Archive for December, 2009

Commercial loan modifications are now a viable solution for commercial real estate investors who are currently behind on their mortgage payments or have a hardship such as a decrease in property values due to increasing vacancies or other economic factors. A commercial real estate owner can benefit from a commercial loan modification because of its ability to increase cash flow and avoid foreclosure. When deciding whether to initiate a commercial loan modification the property owner should begin by determining what kind of financial institution is holding his or her commercial mortgage. Most commercial loans are issued by one of four different institutions including: commercial mortgage backed securities (CMBS), Fannie Mae, life insurance companies or commercial banks.

In their most recent quarterly report from December of 2009, the Mortgage Bankers Association has reported that loans held by CMBS have now reached an all time high default rate of 4.06%. For commercial property owners who are considering the commercial loan modification of their CMBS held loan there are some very important facts and figures that must understood before they decide to attempt negotiating modified terms for their CMBS. The commercial loan modification process for CMBS can be a very complicated and lengthy process that involves negotiating with more than one party.

When CMBS are created they are designed to anticipate a predicted rate of default. The big issue that the industry is facing now is the fact that defaults have already reached levels well beyond what anyone had anticipated earlier. This has left the owners of CMBS scrambling to find a solution. There are two separate bondholder groups that must be negotiated with during a CMBS commercial loan modification. The first group are the banks and institutions that have a senior level position. The second group are the investors who hold a secondary position to the senior bondholders, known as the junior bondholders. The junior bondholders took on more risk than the banks and therefore expected a greater rate of return. The rights of bondholders are spelled out in a Pooling and Service Agreement (PSA). The PSA gives voting rights to junior bondholders.
The differing interests between senior and junior bondholders can make a commercial loan modification a difficult and lengthy process.

For example, a retail strip center owner might have a loan balance of $10 million, but the real value of the strip center in today’s market is now only $8 million. The owner might have the ability to pay the debt at the new market price of $8 million if the additional $2 million is written off. The senior bondholders would probably agree with this solution but the junior bondholders, in a weaker position, would be forced to take the losses of $2million and would probably oppose such a commercial loan modification. In fact, if the junior bondholders were to be faced with a few of these situations at the same time then they might face the prospect of losing all of their money.

When searching for a company to facilitate a CMBS commercial loan modification it is extremely important that you find someone who has experience doing commercial loan workouts specific to CMBS.
If you would like more information about commercial loan modification please visit: Commercial Loan Modification USA

We live in unprecedented times, times when our government is nationalizing whole industries and hardly a day or a week goes by when another industry needs a bailout. The banking industry has been hardest hit with bailouts or outright closures happening at a record pace.

Right now, there are estimated to be between One ($1,000,000,000,000-$2,000.000.000.000) and Two Trillion dollars worth of Commercial Mortgage Backed securities floating in the market. The problem is that no one knows what these securities are worth and what the “security” (commercial real estate) for the securities is worth in today’s market. That uncertainty creates a unique opportunity for the commercial real estate owner.

Rates are low!

Right now the Federal Discount Rate is ½ of One Percent and the Prime rate as published by the Wall Street Journal is hovering at 3.25 percent. Rates that haven’t been seen in nearly 100 years, and probably won’t be seen again for a long time.

If you bought your property in the last 5 years you are probably paying a substantially higher rate than that. Depending on the credit history of the borrower and the “quality and quantity” of the income stream your rate could be double or even triple that.

If you have an adjustable rate loan you’re a happy camper right now, but don’ get to comfortable things change…and they are going to change fast. Most economists believe that as a result of the stimulus package the FED will have no choice but to raise rates in 2010.

Now is the perfect time to convert a floating interest rate mortgage into a low fixed rate and lock in the savings.

Banks are scared!

Nobody wants to talk about it…but there is a 800lb. Gorilla in the room…commercial mortgage Balloons. The unique characteristic of most commercial loans where the entire loan balance is due and payable long before the loan is fully amortized.

Lenders started doing the “balloon” thing right after the interest rate crisis in the early 1980’s. Lenders in the good old days used to make 30 year fully amortized loans at fixed rates, low fixed rates.

Visit here for a free Commercial Loan Modification Consultation

When Paul Volker “slayed the dragon” (inflation) by precipitously raising the FED funds rate banks were left with 30 year loans at 5% interest per annum. The problem was that the banks were paying 12% or more for their money. The banks didn’t want to be exposed to long term low interest rate lending so…viola…the balloon payment was born!

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Today almost all loans originated in the past 3-5 years have balloon payments coming due; the problem is there is nowhere to refinance the loans. In fact even the lenders that currently hold the loans are loathed to refinance them and in some cases have even stopped lending altogether.

