Maximizing Profits In Distressed Commercial Real Estate

In 2008, Commercial Equity Solutions (CES) began to negotiate with lenders at the request of their clients who own commercial real estate. Their commercial property (or real estate portfolio) was under attack.
 

With the economic fallout most investment real estate began to experience higher and higher vacancy rates.  The owners were forced to lower leasing rates to retain quality tenants or had lost the less credit worthy tenants altogether. The Commercial Real Estate (CRE) investors were no longer able to sustain the debt service and asked CES to contact their bank to find a solution to their dilemma.

After hundreds of client interviews, property reviews and confidential bank negotiations, CES has utilized the applied theory of consultation and negotiation in commercial real estate workouts to observe a significant void in the current market: knowing where and how to acquire commercial real estate at its maximum profit delta.

This discovery has expanded the focus of our commercial real estate consulting practice from strictly a property owner as client to an acquisition investor as client perspective.  

By helping property owners achieve a significantly discounted loan payoff opportunity, they are assisting the banks in removing non-performing debt from their books.  This creates an opportunity for an investment client and allows the property owner to reset the basis of their property, setting the table for investors to acquire, or become part of, stable cash flowing real estate throughout the United States.

Of course this all happens prior to foreclosure, before these real estate opportunities are known to the general public.

Most CRE investors understand that once a property has been foreclosed upon, the bank is not going to be as amiable in selling at the best possible price. Additionally, the previous owner may have been the best financial steward that property has seen, but due to outside forces, not their management skills, the property lost its sustainability.

Now as a bank owned property, it will lose further value as tenants flee to a more secure or better priced property. Acquiring or becoming an equity partner prior to these negative consequences is where CES has answered investor’s liquidity and risk concerns.

The maximization of cash flow, sustainability, risk reduction, and profitability (not to mention the altruistic aspects of assisting a neighborhood or an entire community to take a step back towards stabilization and security), is the sweet spot most investors are looking for.

CES has now taken the next step by releasing an investor driven and directed marketing approach to acquire the specific property type, the location, and risk level investors are looking for. This program allows investors to initiate their chosen market and demographics and have the first look at properties that meet these criteria.

This program provides targeted properties negotiated through the CES system that will maximize investor profits in distressed commercial real estate.  Contact a member of our team today to find out how you can leverage our experience and contacts to expand your commercial real estate portfolio.

Larry Larsen
Director of Client Services
Commercial Equity Solutions, LLC
888-807-2786

The Proper Care and Feeding of Bankers

When engaging a banker for the purpose of a commercial mortgage workout, your success will be in direct proportion to your understanding of what motivates your banker.  Understanding who your lender is and what their motivations are is essential to negotiating a workout.

The different types of lenders that you could encounter include, large national banks, community and regional banks, CMBS special servicers and structured sale buyers that originate when the FDIC takes over a bank.

A large national bank who may be trading on the stock market at less than book value  because of unrealized CRE losses may be more apt to recognize a loss in exchange for a quick resolution as they are trying to clean up their balance sheet.  The small community bank may be in a position that they can't afford to realize a loss and might be more apt to "pretend and extend".  In this case, it may be likely that three months from now you may be dealing with a completely different set of circumstances as the smaller banks get gobbled up or closed by the FDIC.

If the loan is with a CMBS special servicer, you must take into consideration that the special servicer usually gets 1% of what they collect and all of the default interest.  They also hold the first loss position tranche of the securitized note.  The special servicer will allow the broader investor pool to take the property through foreclosure rather than forfeit the default interest and other fees that are called for in the serviceing agreements.

A structured sale buyer is a bank that acquired a portfolio of loans from the FDIC when they took over a bank.  These lenders often paid pennies on the dollar to take over what are considered toxic assets.  These lenders are looking to maximize their investment and may be interested in acquiring the property itself through foreclosure.

Which ever of these lenders owns your note, it is important that you communicate with them.  Bankers hate surprises.  They all fall somewhere on the banking food chain and have to answer to someone.  Understanding who they have to answer to and what their motivations are will help you to formulate a workout plan that meets their goals.  Only the lender can approve a workout.

You must have patience with your lender.  There are three distinct stages the lender goes through when there is a problem on a loan.  the first stage is denial.  "Just keep sending your payments, no problem".  Then comes anger.  "I'll sue!"  Next is acceptance.  Your lender understands that the problem is real and needs to be addressed.  This is where you get a workout.  Each of these stages must be dealt with.  You can't skip ahead and these can't be accomplished in the first few meetings.


Bankers like documentation.  When you see things are getting bad, talk to the lender and give him supporting documentation.  Let him know what you are up against so that he isn't surprised if you miss a balloon or interest payment.

By Ted Schmidt, Director of Marketing
Commercial Equity Solutions, LLC

Recent Successes Negotiating with Lenders

Some of our more recent and more sophisticated clients have had success negotiating effectively with their lenders.  This scenario is more likely to happen where there is not a personal guarantee or where the borrower is not financially collectible to the lender for deficiencies.  These clients have been able to convince the lender that it is in everyone's best interest to agree on a discounted payoff "DPO".  This allows the lender to remove the note off their books and make the necessary regulatory adjustments. 


