittish about real estate.”

Ball and Erstine, as well as other brokers in the area, said the improving economy has stabilized the market. Also, the number of OREO properties has been reduced through sales.

Extension Requests Rise

A bank has five years to sell an OREO property before it has to write off the loss on its balance sheet. The Arkansas State Bank Commission allows banks to apply for an extension on a property-by-property basis, and Deputy Commissioner Luther Guinn said there was an uptick in extension applications in the second half of 2014 — about five years after the crash started resulting in foreclosures — with a majority being for northwest Arkansas properties.

State bank officials said there hasn’t been overdue pressure to unload OREO properties lately as the market has stabilized and most banks have been able to sell properties at decent value.

“We got our OREO down to a manageable level to the point where we’re not just having to dump it,” said Greg Stanfill, an executive vice president at Arvest Bank. “It’s not, ‘Oh, we have to get rid of this in 90 days or we have to write the whole thing off.’ We’re not taking it in at near the rate we once were. There’s not near the sense of urgency at having to deal with it that there was a few years ago.”

Steve Wade, senior executive vice president of lending at Simmons First National Bank of Pine Bluff, said his bank practiced prudence in its handling of its OREO property in northwest Arkansas. As bad as the recession was, the general thought was the region and real estate market would recover and return to normal.

“We didn’t want to fire-sale property like that,” Wade said. “As long as you have Wal-Mart, J.B. Hunt and Tyson and all the vendors up there, eventually the market will return.”

Reduced supply and growing demand have changed the real estate market back from a buyer’s market. Clinton Bennett of CBRE Northwest Arkansas said the Whisenhunt deal may end up representing rock bottom for the region, after which things began to rebound like a stock market after-crash graph.

“It has definitely been pared down,” said Bennett, who helped handle a portion of the Whisenhunt deal. “In fact, we have seen a pretty healthy level of interest in bank-owned property, a pretty solid flow of transactions. We’ve really moved a lot of bank-owned property, and our competitors have done the same thing. There has been a lot of it sold, and there is a lot of it in the pipeline being negotiated.”

Wade said, “We’ve sold a considerable amount of [OREO] property.”

Bennett said he never sensed a bank was under pressure to sell, especially lately, when he has brokered a deal either from the buyer or seller side. Ball said small banks may have been in a quandary with OREO, but healthy banks such as Arvest or Simmons could afford patience.

Some banks, such as Bank of America, sold some properties at the best available price just to cleanse their books, not out of financial desperation. Erstine said Bank of America would have liked to have received more for the Whisenhunt purchases but sometimes holding a property doesn’t result in noticeable profit.

Even a bank such as Simmons, which could afford to hold property while the market was depressed, doesn’t want to sit around passively with OREO property on the books. Simmons also collected OREO with its acquisitions in 2013 and 2014 of Metropolitan National Bank and Delta Trust & Bank.

“We’re fortunate that we’re a well-capitalized bank and that allows us flexibility to hold onto these properties,” Wade said. “We certainly don’t like them. They’re nonperforming assets. You want to maximize the value you get for the property.

“Some banks extend and pretend, put a sign out in front of the property and wait for someone to write them a big check. We don’t follow that philosophy.”

The Costs of Holding

Holding a property during the five-year window isn’t cost-free for banks. There are property taxes, maintenance fees and, in some cases, administrative dues such as appraisals, and regulators can devalue the property.

“Almost every financial institution had a different playbook on what they were going to do,” Ball said. “There were some that said, ‘We’re going to take our loss. Now let’s get rid of this so we can focus on banking.’

“Right now there is a ton of money out there to buy distressed assets, but there are less of them. Everyone gets to the game late. Not everyone. There are people who made some very good purchases.”

Stanfill and Wade said it’s a good sign for the region that properties, both OREO and regular, are in demand again. Whisenhunt doesn’t plan any immediate development on the 375 acres, but most investors/developers buy property with the idea of putting it into some kind of production.

“You have these paralyzed projects, you have these paralyzed properties, and nothing can happen,” Ball said. “They needed to go through the washing machine and get the dirt off. There was a cleansing in this market. It’s from people taking these properties that had a lot of issues and recapitalize them and move them forward.”

Bennett said brokers and banks are smart enough to know three things about real estate: location, location, location. That tempered some of the fire-sale pressure and should reward banks’ patience.

“The pressure is coming off the banks in a big way because in 2008, there were properties it was difficult to sell at any price other than extremely reduced prices,” Bennett said. “If you’re going to be stuck with bad real estate assets, there are a heck of lot worse places to be stuck with them than northwest Arkansas.”

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