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."