Once this number is agreed to, the borrower then must perform within a limited time period to either refinance or pay off the lender to consummate the deal.  It also allows the borrower to reset the basis on a new loan that will cash flow.  We are assisting these new clients, performing on the negotiated DPO's.


The process of obtaining new financing, especially where the commercial lending market is already very limited, and where most borrowers are not able to come up with the normal 30 - 40% down payment can be extremely challenging.  We have been able to attract lenders and investors that understand this difficult situation and are willing to lend or invest in this environment.  It is important that any commercial borrower that is working through this situation understands the importance of seeking professional assistance in this process.  The DPO may create a taxable event and consultation with a qualified CPA is not a bad idea.  Failing to take advantage on the negotiated DPO can be very expensive to both the lender and the borrower.


We also have clients that have already lost their property to foreclosure and would like to make an offer to the lender to purchase the property back from the lender REO department.  These clients also require financing or an investor partner to accomplish this purchase.  Seeking the assistance of a professional that understands the challenges associated with this process can save time and money.



We find that working through these ever changing markets conditions is a challenge to all of us.  Particularly in commercial real estate, no two properties are the same, and each transaction must stand up to the merits of the deal.  Understanding the moving parts and the motivation of each affected party is key to achieving success for each workout.



For additional information or comment please contact the author:

Chuck Matheny  602.697.7904

chuck@commercialequitysolutions.com

Strategic Defaults in Commercial Real Estate

By, Dr. Ted C. Jones, Economist Stewart Title

Latest NCREIF Data Show an Improvement in Commercial Real Estate Values in Q2

With an estimated $1.4 trillion of commercial real estate debt set to refinance by the end of 2014, more than half of that is underwater according to a Wall Street Journal article.
Good news, however, is an improvement in the just released Q2 2010 MIT Real Estate Group’s analysis of The National Council of Real Estate Investment Fiduciaries (NCREIF) data.  NCREIF is a not-for-profit trade association that provides data and analysis to the pension fund industry.  They track returns and prices and have more than $234 billion of value in 6,066 income producing properties.  Since these properties are held by pensions funds or retirement accounts, there no tax implications whatsoever.

Rather than using comparable sales, MIT produces what is similar to S&P’s Case-Shiller House Prices Indices, but for commercial real estate.  Rather than examining comparable sales and imputing that to other property values, these indices are based on a sale of a previously acquired property.

The table below shows the typical property value change since the time of acquisition.  The good news is that for the first time since 2007, property values did not track down further in value.  Bad news is that essentially, if a property was acquired since 2004 (but not in the last two or three quarters) it likely is worth the same or significantly less, depending on the date of acquisition.  In the table below, for example, an industrial property acquired in Q3 2007 is now worth almost 44 percent less than the purchase price.  Depending on the property type, acquisitions at the market peak in 2007 are now worth from 27.7 percent to 43.6 percent less than the purchase price.

You need to note that MIT states “results for the 1st, 2nd, and 3rd quarters of any year are considered preliminary and subject to revision until the calendar year is completed with the 4th quarter results.”

Maybe the light at the end of this tunnel is not yet another train.  And these days good news in real estate has been tough to find. 

Commercial Equity Solutions, LLC assists real estate owners in all aspects of their commercial real estate and have successfully assisted and counseled borrows to work with their lenders to modify their commercial loans and mitigate personal and corporate liability.



Commercial Property Owners Choose to Default- WSJ article
 For more info on these price data see MIT Real Estate Group’s analysis of NCREIF data.

Recent Commercial Modification Success Stories

Thrift Store Gets A 2 Year Extension

In February of this year a retail store owner in Glendale, AZ approached us and asked if we would be able to help save their store.  The store provides jobs for battered woman and the profits go to support battered woman's shelters.  They were just 2 weeks from the sale date when they engaged Commercial Equity Solutions, LLC to help.

They had become delinquent on their taxes and could not keep up on the payments.  Previously, the property owner had attempted to negotiate an extension and got nowhere until they retained Commercial Equity Solutions, LLC.

By demonstrating to the lender that the stores income had stabilized over the last few quarters, the lender agreed to a 2 year extension with interest only payments.

110,000 Square Foot Retail Center Gets Principal Reduction.

This multi-tenant retail property in Minnesota has had a high turnover rate because of constant retail lease renegotiation.  The property owners were unable to keep current on the taxes and soon became delinquent on the debt service.

The lender (a CMBS Trust) turned the account over to a special servicer and began foreclosure proceedings on the $9.4 million note.  Commercial Equity Solutions, LLC was successful in negotiations with the servicer and they agreed to a pay off of $5.5 million.

With the loan basis on the property reset to its market value, this shopping center will once again cash flow sufficiently to service the new debt.

Recent Commercial Modification News

To Fix Sour Property Deals, Lenders 'Extend and Pretend' Wall Street Journal - Carrick Mollenkamp - Lingling Wei But the practice is creating uncertainties about the health of both the commercial-property market and some banks. The concern is that rampant modification ...

