Willing buyer has trouble finding willing sellers

Jim Stolpestad, head of St. Paul-based Exeter Realty Co., is raising $10 million to buy distressed real estate assets from Minnesota banks scrubbing their ledgers. He's got money, real estate expertise -- Exeter affiliates are major developers and land owners on St. Paul's Grand Avenue -- and a new website for the debut of the Ironton Asset Fund.

Now, if he could just get the banks to let go of their bad loans.

"We're networking like crazy, talking to banks and brokers," said Stolpestad. "Finding the deals is harder than raising the money," he said. "The whole thing is unfolding more slowly than people thought it would."

Stolpestad's lament is a familiar one. Banks may be struggling with a load of troubled real estate loans, but they're not all racing to sell to clean up their portfolio because the cure can sometimes kill the patient.

Bankers argue that they can't afford to accept lowball offers. Selling loans at a loss erodes a bank's capital -- a risky move because banks, by law, face sanctions if they don't maintain sufficient capital. Troubled banks with thin capital could be insolvent if they sold their distressed loans.

The result is something of a stare-down between banks and bargain-hunting investors. Even for healthy banks, prices have been an issue.

"We call it kicking the can down the road," said Julie Tanaka, CEO of Compendium Business Strategies, a commercial real estate consultant in Minneapolis. "The banks are not willing to reach out and grab the falling knife because we haven't heard the thud of the market bottom."

Prior Lake State Bank -- a well-capitalized bank that is not troubled -- has made only minimal sales. Bank President Bob Barsness said that when he's had sales he's deflected some offers that he considered below the belt.

"Some of it is pretty laughable," Barsness said. "With the huge stocks of foreclosures, et cetera, on the market, there's always bottom feeders out there. People will just throw out numbers and see what sticks."

Sometimes there's suction.

"I was just meeting with a banker on Tuesday. They had just done a bulk loan sale of commercial real estate property. He got 37 cents on the dollar and he thought he was lucky," said bank consultant Jeff Judy, principal of Jeff Judy & Associates in Bloomington.

The wait-and-pray approach isn't painless, either. When a bank finally repossesses a property, it must get it appraised and write down the value to the current market within 60 days, said Barsness. Putting that off can bolster the balance sheet until the market recovers, as state and federal laws allow a bank to hold a property for five years and even longer under some circumstances, he said.

One of the main markets for unwanted bank loans is the electronic marketplace run by Boston-based DebtX. Among DebtX's 300-some clients, mostly commercial banks, is the Federal Deposit Insurance Corp. (FDIC), which is busy selling certain chunks of loans from failed banks. DebtX has doubled its volume in the past year, according to CEO Kingsley Greenland, who said he thinks pricing has finally hit bottom.

"Right now we're at that cusp where all of a sudden there's a lot more pressure to sell than six months ago," Greenland said. "I would expect it's going to be busy way into mid- to late 2010."

The majority of the loans it auctions are backed by commercial real estate, Greenland said, though most of the loans the FDIC sells on DebtX are not. Buyers include real estate developers, private equity funds and banks, among others.

The discounts vary. On DebtX, bad or "nonperforming" land loans are selling below 30 cents on the dollar, while those for commercial real estate that is producing income might sell for 75 cents on the dollar, Greenland said.

The prospects are tantalizing.

So Stolpestad continues raising money. He started in April, with a goal of reaching $10 million in commitments by the end of the year, tapping investors who've worked with Exeter before as well as other wealthy Twin Cities residents with cash to invest. Minimum investments start at $250,000. He's working on three loan deals at the moment.

It's not the first time Stolpestad's stirred the ashes for fire. An Exeter affiliate bought the building called Victoria Crossing South on St. Paul's Grand Avenue from a Resolution Trust Corp. debt purchaser after the savings and loan crisis in the early 1990s. A former Studebaker car dealership on the corner now houses Axel's Bonfire Grill and Cafe Latte.

Exeter affiliates own three of the four corners at that well-known shopping intersection, as well as the nearby buildings that house Restoration Hardware and the indoor mall with Salut Bar Americain. Exeter also developed the new Cobalt Condominiums in northeast Minneapolis.

Ironton's focus this time, Stolpestad said, is retail properties and what's known as fractured condos -- condominium projects where only some units have sold. One strategy is to buy out the condo units that sold and convert the entire project to apartments.

"There's a lot of fractured condominiums out there that banks are stuck with and they don't know what to do with them," Stolpestad said.

Jennifer Bjorhus • 612-673-4683