As the residential real estate market has seen a massive level of mortgage delinquencies and foreclosures over the past twelve months the commercial real estate market so far has not seen the same kind of fallout. However, this could soon change. In fact, Apartment Finance Today dedicated an entire section of their industry magazine in July to what they title “The Gathering Storm” in commercial real estate.
There are quite a few factors that have contributed to the coming problems in commercial real estate and one of the main issues is the fact that many commercial real estate properties were purchased with loans that were backed by commercial mortgage backed securities (CMBS). These CMBS were underwritten with extremely aggressive terms, often offering as much as 90% financing with loan terms that only stretched for five years. Now, according to Apartment Finance Today, apartment building values have dropped as much as 30% and those loans are beginning to become due. “As apartment values continue to descend, the LTV ratio of existing debt gets skewed. A loan that was made at 75 percent LTV two years ago may now be at 85 percent LTV or higher,” said says Don King, head of national agency lending at Needham, Mass.-based CWCapital.
This situation has created a unique problem for both commercial real estate owners and the banks that hold the real estate notes. Many banks and lenders are now more willing to extend and modify the terms of these loans so that owners can afford to stay in the property.
According to Apartment Finance Today, banks are most eager to work with property owners who have reinvested money in their properties. Banks do not want to take ownership of commercial properties, especially in this market. But they are most willing to negotiate with owners who have shown that they have proven property management shills. They don’t want to float a property that has a lot of deferred maintenance. Deferred maintenance is a sign to banks that the owner might not be doing well financially.
One of the available options for apartment building owners to pursue is to refinance another property that has more equity and reinvest in those properties that are currently struggling. This is a route that many have taken; however, it is not an option for everyone. The investors who stand to lose most in the “Gathering Storm” are those that only own one or two properties. Thankfully, there are now companies that specialize in commercial loan modifications. For many, this might be the best option. Generally, these companies charge a small percentage of the total deal size and by law, they must offer a money back guarantee. This means that if the commercial loan modification is turned down by the bank then the apartment building owner doesn’t pay anything.
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Article Author: Ted KarschTed has written 70 articles for us.
Visit Ted's Website: http://www.apartmentbuildinginvestor.com
Joshua Dorkin
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It’s nice to know that the smaller commercial owners still have options. Thanks!
In your article you stated that by law the modification companies by law give you a money back guarantee, can you tell me the statute you are speaking about. thank you.
@Shane: I’m not sure if it’s mandatory, however state by state guidelines for doing business vary; most states do require at the very least a 3 day right to cancel, some states are very specific with regards to upfront fees – e.g. California’s DRE – and specifically dictate basically what your disclosures need to say, who can be licensed, and of course the specifics of the money back guarantee..