Fitch Takes Various Actions on Bear Stearns Commercial Mortgage Trading Markets (press release) - 1 day ago ... modified and the borrower is performing under the terms of the modification. ... Similar to Fitch's prospective analysis of recent vintage commercial ... Fitch Downgrades GMAC Commercial Mortgage Securities 2001-C1 ...? - Earthtimes Fitch Takes Various Actions on Nomura Asset Securities Corp. 1998-D6? - Benzinga all 99 news articles »

Fitch
Affirms Protective Life Insurance Co.'s CMBS Servicer Ratings
MarketWatch (press release) - Jun 15, 2010
The servicer ratings are based on the methodology
described in Fitch's reports 'US Commercial Mortgage Servicer Rating
Criteria' dated June 19, 2009, ...
The
role of mortgage servicers? - Financial Times
The
role of mortgage servicers? - Financial Times
Fitch
Affirms Halliburton's IDR at 'A-'; Outlook Stable? -
Bradenton Herald
all
29 news articles »

BERNANKE ON COMMERCIAL REAL ESTATE

BERNANKE ON COMMERCIAL REAL ESTATE
"We are concerned about it, it clearly is a very weak point in the economy. For many banks, including small and medium-sized banks, it is a problem. We have done a number of things. The Federal Reserve, working with the Treasury, has developed programs to try to restart the commercial mortgage-backed securities markets. Beyond that we have issued guidance to banks on commercial real estate and we're trying to work with them to restructure commercial real estate loans and to find ways to manage in terms of loans, so we're doing the best we can with banks and with the markets. There seems to be, I would say, a few glimmers of hope in this area, some stabilization of prices in some markets, for example, but it does remain a serious concern and we're watching it very carefully."

Commercial Loan Workouts and Modifications

By Chuck Matheny

Commercial Equity Solutions, LLC


Many commercial borrowers now find themselves in the same condition today that a significant majority of homeowners are in. These commercial borrowers have negative equity or in other words their loan is greater than the value of their property. What is worse is that often the income from the property is not sufficient to pay the monthly debt service and taxes due on the property. This poses a problem when it comes to the end of the term of the loan and a refinance or extension is necessary. It also causes a more immediate problem of how will the commercial borrower pay the monthly loan and tax obligations.


This situation has evolved in most cases for two reasons; 1) the economy has caused many business’s to downsize or disappear thus causing increased vacancies and 2) due to the soft market many tenants have requested rent reductions from their landlord to help keep them in business and landlords have voluntarily granted them as it is most often in their best interest.


This situation leaves many commercial property owners in the tenuous situation of having to”feed the property” or support the monthly loan obligations while the property cannot sustain itself. At some point many owners have to determine if it is worth trying to hang on to their properties. The question that is often asked is do I want to keep spending good money after bad in this particular investment.


The lenders on the flip side are having no choice but to send out default notices if the payments due are past 30 days. If the lender feels that deficiencies are not curable and that the property is not being managed properly many will initiate some kind of foreclosure action and attempt to take the property back or at the very least appoint a receiver.


The good news in this scenario is that commercial lenders are realizing that it is often in their best interest not to aggressively pursue a foreclosure action. Often a better action is to modify on a temporary basis the terms of the note. Sometimes this can be done with the shortfall being forgiven by the lender. Some lenders are under such heavy regulatory pressure that the best solution is simply to move the note off their books through a short sale or short refinance. This can often be done where the lender will realize more than would come from a foreclosure. One key component in determining the best course of action for both lender and borrower is an accurate measure of the current value of the property. This is not an easy task where many of the comparables typically used in a valuation or appraisal are a balance between foreclosure sales and legitimate investor income or capitalization rate based sales. This value becomes a moving target. This is also one reason why appraisal firms are so busy. Values are changing monthly and have a wide range of variance.


If a short refinance is pursued as a course of action since the traditional commercial finance markets are so tight the best alternative is often private financing. This adds a whole new dimension of complexity to the process. Borrowers may even have to give up future equity to accomplish this short refinance with a private lender.


The other significant question that bears weight in the decision of what to do is the level of personal guarantees associated with the particular property. In many commercial properties, ownership involves multiple partners and this further complicates the situation. If some of the partners are not able to make necessary cash calls you can imagine the stress that is created.


Many borrowers would be well advised to get professional help in trying to make these difficult decisions, as there is usually significant equity at risk. Find someone that you feel will take the time to get familiar with the details of your commercial property. Also take the time to find someone that will understand the different values that your property will have in this distressed market. Finally, find a professional that will not be too pushy or adversarial with your lender as they are not obligated to do what the borrower desires to accomplish. Remember we are working for the most part in uncharted waters for both borrower and lender and no one knows how long these distressed market conditions will continue.

Commercial Loan Modification Article in National Mortgage Professional Magazine

Please read the following article I wrote for National Mortgage Professional Magazine.
"Commercial Loan Modification"

Record CMBS Delinquencies Reported by Realpoint

Realpoint released their  Monthly Delinquency Report.  Here are some highlights and charts from their 15 page report.



In January 2010, the delinquent unpaid balance for CMBS increased by another $4.3 billion, up to $45.94 billion from $41.64 billion a month prior. The overall delinquent unpaid balance is up 326% from one-year ago (when only $10.79 billion of delinquent unpaid balance was reported for January 2009), and is now over 20 times the low point of $2.21 billion in March 2007. The distressed 90+-day, Foreclosure and REO categories grew in aggregate for the 25th straight month – up by $7.42 billion (28%) from the previous month and over $27.95 billion (508%) in the past year (up from only $5.51 billion in January 2009). This included a substantial jump in 90+-day delinquency in January 2010.

