Douglas Wilson Companies - Spring 2023 Newsletter

SPECIALIZED SERVICES

Court Appointed Fiduciary

Legacy Asset Management Development Services

Land Entitlements

Asset/Property Management

Assignment for Benefit of Creditors

Resort/Hotel Management

Receiverships

Trustee

Brokerage & Disposition

Partition Referee

Forensic Accounting

Due Diligence

Chief Restructuring Officer

Special Master Liquidating Trustee

Expert Testimony

Highest and Best Use Analysis

COMMERCIAL OFFICE REAL ESTATE IN 2023: THE EYE OF THE STORM

Of all the real estate asset classes, office buildings face the greatest headwinds in 2023 and well into the future. In large part due to falling demand for office space and sustained negative absorption due to an onslaught of remote working arrangements, the office sector will likely never be the same as it was prior to the Covid-19 pandemic.

The research strongly shows the problems getting worse in the near term, in fact. A fourth-quarter market snapshot from Colliers International indicates the average occupier reduced their footprint upon renewal by 20% during the quarter and finds “a sizable headwind of space potentially coming to market.” This is a national trend with certain markets experiencing even more severe adjustments.

Adding to those headwinds, employers and employees remain out of alignment in terms of their expectations of employees return to the office post-pandemic, with 55% of employees believing they are visiting the office at the right cadence, compared

with only 39% of employers who share that sentiment, according to the August 2022 National Office Occupier Survey released by global commercial real estate leader CBRE.

“Office utilization rates likely won’t meet employer expectations next year,” according to the CBRE report. “While most companies see office attendance as critical to their success, many workers want the autonomy to decide where and when they work. As companies find an optimal balance over the next few years, office utilization and the space needed per worker will reach a new equilibrium that could ultimately reduce demand for office space per employee by up to 20% from the pre-pandemic norm.”

This potential new equilibrium combined with historically low absorption is leading to problems for owners, tenants and lenders, some of whom are taking significant actions to reduce the burden of office interests.

“There is a lot of hesitancy around the proper course of action to deal with these office assets,” says DWC Chairman and

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As office real estate struggles, developers offer a unique perspective

CONNECTING

DWC Team on the Move

DWC President Michele Vives has been appointed to the State Board of the California Receivers’ Forum (CRF). She will also serve on the regional council for the San Diego Receivers’ Forum chapter as well as the organization’s Membership Committee.

Founder and Chairman Douglas Wilson will speak on a panel at the upcoming Meet the Money National Hotel Finance and Investment Conference in Los Angeles, to be held May 1-3. The event is hosted by Global Hospitality Group and brings together hotel owners, developers, investors, advisors, consultants, brands, lenders and capital sources.

DWC’s leadership team will attend the 35th annual California Bankruptcy Forum Insolvency Conference, to be held in La Quinta, Calif. May 19-21.

The team also will attend the CRE Finance Council’s annual conference June 1214 in New York City.

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CEO Douglas Wilson. “Stakeholders often don’t know what to do with this collateral.”

A variety of consequences

For the various players involved, office space continues to create challenges with many of the resulting scenarios ending up in distress. Some owners, faced with significant equity losses, are choosing simply to exit their positions and write off the losses. In some recent instances, owners are realizing losses of as much as 50% relative to their purchase prices within the recent short term.

We are finding that owners no longer want to put in additional capital for tenant improvements and leasing commissions, especially when facing the difficult headwinds to secure new financings. This scenario will often result with the lender petitioning the court to put in a Receiver to safeguard their collateral. This process may result in the sale of the property through a court-approved receivership sale, which allows the asset the be sold without the lender having to foreclose and step into the chain of title.

“Some of these shifts show a market that is returning to equilibrium as real estate markets are going through what is a natural adjustment right now,” Wilson says. “In office, the challenges are particularly bad.”

A long-awaited adjustment

The shift in the market is painful for commercial stakeholders, but in many ways it is a long awaited return to equilibrium following historically low interest rates and a market characterized by unnaturally high values.

The resulting market will have more availability, less development and less construction lending throughout 2023, according to CBRE’s outlook, along with a growing disparity between prime and secondary office buildings.

“Demand for the best buildings in attractive locations will support rent growth in top-tier office towers,” CBRE notes. “By contrast, there will be a smaller pool of tenants interested in older office buildings.”

The developer’s perspective

While office development will continue to fall in the near term, those with experience in this market can offer a unique viewpoint, particularly for those properties facing distress. With national factors at play as well as local influences such as those markets with burgeoning businesses in certain sectors like biotech and life sciences, experience is critical in navigating this market cycle.

