Bargains or Toxic Assets? Signature Loan Sale About to Start

Nearly six months after Signature Bank bit the dust, the highly anticipated sale of its $35 billion commercial real estate loan book — feared to be “toxic” for its rent-stabilized component — is about to begin.

Newmark is expected to start marketing those loans in early September, Trepp wrote in a recent update. Industry insiders corroborated the time frame.

The brokerage has been tight-lipped on the impending sale. It did not return a request for comment.

The outcome will offer an unprecedented line of sight into rent-stabilized buildings, an asset class that is at least struggling, and at worst is in a catastrophic downward spiral.

Signature’s multifamily loan book totals $19.5 billion, of which $11 billion is rent-stabilized. If the Federal Deposit Insurance Corporation shares the sales figure for the deal — which history signals it should — it will pull back the veil on how far valuations have fallen.

Anecdotes from brokers suggest rent-stabilized valuations have dropped anywhere from 20 percent to 45 percent. Shimon Shkury, who heads Ariel Property Advisors, said three rent-stabilized buildings that traded in the first half of 2023 all sold for about a 30 percent discount.

The problem stems from a 2019 state law that severely limited rent increases on rent-stabilized apartments, followed by a surge in interest rates and landlords’ expenses. But beyond individual building or portfolio sales, data on the impact of the law’s effect on building valuations have been scant.

The balance sheets of publicly traded banks that lend to rent-stabilized buildings offer an incomplete picture. Lenders are reluctant to write down bad debts, particularly on the heels of this year’s bank failures. And borrowers will typically cut every expense possible before showing a distressed hand to their bank.

The FDIC is expected to tap its Great Recession playbook in the Signature sale, and acquire the loans in ventures with third-party investors, the Trepp post reported. The FDIC would retain an equity stake and offer interest-free financing; the private investors would kick in capital for a slice of the pie.

The research firm’s blog post last week is perhaps the most insight owners have had into the sale process. For the most part, the industry has relied on rumors.

Some insiders expect the FDIC to offload the loans to a third party, which in turn would sell them to others. Private equity is expected to step in on the buy-side.

The uncertainty has bred anxiety among the defunct bank’s rent-stabilized borrowers. These landlords are waiting to see how their loans will be affected down the road by a sale and the expected valuation reset. Owners with a fast-approaching maturity date will find out first.

“None of the loan holders have been kept in the loop,” said Jay Martin, executive director of the Community Housing Improvement Program, a landlord group.