CMBS Delinquency Amounts

CMBS Delinquency Percentages

 

All deals seasoned at least a year have a total unpaid balance of $789.07 billion, with $45.94 billion delinquent – a 5.82% rate (up from only 3.15% six months prior).

 Geography

• The top three states ranked by delinquency exposure have remained consistent since January 2009, as California, Florida, and Texas collectively accounted for 30% of delinquency through January 2010.
• The 10 largest states by delinquent unpaid balance reflect 57% of CMBS delinquency, while the 10 largest states by overall CMBS exposure reflect 52% of the CMBS universe.
• The state of California remains a major concern at near 13% of CMBS delinquency. By MSA, however, such delinquency is concentrated in the Los Angeles, Riverside-San Bernardino, and Orange County MSAs highlighted below.
• While by state delinquency exposure Florida ranks second, no Florida MSA is found in the Top 10 MSA’s ranked by delinquency exposure (highest being Miami, which ranked 14th in our data).
• Notably, over 10% of total CMBS exposure in the states of Florida, Arizona, Nevada and Michigan are delinquent, with the Phoenix, AZ and Las Vegas, NV MSAs accounting for the top 2 by delinquency exposure at (14% and 14.5% of the MSAs, respectively).
• Credit also appears to be deteriorating further in the Riverside-San Bernardino, CA MSA, as over 11% of the total MSA exposure was reported delinquent through January 2010.
• Texas delinquency is highly concentrated within the Dallas-Fort Worth and Houston MSAs.
• Only one MSA topped 4% of CMBS delinquency in January 2010, consistent with the prior month.
• The 10 largest MSAs by delinquent unpaid balance reflect 30% of CMBS delinquency, while the 10 largest MSAs by overall CMBS exposure reflect 34% of the CMBS universe.

Video: How Will The CRE Bubble Be Resolved?

Watch this interesting discussion on the commercial real estate crisis. Tom Flexner, head of real estate at Citigroup, and Richard LeFrak, president of the LeFrak Organization, talk to CNBC.

Billions in opportunistic private money remain on the sidelines as the large rift between buyers and sellers highlights the state of commercial lending.

Congressional Oversite Panel Issues Gloomy CRE Report

The Congressional Oversight Panel issued its 190 page report on CRE .  Find the executive summary below.  The complete report is available at http://cop.senate.gov/documents/cop-021110-report.pdf



Executive Summary

Over the next few years, a wave of commercial real estate loan failures could threaten America’s already-weakened financial system. The Congressional Oversight Panel is deeply concerned that commercial loan losses could jeopardize the stability of many banks, particularly the nation’s mid-size and smaller banks, and that as the damage spreads beyond individual banks that it will contribute to prolonged weakness throughout the economy.

Between 2010 and 2014, about $1.4 trillion in commercial real estate loans will reach the end of their terms. Nearly half are at present “underwater” – that is, the borrower owes more than the underlying property is currently worth. Commercial property values have fallen more than 40 percent since the beginning of 2007. Increased vacancy rates, which now range from eight percent for multifamily housing to 18 percent for office buildings, and falling rents, which have declined 40 percent for office space and 33 percent for retail space, have exerted a powerful downward pressure on the value of commercial properties.

The largest commercial real estate loan losses are projected for 2011 and beyond; losses at banks alone could range as high as $200-$300 billion. The stress tests conducted last year for 19 major financial institutions examined their capital reserves only through the end of 2010.

Even more significantly, small and mid-sized banks were never subjected to any exercise comparable to the stress tests, despite the fact that small and mid-sized banks are proportionately even more exposed than their larger counterparts to commercial real estate loan losses.

A significant wave of commercial mortgage defaults would trigger economic damage that could touch the lives of nearly every American. Empty office complexes, hotels, and retail stores could lead directly to lost jobs. Foreclosures on apartment complexes could push families out of their residences, even if they had never missed a rent payment. Banks that suffer, or are afraid of suffering, commercial mortgage losses could grow even more reluctant to lend, which could in turn further reduce access to credit for more businesses and families and accelerate a negative economic cycle.

It is difficult to predict either the number of foreclosures to come or who will be most immediately affected. In the worst case scenario, hundreds more community and mid-sized banks could face insolvency. Because these banks play a critical role in financing the small businesses that could help the American economy create new jobs, their widespread failure could disrupt local communities, undermine the economic recovery, and extend an already painful recession.

Present Condition of Commercial Real Estate

The commercial real estate market is currently experiencing considerable difficulty for two distinct reasons. First, the current economic downturn has resulted in a dramatic deterioration of commercial real estate fundamentals. Increasing vacancy rates and falling rental prices present problems for all commercial real estate loans. Decreased cash flows will affect the ability of borrowers to make required loan payments. Falling commercial property values result in higher LTV ratios, making it harder for borrowers to refinance under current terms regardless of the soundness of the original financing, the quality of the property, and whether the loan is performing.

Second, the development of the commercial real estate bubble, as discussed above, resulted in the origination of a significant amount of commercial real estate loans based on dramatically weakened underwriting standards. These loans were based on overly aggressive rental or cash flow projections (or projections that were only sustainable under bubble conditions), had higher levels of allowable leverage, and were not soundly underwritten. Loans of this sort (somewhat analogous to “Alt-A” residential loans) will encounter far greater difficulty as projections fail to materialize on already excessively leveraged commercial properties.

