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
Showing posts with label commercial modification. Show all posts
Showing posts with label commercial modification. Show all posts
Friday, September 10, 2010
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 Q2With 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.
Thursday, August 12, 2010
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.
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.
Thursday, July 8, 2010
Recent Commercial Modification News
To Fix Sour Property Deals, Lenders 'Extend and Pretend'Wall Street Journal - CarrickMollenkamp - 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 Trading Markets (press release) |
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 »
Thursday, January 28, 2010
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.
Wednesday, September 16, 2009
IRS Relaxes Rules for Modification of Commercial Mortgages
Effective today, the IRS has issued a new rule (IRS Revenue Procedure 2009-45 http://www.irs.gov/pub/irs-drop/rp-09-45.pdf) that eases the restrictions on modifications of commercial mortgages that have been packaged into commercial mortgage backed securities.
This action allows borrowers to open discussions with the loan servicer prior to any default in an attempt to work out the loan. Prior to this new rule only a very small number or loans in a servicing pool could be modified and they must already have been in arrears.
Commercial property owners can get a free consultation at http://www.commercialmodification.com
This action allows borrowers to open discussions with the loan servicer prior to any default in an attempt to work out the loan. Prior to this new rule only a very small number or loans in a servicing pool could be modified and they must already have been in arrears.
Commercial property owners can get a free consultation at http://www.commercialmodification.com
Saturday, August 15, 2009
A New Paradigm For Commercial Real Estate Financing?
By Ted Schmidt
Commercial real estate is financed primarily through three channels, portfolio lending, commercial mortgage backed securities (CMBS) and direct cash purchases.
Portfolio lenders are regional banks, insurance companies, pension funds and others that lend money directly to commercial property owners. These loans stay on the lenders books for the life of the loans. Portfolio lenders have pulled out of the market and are actively trying to reduce their exposure to commercial real estate.
CMBS loans are made by mortgage banks that fund the initial transaction and then sell the income stream that the loan produces as investment vehicles on the stock market. The CMBS market seized up in 2008 following the sub-prime crisis and even with efforts from the Federal Reserve with the Term Asset Lending Facility (TALF) program to "prime the pump" the market is still effectively locked down. The TALF program allows institutional owners of CMBS to use the securities as collateral for extraordinarily low interest rates loans. This was designed to grease the wheels of the CMBS market but does not address the nearly $270 bn. capital deficiency on the exiting $800 bn. in maturing loans in the next 2 years.
Effectively there is nowhere to go. The options for both borrower and lender are few. Fed Chairman Ben Bernake says that these loans "ought to" be modified. Portfolio loans have some chance of being worked out and restructured since it is easy to identify and contact the owner. The major obstacle for regional banks who own these loans is that if they modify the loan or accept a short sale, they have to recognize the loss on their books. At a time when they are already hurting for capital they are reluctant to acknowledge the loss and would rather keep it on their books at full value. CMBS's cannot be modified because IRS rules that would render invalid the mortgage conduits tax exempt status. (these rules were changed 09-16-09)
Commercial property buyers remain on the sidelines as values plummet. Property owners and portfolio lenders are in still in denial about the true market value and can only sell at distressed prices. Right now, only seller financing and all cash deals are being accomplished in the commercial real estate space. Property owners are seeking commercial loan modification alternatives.
We need an entirely new way to fund commercial real estate transactions. Will the government step in with a commercial real estate bailout? Who will they bail out? Will congress pass new laws that will circumvent servicing agreements and force investors to accept renegotiated terms? These questions need to be answered.
We need a new paradigm in commercial lending. Comments please.
Commercial real estate is financed primarily through three channels, portfolio lending, commercial mortgage backed securities (CMBS) and direct cash purchases.
Portfolio lenders are regional banks, insurance companies, pension funds and others that lend money directly to commercial property owners. These loans stay on the lenders books for the life of the loans. Portfolio lenders have pulled out of the market and are actively trying to reduce their exposure to commercial real estate.
CMBS loans are made by mortgage banks that fund the initial transaction and then sell the income stream that the loan produces as investment vehicles on the stock market. The CMBS market seized up in 2008 following the sub-prime crisis and even with efforts from the Federal Reserve with the Term Asset Lending Facility (TALF) program to "prime the pump" the market is still effectively locked down. The TALF program allows institutional owners of CMBS to use the securities as collateral for extraordinarily low interest rates loans. This was designed to grease the wheels of the CMBS market but does not address the nearly $270 bn. capital deficiency on the exiting $800 bn. in maturing loans in the next 2 years.
Effectively there is nowhere to go. The options for both borrower and lender are few. Fed Chairman Ben Bernake says that these loans "ought to" be modified. Portfolio loans have some chance of being worked out and restructured since it is easy to identify and contact the owner. The major obstacle for regional banks who own these loans is that if they modify the loan or accept a short sale, they have to recognize the loss on their books. At a time when they are already hurting for capital they are reluctant to acknowledge the loss and would rather keep it on their books at full value. CMBS's cannot be modified because IRS rules that would render invalid the mortgage conduits tax exempt status. (these rules were changed 09-16-09)
Commercial property buyers remain on the sidelines as values plummet. Property owners and portfolio lenders are in still in denial about the true market value and can only sell at distressed prices. Right now, only seller financing and all cash deals are being accomplished in the commercial real estate space. Property owners are seeking commercial loan modification alternatives.
We need an entirely new way to fund commercial real estate transactions. Will the government step in with a commercial real estate bailout? Who will they bail out? Will congress pass new laws that will circumvent servicing agreements and force investors to accept renegotiated terms? These questions need to be answered.
We need a new paradigm in commercial lending. Comments please.
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