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

Commercial Loan Modification Special Report