Economic Conditions and Deteriorating Market Fundamentals

The health of the commercial real estate market depends on the health of the overall economy. Consequently, the market fundamentals will likely stay weak for the foreseeable future. This means that even soundly financed projects will encounter difficulties. Those projects that were not soundly underwritten will likely encounter far greater difficulty as aggressive rental growth or cash flow projections fail to materialize, property values drop, and LTV ratios rise on already excessively leveraged properties. New and partially constructed properties are experiencing the biggest problems with vacancy and cash flow issues (leading to a higher number of loan defaults and higher loss severity rates than other commercial property loans).

For the last several quarters, average vacancy rates have been rising and average rental prices have been falling for all major commercial property types.

Current average vacancy rates and rental prices have been buffered by the long-term leases held by many commercial properties (e.g., office and industrial). The combination of negative net absorption rates and additional space that will become available from projects started during the boom years will cause vacancy rates to remain high, and will continue putting downward pressure on rental prices for all major commercial property types. Taken together, this falling demand and already excessive supply of commercial property will cause many projects to be viable no longer, as properties lose, or are unable to obtain, tenants and as cash flows (actual or projected) fall.

In addition to deteriorating market fundamentals, the price of commercial property has plummeted. As seen in the following chart, commercial property values have fallen over 40 percent since the beginning of 2007.

For financial institutions, the ultimate impact of the commercial real estate whole loan problem will fall disproportionately on smaller regional and community banks that have higher concentrations of, and exposure to, such loans than larger national or money center banks. The impact of commercial real estate problems on the various holders of CMBS and other participants in the CMBS markets is more difficult to predict. The experience of the last two years, however, indicates that both risks can be serious threats to the institutions and borrowers involved.

Although banks with over $10 billion in assets hold over half of commercial banks’ total commercial real estate whole loans, the mid-size and smaller banks face the greatest exposure.

The current distribution of commercial real estate loans may be particularly problematic for the small business community because smaller regional and community banks with substantial commercial real estate exposure account for almost half of small business loans. For example, smaller banks with the highest exposure – commercial real estate loans in excess of three times Tier 1 capital – provide around 40 percent of all small business loans.

Foresight Analytics, a California-based firm specializing in real estate market research and analysis, calculates banks’ exposure to commercial real estate to be even higher than that estimated by the Federal Reserve. Drawing on bank regulatory filings, including call reports and thrift financial reports, Foresight estimates that the total commercial real estate loan exposure of commercial banks is $1.9 trillion compared to the $1.5 trillion Federal Reserve estimate. The 20 largest banks, those with assets greater than $100 billion, hold $600.5 billion in commercial real estate loans.

Figure 17: Commercial Real Estate Loans by Type (Banks and Thrifts as of Q3 2009)

 

 

As seen in the Foresight Analytics data above, the mid-size and smaller institutions have the largest percentage of “CRE Concentration” banks compared to total banks within their respective asset class. This percentage is especially high in banks with $1 billion to $10 billion in assets. The table above emphasizes the heightened commercial real estate exposure compared to total capital in banks with $100 million to $10 billion in assets. Equally troubling, at least six of the nineteen stress-tested bank-holding companies have whole loan exposures in excess of 100 percent of Tier 1 risk-based capital.

Risks

In the years preceding the current crisis, a series of trends pushed smaller and community banks toward greater concentration of their lending activities in commercial real estate. Simultaneously, higher quality commercial real estate projects tended to secure their financing in the CMBS market. As a result, if and when a crisis in commercial real estate develops, smaller and community banks will have greater exposure to lower quality investments, making them uniquely vulnerable.

As loan delinquency rates rise, many commercial real estate loans are expected to default prior to maturity. For loans that reach maturity, borrowers may face difficulty refinancing either because credit markets are too tight or because the loans do not qualify under new, stricter underwriting standards. If the borrowers cannot refinance, financial institutions may face the unenviable task of determining how best to recover their investments or minimize their losses: restructuring or extending the term of existing loans or foreclosure or liquidation.

On the other hand, borrowers may decide to walk away from projects or properties if they are unwilling to accept terms that are unfavorable or fear the properties will not generate sufficient cash flows or operating income either to service new debt or to generate a future profit.

Delinquent Loans

Although many analysts and Treasury officials believe that the commercial real estate problem is one that the economy can manage through, and analysts believe that the current condition of commercial real estate, in isolation, does not pose a systemic risk to the banking system, rising delinquency rates foreshadow continuing deterioration in the commercial real estate market. For the last several quarters, delinquency rates have been rising significantly.



The extent of ultimate commercial real estate losses is yet to be determined; however, large loan losses and the failure of some small and regional banks appear to some experienced analysts to be inevitable. New 30-day delinquency rates across commercial property types continue to rise, suggesting that commercial real estate loan performance will continue to deteriorate. However, there is some indication that the rate of growth, or pace of deterioration, is slowing. Unsurprisingly, the increase in delinquency rates has translated into rapidly rising default rates.



