Dear Commercial Real Estate Professional

Commercial Loan Modification USA is now hosting an exclusive weekly webinar with Adam Von Romer of Commercial Capital Advisors, LLC. Adam Von Romer, our chief bank negotiator, is a commercial real estate broker and CCIM who has successfully performed commercial loan workouts for dozens of banks over the past 20 years. The commercial loan modification training webinar is free to attend and is created to inform commercial property owners how the commercial loan modification process actually works.

Some of the topics to be covered in upcoming commercial loan modification trainingwebinars include:

• The effect of recent government legislation on commercial loan workouts.
• The potential economic damage that could result from massive commercial real estate foreclosures.
•  Government strategies to deal with the commercial loan crisis.
•  How banks are approaching the commercial loan modification process.
•  What banks are looking for in a commercial workout proposal.
• How to indentify if a commercial property and commercial owner are a good candidate for a successful workout.

There are 500 billion dollars of commercial loans coming due in 2010 and many more billions in delinquent commercial loans sitting on the books of major banks.

Begin your Commercial Loan Modification Training

Banks are acting aggressively right now to foreclose on commercial property owners.

If you purchased an apartment building or other commercial real estate property in the last five years you have probably seen the value of your investment plummet by at least 40%. Now is the time to protect yourself from over reaching banks and avoid foreclosure.  Attend our commercial loan modification training: Register Here Now

Please join us as we interview Adam Von Romer of Commercial Capital Advisors, LLC. Adam is our chief bank negotiator and has been performing successful commercial loan workouts for the past 20 years. Register Now

***If you are unable to attend our scheduled live webinar, please download a copy of a recent webinar Here

In our free commercial loan modification training webinar you will learn:

1.  What is a Commercial Loan Modification?
2.  What properties and borrowers qualify for a commercial loan modification?
3.  How a commercial loan modification can help a commercial real estate owner stay in business.
4.  Why banks are eager to perform commercial loan modifications.

If you are a commercial real estate owner who owns a property in financial distress or if you know of someone who is, this might be the most important event that you attend all year.

I look forward to seeing you there! Register Here Now

Who should attend our Commercial Loan Modification Webinar?

• Apartment Building Owners
•  Strip Mall Owners
•  Office Building Owners
• Hotel and Motel Owners
• Commercial Real Estate Agents
• Commercial Mortgage Brokers
• Certified Public Accountants
• Real Estate Attorneys

Sincerely,
Ted Karsch
Commercial Capital Advisors, LLC

Almost every type of small business has been hurt over the past few years by what is now being called “The Great Recession”, however, one segment of the small business economy that has seen its fair share of pain has been those people who own small or medium sized hotels and motels. Many of these owners are now seeking hotel loan modifications. As the unemployment rate has reached as high as 20% in some major economic areas such as Detroit and 10% average for the nation as a whole many hotel owners have seen their occupancies drop by as much as 80% in some areas. This is understandable considering the fact that a lot fewer families have the excess capital available to spend on vacations or travel. Business travel has all but dried up as a result of the economic downturn. Many hotel and motel owners have found that they can no longer afford to keep making their full mortgage payments and many others have decided to stop paying their mortgages all together.

According the many real estate analysts commercial real estate prices have declined by 40% on average. In some areas of the country this number has reached as high as 60% and we have even reviewed specific hotels and motels that have lost as much as 80% of their 2007 values. Almost every hotel or motel owner who purchased their property in the past 5 to 7 years now finds themselves owing more on their property than what it is worth and in the middle of the worst recession that the U.S. has ever seen.

Solutions for hotel owners are not easy to come by. It is now almost impossible to find financing for hotel and motel properties as most commercial lending institutions have either stopped lending entirely or changed their underwriting guidelines so drastically as to exclude all but the best deals from being financed. To make matters even worse, the Congressional Oversight Panel released their February report entitled “Commercial Real Estate Losses and the Risk to Financial Stability” where they predict that over 500 billion dollars of commercial balloon notes will be coming between now and 2011. Meanwhile, there are no banks sitting on the sidelines to refinance these properties.

The current economic times leave few options for hotel and motel owners who are in financial distress. The most recent hotel owner client of Commercial Capital Advisors, LLC is an nationally flagged chain hotel in Orlando, Florida. They purchased their property in 2007 for 4.25 million dollars. The most recent appraisal for the property came in at 1.5 million dollars. This represents a loss of over 2 million dollars in equity in just a three year period of time.

For many hotel and motel owners facing a similar situation, the best option they have is a hotel loan modification. In many cases a successful hotel or motel loan modification will be able to lower interest rates, give an extended period of forbearance, extend the balloon date for the note and occasionally reduce the balance of the mortgage.