Visit the following link for immediate help with your commercial loan modification

Lending is pretty much dead!

Someone once said “A bank will only lend you money if you don’t need it!” and that holds pretty much true today.

Despite all the hoopla about TARP/TRAF and all the other bailouts Lenders aren’t lending. Yes, they took the money but they are not lending any of it. In fact one major bank used the TARP funds it got to buy back its own stock at a discount. They bailed their investors and themselves out ant the taxpayer is holding the bag.

One lender recently announced that they have $42 BILLION in cash available but instead of lending it they are buying the assets (loans) of their competitors at huge discounts creating double digit yields. For them to match the return they would have to be able to lend at 10% per annum or more.

So lenders are sitting on the sidelines waiting to see what is going to happen in the overall economy before coming back into the market. This has the net effect of making it nearly impossible to refinance a loan.

Banks don’t want the real estate!

Another reason banks are scared is that unlike you or I the thought of owning real estate sends an icy shiver down most banker’s spine.

Banks are in the money business not the real estate business don’t believe me have a bank trust department operate a piece of real estate for you.

Banks don’t have the staff or expertise to operate real estate and they don’t understand the market. They are not expert in leasing or management which are key to whether a property is profitable or not (and can pay back its loans).

One major difference is that a piece of real estate on banks “books” is a liability and not an asset. For every piece of real estate a bank has to take back a “loan loss” must be booked and a reserve placed in cash to offset a portion of that loss.

The net result is less cash to lend, less profit to the bank, less cash flow to operate on and possible exposure to the FDIC and liquidation.

If a bank restructures a “non-performing” loan by lowering the rate, or payment or lengthening the loan term it is able to move that loan into a performing status. This is what didn’t happen during the RTC days the result of that was the complete liquidation[1] of hundreds of banks and savings and loan.

The Economy is slow!

News flash the economy is in the doldrums retail sales are off, housing starts are non-existent; unemployment is “officially” pushing 10%. Durable goods orders are off and car sales have plunged since the cash for clunkers program ended.

Investment real estate sales are nearly at a complete halt. So, even if an owner wanted to sell a property the likelihood of that happening is very, very, very low.

That goes for banks too. If a bank were to take back a building it would find it very difficult to sell the asset and if they could it would be at a steep discount.

Two quick war stories, I recently disposed of an asset for a local bank. The asset was a 6 unit apartment building with 5 boat slips in a tony area of South Florida. The original bank lent nearly $2 million on the property which on its best day, fully rented was worth maybe $600,000.

But it was a Luxury Condo conversion and as most people know that’s just what we need more of. As it happens the borrower couldn’t get it converted quickly enough and missed the market. Subsequently the borrower stopped paying the bank and the bank moved to foreclose.

The original bank was declared insolvent by the FDIC and liquidated. A local bank bought the “assets” of the failed institution for a substantially discounted price.

Nearly a year later after paying property management fees, making thousands of dollars in repairs, and contesting a number of code violations the property was sold. The final number $825,000 with the new bank financing the purchase at 5% interest only for the 1^st year, 5% P & I for year 2-4 and a balloon in year five.

Oh, and it only took about 12 contracts and two dozen offers to get the property sold.

Last war story, an acquaintance of mine just went through a “short-sale” on his property in Detroit. The property was financed at $147,000 three years ago the sales price in 2009 $7,500.

TARP/TRAF and the pot of gold

TARP or the Troubled Asset Relief Program is over. Unless the current administration can figure a way of magically making money appear there is no more money available.

The financial institution that got the money by and large are hording it as a hedge against uncertainty and the institution that paid it back represent a drop in the financial bucket.

The crisis that is looming is at least twice the size of the last bailout and the well is dry.

TALF or Term Asset Backed Loan Facility is designed “to help market participants meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities (ABS) collateralized by auto loans, student loans, credit card loans, equipment loans, floor plan loans, insurance premium finance loans, loans guaranteed by the Small Business Administration, residential mortgage servicing advances, or commercial mortgage loans.” (right off the FED’s website)

I know of no instance where any of this relief has been used or even made available.

So the idea that anyone banks included are going to be “bailed-out: is pretty farfetched.

Giving the current state of the capital markets banks and borrowers are going to have to deal with existing debt financing and make a go of it.

The Market

In any economic cycle there are always buyers and sellers in the market and transaction business the situation however is vastly different than it was just a few short years ago.

Most of the market participants are in the market by necessity not by conscious choice. Most sellers are selling only because they have to, they may need to raise cash, lower overhead or a combination of both.