The increasing number of delinquent, defaulted, and non-performing commercial real estate loans also reflects increasing levels of loan risks. Loan risks for borrowers and lenders fall into two categories: credit risk and term risk. Credit risk can lead to loan defaults prior to maturity; such defaults generally occur when a loan has negative equity and cash flows from the property are insufficient to service the debt, as measured by the debt service coverage ratio (DSCR).

If the DSCR falls below one, and stays below one for a sufficiently long period of time, the borrower may decide to default rather than continue to invest time, money, or energy in the property. The borrower will have little incentive to keep a property that is without equity and is not generating enough income to service the debt, especially if he does not expect the cash flow situation to improve because of increasing vacancy rates and falling rental prices.

Broader Social and Economic Consequences

Commercial real estate problems exacerbate rising unemployment rates and declining consumer spending. Approximately nine million jobs are generated or supported by commercial real estate including jobs in construction, architecture, interior design, engineering, building maintenance and security, landscaping, cleaning services, management, leasing, investment and mortgage lending, and accounting and legal services.

Projects that are being stalled or canceled and properties with vacancy issues are leading to layoffs. Lower commercial property values and rising defaults are causing erosion in retirement savings, as institutional investors, such as pension plans, suffer further losses. Decreasing values also reduce the amount of tax revenue and fees to state and local governments, which in turn impacts the amount of funding for public services such as education and law enforcement. Finally, problems in the commercial real estate market can further reduce confidence in the financial system and the economy as a whole. To make matters worse, the credit contraction that has resulted from the overexposure of financial institutions to commercial real estate loans, particularly for smaller regional and community banks, will result in a “negative feedback loop” that suppresses economic recovery and the return of capital to the commercial real estate market. The fewer loans that are available for businesses, particularly small businesses, will hamper employment growth, which could contribute to higher vacancy rates and further problems in the commercial real estate market.

Conclusion

There is a commercial real estate crisis on the horizon, and there are no easy solutions to the risks commercial real estate may pose to the financial system and the public. An extended severe recession and continuing high levels of unemployment can drive up the LTVs, and add to the difficulties of refinancing for even solidly underwritten properties. But delaying write-downs in advance of a hoped-for recovery in mid- and longer-term property valuations also runs the risk of postponing recognition of the costs that must ultimately be absorbed by the financial system to eliminate the commercial real estate overhang.

Any approach to the problem raises issues previously identified by the Panel: the creation of moral hazard, subsidization of financial institutions, and providing a floor under otherwise seriously undercapitalized institutions.

There appears to be a consensus, strongly supported by current data, that commercial real estate markets will suffer substantial difficulties for a number of years. Those difficulties can weigh heavily on depository institutions, particularly mid-size and community banks that hold a greater amount of commercial real estate mortgages relative to total size than larger institutions, and have – especially in the case of community banks – far less margin for error. But some aspects of the structure of the commercial real estate markets, including the heavy reliance on CMBS (themselves backed in some cases by CDS) and the fact that at least one of the nation’s largest financial institutions holds a substantial portfolio of problem loans, mean that the potential for a larger impact is also present.

There is no way to predict with assurance whether an economic recovery of sufficient strength will occur to reduce these risks before the large-scale need for commercial mortgage refinancing that is expected to begin in 2011-2013.

The Panel is concerned that until Treasury and bank supervisors take coordinated action to address forthrightly and transparently the state of the commercial real estate markets – and the potential impact that a breakdown in those markets could have on local communities, small businesses, and individuals – the financial crisis will not end.

CMBS Trusts Take Beating As Loans Are Liquidated

December 2009 saw the largest ever liquidation of commercial mortgage backed securities.  Over half a billion dollars in loans were removed from REMICs (real estate mortgage investment conduits) books.  This represents a five fold increase over the same period last year.

Investors in these CMBS bonds lost hundreds of millions.  Most of the loans were sold for less than 50% of their face value and some even sold for less then 10 cents on the dollar.

2009 ended with loans over $60 billion in special servicing, up from only $12.8 billion 12 months earlier.  A loan that is in special servicing is a loan that is either in default or likely to default soon.

Over $40 billion of CMBS loans were behind in payments as of the end of December, according to Realpoint, a nationally recognized credit-rating agency.

Lawmakers Urge Treasury to Support The CRE Market

 

WASHINGTON - This week, Congressman Paul E. Kanjorski (D-PA), Chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, and Congressman Ken Calvert (R-CA), sent a bipartisan letter to Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke about the growing concerns that deteriorating conditions in the commercial real estate (CRE) market may threaten an economic recovery.

"The growing bubble in the commercial real estate industry has the potential to infect our economy and slow a recovery," said Chairman Kanjorski.  "In order to safeguard the businesses operating on Main Street and protect the millions of jobs depending on commercial real estate, the Treasury and the Federal Reserve now must take needed and urgent action to stave off a potentially devastating wave of commercial real estate foreclosures and bank losses." 

"I am deeply concerned about the health of our commercial real estate market and the stability of thousands of small businesses across the country," said Congressman Calvert.  "We must take the appropriate steps to ensure that our commercial real estate market does not experience a liquidity crisis that would further exacerbate our struggling economic situation." 

"A liquidity crisis in the commercial real estate market is hurting small business owners across the entire nation," said National Association of REALTORS President Vicki Cox Golder, owner of the commercial real estate company Cox & Associates in Tucson, Arizona.  "I join with all commercial property owners who applaud the efforts of Reps. Calvert and Kanjorski to resolve this problem and put small business owners back in business." 

