The recent real estate crash has been particularly hard on commercial developers, and many community banks now find themselves with troubled, half-completed projects, taken back when developers couldn’t pay their bills.

Banks usually move quickly to get such properties off their books – but selling into a declining market can be tough on the balance sheet.

George Darling, principal at Newburyport bank consulting firm Darling Consulting, described a bank client who recently took back an incomplete over-55 residential development. The bank knew “there’s no way they could finish that project, a developer came in, offered them 50 cents on the dollar, and they took it.,” he said.

Such losses are typical, he said.

“Most commercial [developments], if you have to take the property back, you’re talking losing 50 cents on the dollar,” Darling told Banker & Tradesman.

But Rob Harrington thinks he can help. A developer and co-founder of Framingham’s Nexum Group, Harrington and his partners, Peter Burke and John Balcom of B&B Land Corp., have launched a consulting firm called Fresh Look, which works with banks to come up with profitable dispositions for troubled properties.

Banks face “a lot of pressure to get rid of these properties,” Harrington said. “But banks also know that if they sell it off, someone else is going to pick it up and make a profit on it. Good banks, smart banks, would like to do that, but they don’t have the staff and the expertise to do it.”

Fresh Look first works with banks in a consultative capacity, modeling different options for stalled developments they’ve repossessed – from accelerated auctions, to engineering a tax-free exchange, to re-dividing lots and redesigning units. The firm then presents a set of options which will enable the bank to make more profit than from a simple sale of the property.

Consultants who deal with community banks said Fresh Look’s model is an unusual approach in the development world.

William Kozak, principal at WTK Assoc. in Rockport, was skeptical of banks getting more involved with troubled properties. “It’s not their forte. They’re lenders, and if they have something that doesn’t work out, they need to get rid of it,” Kozak said.

While a bank should certainly be willing to consider every possible option for disposing of a property, Kozak said, they also need to stay realistic when calculating value. And though there may be cases in which troubled developments can be successfully redesigned and developed, by sticking with a property a bank faces not only an uncertain potential for gain, but also the loss of other opportunities for investing capital.

“There [may be] something so magnificent that it jumps out at you–in which case you’ve got to ask yourself why didn’t it get completed and sold before you took it over–but in general a bank is better off moving on,” he said.

Harrington acknowledges that sometimes there isn’t a good option for redevelopment. “Sometimes, it’s better to liquidate,” he said. For a property in Sharon, the team ended up advising the bank to “get it off your books. If you spend more money on [this property] we don’t think you’re going to get the capital back.”

Creative thinking

But there are times when applying a little creative thinking might be a better move than selling right away.

Harrington certainly thinks so. In such cases Fresh Look will form a partnership with banks to redevelop troubled projects. Terms vary among deals, depending on the individual legal and tax situations of the project and the bank. What is consistent is that Fresh Look frames the deal so that the bank’s interest and Fresh Look’s interests are aligned. The bank is generally guaranteed to receive returns up to a certain amount, Harrington explained, with Fresh Look splitting profits beyond that number.

On a West Roxbury condo project the team worked on last year, the lending bank was able “to recoup their full principal balance on the loan and even above that,” he says.

The key, Harrington says, is that he and his partners have all been involved with local banks in various capacities, serving as bank directors, trustees or incorporators, and understand the constraints under which banks operate.

The team’s development background also gives them insight into the small details that can make a big difference: By changing the type of washing machine hoses used in all the units on a recent condo project, Harrington said, the team was able to save thousands on insurance.

Still, some of the projects Fresh Look takes on require a lot more than minor tweaks.

The Laurence Falls project in Northborough, originally intended as a senior housing community, has two separate streams running through it, and abuts protected wetlands. Special engineers were required to evaluate flood issues, since the site also includes a small dam.

The development passed through three different developers’ hands before being taken back by Framingham Cooperative Bank, who then brought in Fresh Look. The team intends to transform it into a mixed-ages development.

Such efforts have given Fresh Look insight into how banks can better protect their investment before properties get in trouble, Harrington said. Steps like requiring the submission of as-built plans before new rounds of funding are issued would place banks in a better position to recoup losses if they take a property back.

“We believe the growth of our business will be working with banks before they make the loans, helping to keep an eye on a project from a developer’s point of view,” Harrington told Banker & Tradesman.