DWC’s foundation was the development of San Diego’s 1 million square-foot mixed-use Symphony Towers property, including 575,000 square feet of office space. Since then, we’ve completed numerous office projects during prosperous times and we have served as a fiduciary and an advisor to countless office owners and lenders during times of distress.

In one noteworthy case, DWC served as the for Receiver to preserve, protect and complete the construction of a 400,000 square foot LEEDCertified, Washington, D.C. Capitol Riverfront District office building with three levels of subgrade parking and ground floor retail. The building was 30% constructed at the onset of the assignment, following the borrower’s filing for Chapter 7 bankruptcy with additional takeout financing in place. With our expertise in development and construction, we were able to utilize the balance of the construction loan to complete the project — including meeting dozens of conditions — and resulting in a full recovery to the lender.

Throughout the years, the firm has been involved in office properties in many capacities: as a management company, developer, agent and receiver. As a receiver, we use the specific skill set and cyclical experience we learned as a principal developer, so that we can complete and stabilize partially-built projects, protect office assets in distress, and otherwise protect collateral at risk during these market cycles.

“Today’s environment is giving rise to a need for us to step into complex projects involving construction, environmental and entitlement issues—all areas we are intimately involved in as a developer,” says DWC President Michele Vives. “We anticipate the demand for this expertise will only continue through this troubled time for the office sector.”

Executive news & speaking engagements

STATE OF THE MARKET: CANNABIS

Troubles continue for cannabis operations

While it once had a very promising outlook for entrepreneurs and business owners on the cutting edge of a new market, the cannabis market continues to present challenges for operators in California and across the states where it has been legalized for recreational sale. These challenges are leading to more and more troubled cannabis businesses,

DWC has been assigned to a number of receiverships of late involving cannabis operations spanning all parts of the business: retail, distribution, licensing, manufacturing and growing.

In the case of one cannabis partnership dispute, DWC is serving as receiver for a West Hollywood dispensary and is in the process of marketing several licenses for sale in the recovery process.

Operating challenges

Operating differences between cannabis companies and other retail and distribution operations are significant. DWC continues to encounter businesses encumbered by fundamental business elements that apply to cannabis only such as limited banking and finance availability, unique regulations, restricted payment sources, increased security needs, and

and in turn, an increased need for receivers and other fiduciaries to play a role in recovery.

Options for cannabis companies in distress are very limited due to the fact that cannabis is not federally regulated, though a recent controversial ruling in the U.S. Bankruptcy Court for the Central District of California may signal a slight shift in the courts’ response to some cannabis cases seeking Chapter 11 bankruptcy protection. The vast majority, however, remain unable to receive this protection and must pursue other remedies — receivership included.

“Cannabis markets are in a state of disarray from a capital standpoint and from a regulatory standpoint,” says DWC Chairman and CEO Douglas Wilson. “Because of that there is compaction, confusion and consolidation in these markets, resulting in a massive amount of erosion of equity.”

In another, DWC served as a receiver where a property had been used for illegal growing operations, leading to problems with the site and ongoing issues for the owner.

In our most recent experience, today’s market is marked by several factors from falling sales to unsustainable taxation, all playing roles in the disarray many cannabis operators are facing.

Cannabis sales

Reported cannabis sales are falling in some markets. Sales fell in California in 2022 — the first annual decline since legal sales began in the state in 2018. California recorded $5.3 billion in cannabis sales taxed in 2022 down from $5.77 billion in 2021. Experts attribute the decline to a disproportionately burdensome tax structure and falling wholesale prices, among other factors. One cannabis farmer told Forbes in late February the market is “imploding.”

disproportionate taxation compared with non-cannabis goods.

Unsustainable taxation and pricing problems

With a 15% excise tax on wholesale cannabis products in some states, plus other local and state taxes, many businesses are struggling to compete with the black market for marijuana. And while raw supply is abundant, consumers face a much higher price when purchasing cannabis products from legal vendors than what is available illegally. This counterbalance has recently led to turmoil for some operators. With the added pressure of very little capital available in today’s market, many individual operators are unable to survive.

Douglas Wilson Companies

CRYPTOCURRENCY AND RECEIVERSHIPS

Doulgas Wilson Companies

Why digital currency is raising concerns for receivers

Since its origins in Bitcoin following the onset of the Great Recession, cryptocurrency has made inroads into all areas of finance and investing, from blockchain-enabled real estate transactions to cross-border money transfers. With more than 20,000 different cryptocurrencies in existence today, the market continues to evolve with more applications than ever before.

As receivers and advisors, we need to stay up to date on cryptocurrency happenings and trends as we increasingly encounter crypto in our assignments. There are a few general areas where we are observing digital currency as a mechanism by which organizations and individuals are holding and transferring value.