Specifically, the letter asks regulators to take the following steps:

• Establish a clear method for measuring and evaluating the effectiveness of recent CRE loan modification guidance issued by the regulators.

• Institute metrics to more clearly differentiate performing versus non-performing loans as well as any other steps that provide lending institutions with more confidence in assessing CRE loans.

• Make clear public statements encouraging lenders to continue to make credit available for performing assets as a means of restoring confidence and long-term value in the CRE market.

The $6.7 trillion CRE sector supports 9 million American jobs.  If the conditions in the CRE market deteriorate further the negative effects will be significant and widespread, rippling not only through the CRE sector but also the broader economy.  More than $1.4 trillion in commercial mortgages will come due by 2013, and as much as 65% of those deals will have trouble getting refinanced according to recent analysis conducted by Deutsche Bank.  While the Federal Reserve and Treasury Department have acknowledged the ongoing CRE challenges, their actions have so far failed to ease growing concerns among economists and market participants. 

The text of Congressmen Kanjorski and Calvert's letter which is signed by an additional 77 Members of Congress to Secretary Geithner and Chairman Bernanke from February 1 follows: 

Dear Secretary Geithner and Chairman Bernanke:
As you know, the financial crisis continues to have a dampening effect throughout the credit markets.  The commercial real estate (CRE) market, in particular, continues to experience difficult credit accessibility conditions.  Moreover, the scarcity of credit in the $6.7 trillion CRE sector poses a dangerous threat to our financial system just as our economy has begun to show signs of recovery. 

Earlier this month real estate data provider Trepp announced that the delinquency rate for loans underlying commercial mortgage-backed securities (CMBS) ballooned 500 percent in 2009, surpassing 6 percent in December for the first time.  Additionally, the CMBS market has all but shut down over the past year making it more difficult for CRE owners to sell or refinance. 

We appreciate the acknowledgement by federal regulators of this situation in October, when the Board of Governors of the Federal Reserve System, along with the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the National Credit Union Administration, and the Office of Thrift Supervision, issued a policy statement advising financial institutions to extend and/or restructure loans backed by income-producing and/or development properties whenever possible in order to minimize losses as well as to stabilize overall asset values in the communities they serve. 

While the regulatory guidance is a relatively recent occurrence, we remain concerned by early indications that it may not yet be having the desired impact in stabilizing the CRE market. While some properties are in desperate need of modification due to the economic downturn, we are not convinced these loans are being serviced properly or in an efficient manner.  Of even more concern, anecdotal evidence suggests that regulators continue to encourage lenders to write down the value of performing loans, whose payments may well be current and, in some instance, even call the loan.  This further exacerbates the crisis by creating defaults in properties that were able to meet their debt servicing. 

To ensure the recent CRE loan modification guidance will have a positive and stabilizing effect, and to protect the broader economy from further disruptions, we urge you to establish a clear method for measuring and evaluating its effectiveness.  Furthermore, we encourage you to institute metrics to more clearly differentiate performing versus non-performing loans as well as any other steps that provide lending institutions with more confidence in assessing CRE loans.  We also call upon you to make clear public statements encouraging lenders to continue to make credit available for performing assets as a means of restoring confidence and long-term value in the CRE market. 

In sum, we strongly believe that regulators must take continued steps to mitigate ongoing turmoil in the CRE sector before it becomes a full-fledged crisis, forestalls our economic recovery, and possibly requires additional taxpayer-funded capital injections.  Consistent with all applicable law and regulation, thank you for the consideration of our views and your attention to these matters.

### 

source http://kanjorski.house.gov/

Commercial Loan Modifications and Other Favorable Outcomes

When a commercial property owner hires a commercial modification consultant, a permanant modification is only one of many possible outcomes. Often the property owner is focused on one particular outcome without regard to other possibilities that are often more realistic.

Take a recent example of an owner of an apartment complex that was hell-bent on getting the mortgage holder to grant a principle reduction so that he could sell the property for a profit. He said he could get nowhere with the bank (no surprise there) and wanted to hire a consultant to negotiate a short payoff.

The reality is that the bank won't go for that kind of deal, it just stinks for them. The only way to get the note holder to reduce the principal is to pay him off prior to the sale of the property. One way this could be accomplished is to make a bonafide offer on the note.

A friendly note buyer would then allow the owner of the complex to sell it to a third party and share the profit. Another option would be a short refinance in which a friendly note buyer would buy the mortgage and restructure the terms with the current owner.

Every situation is different. In order to make a recommendation of the best course to take as an owner, an in-depth study must be preformed in order to uncover all of the facts that are relevant.

CommercialModificaiton.com offers consulting services to business owners. Click or call for a thourough evaluation of your situation.

Tishman Walks Away From $5.4 Billion Mortgage

Watch this video discussing the largest CMBS mortgage deal to ever go bust, this month when investors walk away from from an underwater mortgage.

Commercial Real Estate & Loan Modification News

Stuyvesant Town/Peter Cooper Village apartment complex misses loan payment - Reuters

Commercial Mortgage Delinquencies Spike, But There Is Hope - Wall Street Journal

A bottom in CRE?