The sellers in the market are not in the market as a “profit taking” proposition they need to sell and that is reflected in pricing across the board.

Buyers in the market are looking for bargains. They feel that now is the time to take advantage of the reduction in pricing and the desperation that is prevalent today.

The problem both the buyers and sellers have is a complete lack of debt financing. There are simply no lenders lending in the market currently and if they are it is at LTV’s and terms that make no sense.

The only buyer that will be successful are those that either can pay all cash for an asset (which greatly reduces the yield) or find an owner willing and able to finance the property.

Banks are especially concerned with trying to sell assets in the market; they don’t want the exposure to long marketing times, the diminution of values and the cost and expense of maintaining, leasing, and managing a property.

As an example I have been told that in an effort to avoid taking back assets some banks are allowing “wrap-around” mortgages in spite of the alienation clause in most mortgages. In the banks mind a performing asset on someone else’s books is far better than a non-performing asset on the banks books,

Uncertainty

Lenders, borrowers, retailers, builders are all concerned with the future and the direction the overall market is going to take.

Uncertainty plays a role in pricing expectation as well if you believe that the market is going to recover quickly the tendency would be towards price stabilization or even an increase.

If on the other hand you believe that there is likelihood that pricing will soften further the tendency will be towards a lowering of prices.

This uncertainty creates a dissonance between ask/bid type pricing. In other words nobody really knows what a given property is really worth in the context of today’s market unless and until it sells.

This disconnect creates an opportunity for the commercial owner looking to modify a loan. The value of the property is anyone’s guess, the direction of the market is uncertain and the duration of the uncertainty is unknown.

Values and Velocity

With all the uncertainty what is happening across the board is a general decline in values and a curtailing of any market velocity.

The values are declining for a number of reasons some of which have no basis in reality. If the property is fully leased and has little or no vacancy and the tenants are “creditworthy” theoretically the value should be stable.

However, as we have seen the values are slowly declining as investors eschew commercial investment real estate for other less volatile and illiquid investments.

With less interest there is generally less volume and velocity, product is taking much longer to sell as buyers are spending a greater and greater amount of time in due diligence.

Some sellers have become so disheartened that they have decided to sit this cycle out and wait a few years for a recovery before bring a property to market.

Less volume and longer marketing times mean lenders and sellers alike are exposed to declining values and the “dead cat bounce”.

What does it all mean?

In short now is the “perfect storm” for commercial loan modifications.

Rates are at historic lows. Lenders are scared to death of taking back assets and trying to dispose of them in the current market and they are not in the property business they are in the money business.

Banks don’t want assets on their books performing or not, the banks want money and cash flow so they will do just about anything to avoid the F-word (foreclosure).

A modified loan is a performing loan, and lessens the lenders exposure to FDIC scrutiny and possible liquidation. As of the writing of this article 12 of the top South Florida Banks have had to raise over $1 BILLION to stay in business this year alone.

How we can help?

Commercial Capital Advisors, LLC is a full service commercial loan modification company specializing in the modification, restructuring of commercial loans only.

The principals of the company have over 40 year of real estate experience and have represented lenders as receivers, asset managers, property managers and workout specialist.

We are expert in valuation, sales, and leasing and have strategic alliances with property management, commercial lenders and appraisers.

We currently represent several banks in the creation of commercial loan documents including deeds, notes and mortgages on behalf the lender.

Our staff of attorneys have been in law for over 30 year and specialize in commercial real property transactions. Our processing department is staffed by full-time employees and is closing 50-60 cases each month.

We can reduce or eliminate late fees, penalties, and other charges. We can eliminate balloon payments and reduce interest rates.

We can restructure amortization schedules and modify terms of the loan all to your benefit.

For More Information:

CCA – Commercial Capital Advisors

Ted Karsch
1-954-727-3316

Visit here for a free Commercial Loan Modification Review

Commercial Loan Modification

With a projected 700 banks on the FDIC failure watch list many analysts are beginning to wonder how many more banks will fail due to the fact that they are holding non-performing commercial loans. In my role as a commercial loan modification consultant I speak to commercial real estate owners who have seen their occupancy levels drop between 30% and 60% over the last two years. These numbers are devastating to the individual commercial property investor who depends on rents to pay their expenses and mortgage loan. Many commercial property owners are turning to commercial loan modifications to help them weather the storm.

