Centerline to start distressed debt fund

NEW YORK (Reuters) - Centerline Capital Group is in the preliminary stages of creating a fund to snap up distressed debt on commercial property, the real estate finance company's chief executive said on Tuesday.

"We believe that there will be opportunities to acquire debt that has broken," Marc Schnitzer said at the Reuters Global Real Estate Summit in New York.

For the past several years, commercial real estate investors have used as much cheap debt as they could to buy properties. Many of those loans made their way into pools of mortgages behind commercial mortgage-backed securities (CMBS).

Last year, $202.7 billion of U.S. CMBS bonds were generated from commercial mortgage pools, according to Commercial Mortgage Alert, a trade paper.

But with rising interest rates, and the potential for slowing price appreciation and a weakened economy, those borrowers may run into difficulties paying their loans.

"Because we think on some of these aggressively underwritten pools, we will see losses higher in the stack and that there will be some investment-grade (CMBS) buyers who suddenly find themselves in the control position who are not special servicers or work-out experts," Schnitzer said.

"We think in those situations we will be able to potentially come in, acquire that debt and use our expertise to fix those deals."

Last year, Centerline, a unit of Centerline Holding Co. CHC.N, was the No. 3 U.S. buyer of the riskiest part of CMBS trusts. With its role as that so-called "B-piece" buyer and its experience in fixing troubled loans in CMBS pools, the company is well positioned to step in when investors find themselves with properties they are unequipped to own, he said.

The last time the real estate market was in dire financial trouble, spawning a glut of distressed loans, was in the early 1990s, when a glut of new buildings hit the market and loans dried up.

"Today it's not an issue of oversupply," Schnitzer said. "For the most part we think the issues will be on good real estate with bad debt as opposed to bad real estate."

But the commercial real estate market today remains strong, with commercial mortgage defaults at all-time lows, so the fund will wait until conditions change, he said.

"There are not a lot of opportunities right now," he said. "We think going into next year, there will be opportunities that we're going to want to take advantage of, whether it's 2008 or 2009."