Recently, talking heads on CNBC and elsewhere have been calling a bottom in CRE.  I am not so sure.  See this article by CNBC's Diana Olick.

Here are some numbers we reported yesterday from Trepp, a leading provider of CMBS and commercial mortgage information and analytics:

• Commercial MBS delinquencies rise 502 percent from a year ago to 6.07 percent.
• Hotel CMBS delinquencies jump 900 percent to nearly 14% of all loans in default.

Those are just a few ridiculous stats that I need to throw out to preface today's premise that commercial real estate is a buy.

Am I nuts?

No. Look, there is definitely going to be more pain before we see any gain, but after two interviews today, I started to think that maybe it's not all blood and guts in the market.

"We have seen a trend that keeps ticking upward, and we currently do not see a reason to say that that has plateaued, so we don't think the other shoe has ropped yet," says Trepp CEO Annemarie Dicola. But on the flip side, she adds, the investors are circling. "We find that a lot of our users are combing through the data looking for some interesting distressed opportunities, to try to find the overvalued properties that maybe now should be revalued and invested in."

We already know that Harry Macklowe is jumping back in to the lot vacated by the old Drake Hotel in Manhattan. Also, Blackstone Group is going after Highland Hospitality, a lodging REIT, despite the nasty numbers I wrote above. Why? There is activity, especially in the office sector.

 "There's a significant increase in the velocity of leasing, and by velocity I mean the number of square feet leased on a monthly basis," says Steve Siegel, Global Brokerage Chairman at CB Richard Ellis. "New York, for example, the first five months January through May we had an average of 900,000 square feet leased and from June until the end of December we had 1.8 million, so roughly a 100 percent increase per month."

There is also more activity in retail, of course depending on where you are. If you add the fact that commercial real estate construction has ground to a halt, and there is not the oversupply in commercial that there is in residential, you also see the positives. I'm also told lenders are working harder to save some of the delinquent loans, which Dicola calls a "green shoot." And that's making investors' ears perk up.

"What we have seen at trepp absolutely is a lot of new entrance to the CMBS market, a lot of investor groups that have been forming, circling and studying a lot of the data, and we see a lot of preparation for investor activity in this market," says Dicola. She cites three successful CMBS offerings at the end of 2009 after an 18 month drought. Investors have built up cash, and "volatility has now created a market for them.

Commercial Modification Consulting Business Opportunity

As the commercial real estate market looks for footing, the volume of defaulting commercial loans is rising at the fastest pace ever.  Property owners and banks alike are scrambling to come up with solutions in an environment of shrinking rents rising vacancies and the absences of a commercial mortgage market.  All of these factors together create an opportunity for consultants to help property owners resolve their mortgage problems. 

CommercialModification.com, has assembled a group of highly experienced negotiators and processors to facilitate commercial loan modifications and other optimal resolutions for commercial property owners.  

CommercialModification.com is offering a branch affiliate business opportunity to real estate agents, mortgage brokers, consultants and attorneys.  Becoming a CommercialModification.com branch affiliate, instantly brings credibility and substance to the services that you currently offer your clientele.
Sales Support


CommercialModification.com branch affiliates get 100%, 360 degree support in everything from marketing and initial sales calls to customer acquisition and follow through.  The company offers advanced web based lead followup and sales cycle completion reporting.

Back Office Support
The commercial modification process involves extensive negotiations, in-depth market research, financial analysis and hours of tedious data collection, discovery, verification and reporting.  After we make the sale of the consulting services, the professional team follows up and executes the plan that is proposed.


Internet Marketing
CommercialModification.com provides a regional sub-domain website for each branch affiliate.  As the number one ranked website for commercial mortgage modification, www.commercialmodification.com gets the lions share of web traffic in this vertical market.  In order to attract local search engine traffic, each branch affiliate will have a unique website that will be targeted to generate local commercial modification leads.  An example of a regionally targeted sub domain is http://newyork.commercialmodification.com.  This website has already achieved a high rank on Google searches for "new york commercial loan modification".

Training
Initial training is conducted by weekly webinars.  These are 1 hour meetings with 30 minutes of prepared material and 30 minutes of Q and A.  The topics will include marketing, prospecting and client intake.  Branch affiliates will participate in the sales process and customer webinars.  You must attend at least 10 client webinars and complete a written exam to be qualified to conduct client webinars.  Each quarter there is a 3 day training seminar at the processing center in Arizona.


How to get started.

The first step is to register for a webinar.  Go here to sign up.  We will send you an invitation for the next scheduled webinar.

Commercial Modification Consulting Opportunity Webinar Schedule

CommercialModification.com is offering a branch affiliate business opportunity. Interested parties can attend a 30 minute webinar that outlines the background of the key players and the depth and scope of services offered to commercial property owners.

Prospective affiliates will get an overview of the branch enrollment process and commercial modification consulting business opportunity.



Tuesdays 900 am Pacific Time

Thursday 300 PM Pacific Time


To register http://www.commercialmodificationleads.com/Webinar_Registration.html

Commercial Modification News

(FED) The Economic Outlook - Forex Hound

Balance is key, new boss believes - Boston Globe

The Biggest Losers - Wall Street Journal

Real estate faces a tough slog to recovery - Wall Street Journal