For one, as an alternative to land and other traditional assets, cryptocurrency can be utilized by organizations to store and transfer cash. Digital assets can be kept in trusts to hold

DWC PERSONNEL NEWS

New Hires and Promotions

individual or corporate wealth, and due to the anonymous nature of crypto wallets, these assets can be extremely difficult to track. Some recent Ponzi schemes have been conducted solely via cryptocurrencies — promising high returns on short term currency investments — which can be much more challenging to trace than traditional accounts.

All of these applications are leading to a rising prevalence of digital currency in receiverships. A few common challenges we’ve encountered:

Access. Because digital currency can only be accessed via unique digital keys, we need to continue to be aware of how to find and manage cryptocurrency assets. Additional challenges exist due to the presence of both “hot” (online) and “cold” (offline) wallets where currency can be stored.

Visibility. In some criminal cases, organizations hide funds in digital wallets and attempt to leverage these hidden assets to their future benefit.

Transference. Digital currency owners often move currency quickly and frequently from wallet to wallet. Despite having anonymous owners, however, we can begin to detect patterns by observing the ongoing transfer of cryptocurrency.

Liquidation. In the recovery of assets, liquidation of digital currency can be challenging. Because value fluctuates rapidly and has been marked by many “crashes” throughout the years, receivers may be tasked with deciding whether to return recovered assets as cryptocurrency or sell at a present value and return the value in cash.

“Cryptocurrency will be an inevitable part of receiverships going forward,” says DWC Vice President Ryan Baker. “Almost every federal equity receivership we’ve seen recently for the SEC has some crypto element involved, and the uses are becoming increasingly sophisticated.”

As the company positions for new projects and assignments, we are pleased to announce two new personnel updates.

Kristine Bickings has been promoted to Project Associate. In her time at DWC, Ms. Bickings has worked extensively on a $1.2 billion SECappointed receivership case, including forensic analysis and executive team coordination. In her new role, she facilitates project progress, manages deadlines, and provides essential project-level and communications support.

Kristina Godinez has joined DWC as Project Associate. Ms. Godinez brings extensive receivership industry experience to her role, including paralegal and project management work in cases spanning state, federal and

bankruptcy courts. In her role, she works closely with DWC’s project, receivership and executive teams.

James Johnson has joined the firm as Office Administrator. In his role, he manages and coordinates a variety of administrative projects for DWC, including executive level support, operational functions and project details. In addition, he is responsible for DWC’s document management and facilities-related activities. Mr. Johnson brings to the firm 26 years of legal industry experience.

DWC congratulates Kristine, Kristina and James and looks forward to introducing them in their new roles to our clients and network.

KRISTINA GODINEZ

JAMES JOHNSON

TODAY’S OPPORTUNITY FOR REAL ESTATE OWNERS

One of the most meaningful lessons I have learned throughout my career is that periodic real estate downturns can be full of opportunities. I had a mentor who often stated that wealth is created when you “buy your straw hats in the winter.” This simple quote summarizes the notion that these cycles should be a time to reposition existing assets and acquire new ones at a discount.

The Legacy Asset Management platform that DWC created about five years ago allows us to provide objective guidance to many families whose wealth is primarily held in real estate. Our nearly 35 years of experience spanning $15 billion of assets of all product types has given us a strong foundation from which we can provide objective advice to owners. This is particularly true among families that are in the process of transferring properties to the next generation, which can often present challenges. In many cases, these properties have been in the family for many years and are in need of a third-party review to determine how they might be best positioned for the future as markets are always evolving.

The strong leadership team we have in place to carry our brand forward is going to increase our focus on the Legacy platform as the transfer of real estate wealth is poised to surge in the years ahead. Our success to date in this area is based upon our real-life experience as both a principal developer as well as having the integrity of being a court-appointed fiduciary on over 1,200 projects across 35 states. We combine an entrepreneurial spirit with an institutional pedigree to work hard toward achieving the best outcomes for our clients.

Sincerely,

Douglas P. Wilson

DOUGLAS P. WILSON

When DWC founder, Douglas Wilson, moved to San Diego in the early 1980s from the busted energy bubble of Denver, he was thinking big.

As DWC enters its fourth decade, it does so with an executive suite of high-achieving young professionals who have already experienced a round or two of cycles.

COMMERCIAL OFFICE REAL ESTATE IN 2023: THE EYE OF THE STORM

CRYPTOCURRENCY AND RECEIVERSHIPS

Why digital currency is raising issues and concerns for receivers.

STATE OF THE MARKET: CANNABIS DWC PERSONNEL NEWS

As office real estate struggles, developers offer a unique perspective. Troubles continue for cannabis operations.

Plus: leadership appointments, meetings and speaking engagements.