Come to Us for Central Massachusetts Commercial Real Estate
Damian Paletta of the Wall Street Journal has reported in the article below that the Feds are considering a new plan to allow banks to create workouts on commercial loans rather than letting the loans go into default. We realize that this would ulitmately have the potential to cause more bank failures if too many commerecial loan losses accumulate in the bank's portfolio.
As more tenants are renegotiating lease terms with their landlords, the investor's situation is most likely deteriorating potentially causing them to go into loan default. We know that many lenders have been doing workouts on their own initiative. It's good to see the feds working toward a practical solution while the commercial real estate market sorts itself out over the next few years.
"WASHINGTON - Federal bank regulators are close to issuing guidelines that would encourage lenders to rework troubled commercial real-estate loans, a sector of the economy they expect to topple scores of additional financial institutions."
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This article sumitted by Robert Yale, CCIM
contact bobyale@svn.com
Central Massachusetts Commercial Real Estate
Come to Us for Central Massachusetts Commercial Real Estate
Why? It boils down to fundamentals. We recently experienced an unprecedented upward spiral in commercial real estate (CRE) values with some properties selling at unrealistically high prices compared to their underlying real value. Too many investors bought at low CAP rates in the 3 to 5% range without paying enough attention to the true value of some of the leases, the tenants, and the local market. And they over leveraged their purchases at 80% loan to value or more. This didn't leave a lot of room for the loss of a key tenant or, as is the case now, tenants coming back to the landlord to renegotiate their rents downward - or just vacating before their lease terms expire.
I heard a report this morning suggesting that there are $1.7 Trillion dollars of CRE mortgages outstanding today. Not all of these are in trouble, but the estimate is that 25% of these, or over $400 Billion worth, are "under water". Of this figure, lenders have only recognized about 10% of these troubled assets.
No one knows what the real number is, but let's say $350 Billion of troubled assets are still to be recognized and dealt with in some manner. How will this affect you?
We already recognize that, in general, values have dropped from 30% to 50% from their peak in 2006-07. If this is true in your market and for your property type, then your 70% loan to value mortgage is under water and subject to be called by the lender. The momentary favorable news is that lenders don't want your property and are tending to "kick the can down the road" as one commentator put it. In other words, defer action and see if the problem will go away.
I'm a glass half full guy and I hope the problem will go away, but I was in this business during the late 80's and early 90's and saw that these problems tended not to go away.
Are there steps that you can take today? Yes, although I don't want to imply that any single fix will correct everyone's problems. Each owner's asset must be looked at carefully with consideration to the points above and more. The US commercial real estate market is made up of thousands of local markets. No one brush can paint them all equally. So even within a portfolio there may be different solutions suggested.
As part of a national real estate firm we're in a position to put you in touch with the right experts to offer a solution. These parties may be local, part of our national Asset Recovery Team (SVN ART) or one of the many outside firms with whom we have affiliations for specialized purposes.
Whether you contact Sperry Van Ness or another source, take a look at your CRE properties now, recognize the true value of your property and compare it to your mortgage value. Include in this a risk analysis for your tenant base and discount any growth you may have built into your operating statements - since the growth may go the other way.
This artilce contributed by Robert L. Yale, CCIM
Sperry Van Ness/ComVest Realty
Northborough, MA 01532
508-351-7079
bobyale@svn.com
Central Massachusetts Commercial Real Estate