“Commercial real-estate debt is potentially more dangerous to the financial system than debt classes such as credit cards and student loans because of its size.” The Real Estate Roundtable, a trade group, estimates that commercial real estate in the U.S. is worth $6.5 trillion and financed by about $3.1 trillion in debt. Partly because the commercial real-estate debt market is nearly three times as big now as in the early 1990s, potential losses in dollar terms loom larger”(Source: Wall Street Journal.)

In the next 24 months, a staggering eight hundred and eighty five billion dollars of commercial mortgages are coming to term. Unfortunately, only 50 billion dollars are available to lend.  This leaves the prospects for refinancing a distressed property very unlikely.  For commercial property owners and their Banks who are caught in between a rock and a hard place, commercial loan modifications provide a viable alternative for resolving the impending multitude of distressed property scenarios. As a result experienced commercial real estate analysts will be needed to utilize their origination skill sets and provide assistance to investors caught in between the banking credit crunch and the growing irrelevance of capitalization rates (Cap Rates are an indirect measure of how fast an investment will pay for itself).

When renters were plentiful and price per square footage was twice the current market rate, commercial property owners qualified for inexpensive, short term loans, generally fixed for 3, 5 or 10 years. Today, net operating income (rents minus management, maintenance, utilities and vacancy factor of 5%) is dropping to par or below the Debt Service Ratio calculated in the past.  Your approach will be to convince the Bank that because Annual Net Operating Income divided by the depreciated Market Value has diminished capitalization rates, a “hardship” has legitimately presented itself for mitigating the previously underwritten mortgage terms.

The Commercial Loan Modification Process

Many business owners will be looking for a life preserver, or more specifically, an exit strategy. Hence, Commercial Loan Modifications are a viable solution. The commercial mortgage modification company becomes a helpful consultant  for the struggling investor by analyzing all sides of the sinking ship and then increasing the cash flow situation by lowering the mortgage payments.

The process begins with the mortgage professional originating and compiling of supporting financial documentation (typically, Rent Rolls, year to date Balance Sheets, Profit and Loss Statements, Tax returns with all Schedules intact, Mortgage and business bank statements, and an Executive Summary outlining the Hardship.) After the required documents are stacked, a due diligence period of approximately seven days takes place to determine how to structure a case for negotiating with the special assets department of a commercial Bank or private lender.  Contrary to popular belief, Commercial Loan Modifications take less time than residential modifications.  Because the banks are not inundated as they are with residential modifications, the decision maker can be engaged earlier in the game. Generally, sixty days from beginning to end appears to be the approximate time line.

Negotiating with the Bank will inevitably require the legal expertise of a Real Estate Attorney and the processing acumen of an experienced underwriter familiar with analyzing financial statements and tax returns. Therefore, it would be prudent for the Mortgage professional to align themselves with a team of experienced commercial real estate and legal professionals.

There are two main reasons:

Reason number one: The current economic market conditions have generated a huge vacancy factor, leaving many property owners of retail strip centers, apartment buildings, warehouses and offices in a vulnerable state of affairs. They no longer qualify for the strict lending guidelines of commercial finance, whether private equity, portfolio lenders or institutional banks. The main underwriting culprit: DSR escalation. DSR , Debt Service Ratio, generally at 1:1.20, represents that for every dollar that is lent, the lender wants to see a dollar and twenty cents returned. This ratio no longer “pencils” due to the fact that anchor tenants, major retailers, have shut their doors and the current occupants remaining are only willing to pay a discounted rent rate, predominantly at 50 percent of the previous price per square foot originally qualified by the lender.

As a result, part of originating a commercial modification entails analyzing the market ratios, forensic auditing of mortgage documentation, assessing both historical and future value, and ultimately determining an appropriate solution to suture the cash flow bleeding.

Reason number two: In order to negotiate, you have to have bargaining chips.  These chips come in many forms, from gentrifying the property management for augmenting rent rolls, applying for variances on use codes and certifications of completion, or to selling the distressed property or Note to a sideline of investors, whether Joint Venture Capital or Real Estate Investment Trusts. The larger your pool of available exit strategy resources, the more apt the bank will be to let your principle buy time for salvaging the sinking ship. Needless to say, the bank does not want to be left holding the bag at the end of the new negotiated loan term.  Nor are banks or lenders in the business of giving away the house. It is imperative to have all your ducks in a row before presenting your case to a savvy banker or their legal counsel. Adding to the complexity, each bank or lender is governed by different parameters.

CLEAR SKIES AHEAD

Drafting a win/win scenario with the bank, which would entail alleviating their frozen reserves and improving their asset ratios and/or lender portfolios, will not only increase your probability of a successful commercial loan modification, but you will also be fostering a long term relationship with your investor clients who will be inclined to ride out the economic storm with you.