Friday, September 10, 2010

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

Thursday, September 2, 2010

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.