For more information please visit: Hotel Loan Modification

Commercial Loan Modification

Over the next two years there will be eight hundred and eighty five billion dollars of commercial mortgages that will be coming to term. Even with major stimulus from the federal government there are still only fifty billion dollars available from banks for commercial lending. This leaves eight hundred and thirty billion dollars of commercial loans that can not be refinanced or renewed. Unfortunately, not all of these commercial property owners will be able to hold on to their properties. Many of them will unsuccessfully try negotiating with their banks on their own. A larger number will probably just throw up their hands and walk away from their property. However, most commercial real estate owners that we have worked with are desperate for an affordable solution that will allow them to hold on to their property and stay in business.

As a commercial loan modification agent you will be helping American business owners stay in business while teaming up with a group of seasoned industry professionals including a commercial real estate broker and CCIM with over 20 years of successful experience performing commercial loan workouts for dozens of national banks.

1) Find a Commercial Property Owner in Distress

Many of our referral partners are commercial real estate professionals who already have a large database of prospective clients. However, we have had referral partners successfully transition their skill to this niche from many different industries. As a referral partner for our company we will share with you how to find commercial property owners in your local area and across the United States. We will also supply you with marketing materials including direct mail letter templates, sample emails, a brochure template and a business card template.

2) Fill out the two Page Intake Form

Once you have found a prospect who owns a commercial real estate property in distress your next step is to fill out our two page intake form. The intake form gives our underwriters the essential details about the subject property and describes the hardship that the owner is experiencing.

3) Submit the Intake Form to our Underwriter for Approval

Our underwriters will take between 24 to 48 hours to review the intake form before making an approval decision.

4) Deliver the Contract to the Client.

Once the file is approved, our underwriters will prepare a contract that you will deliver to the prospect by email. The contract is a legal description that describes the commercial loan modification process that will take place and what is expected of both parties.

5) Collect Signed Contract.

The next step is to collect the signed contract from the client. The contract will instruct the client where to wire funds to pay the fee. All fees will be held in a verifiable escrow account as outlined in the client contract. As a referral partner you will be paid according to the terms outlined in our “Client Referral Form”.

6) The Modification Process Begins

Once the contract is returned and the payment made, the loan modification process begins.

For more information on how to become a Commercial Loan Modification Agent visit our website.

Despite the fact that banks are not lending they used to on construction projects and commercial real estate there still exist many alternative financing options for the commercial real estate investor who is willing to do some leg work and research. The following are a list of alternative funding sources that are being used in today’s market.

1. Commercial Loan Modification Bank loans are simply not an option for many commercial real estate owners who have seen the values of their properties drop between 30% and 50% over the past two years. Many commercial property owners now owe more on their commercial loans than the property is worth. The most affordable solution for commercial real estate owners who want to stay in business and hold on to their commercial property is a commercial loan modification. A commercial loan workout can lower the interest rates on the commercial loan by as much as 5%, convert the loan to interest only, defer payment all together and lower the balance on the loan. Banks do not want to take back commercial loans. They are more amenable than ever to facilitating workouts that allow them to keep a conforming loan on their books and avoid default.
2. IRA and Retirement Accounts. It is now easier than ever to tap into retirement accounts for the purchase of real estate. There are legal services that give business owners and real estate investors the ability to transfer money from their 401(k) and IRA to a C corporation. Once the funds are deposited into a C corporation they can used to purchase real estate without paying taxes or penalties due to the transfer. It is important to seek the counsel of a tax professional to ensure that you are abiding by all laws and regulations.
3. Stimulus Money. There are many stimulus programs now available from the state and federal governments that may assist the commercial real estate investor, developer or business owner. Low income multi-family projects may qualify for tax breaks and grants from the county or city government where they are located. The American Recovery and Reinvestment Act of 2009 set aside funds for small companies working in alternative energy.
4. U.S. Small Business Administration (SBA). While most other kinds of traditional financing have seen major cutbacks, SBA loans are actually increasing in today’s economy. Government guarantees have increased all the way to 90% as part of the recovery act. The SBA’s 504 program is a useful investment vehicle for owner-occupied business real estate which allows the owner to put down as little as 10%.
5. Seller Financing. Many commercial real estate owners are finding that they need to sell properties to cover the expenses of maintaining another property that under performing. These owners are forced to sell many times because they are unable to find refinancing. Many of these commercial real estate owners will also be open to the prospect of offering seller financing at a very affordable rate.
6. Friends and Family. It can often be awkward and uncomfortable to ask a relative for a loan. However, they often will trust you and now there are social lending websites that will create a formal loan document between the lender and borrower.

Knowing how to pick a commercial loan modification company can be a difficult task. There are many factors to consider and the most important is to first decide whether you are good candidate for a commercial loan modification. Many commercial real estate owners have seen their property values decline between 30% and 50% depending on where their properties are located in the country. The major reason for the decline in commercial property values for most people is the vast increase in vacancies seen for multifamily properties, office buildings and retail centers.

The economic recession has forced many businesses, large and small into bankruptcy and many renters in apartment buildings have decided to take on roommates or move back in with family. The second reason for falling commercial property values is the fact that it is now extremely difficult to find financing for any kind of commercial real estate. For example, just a few years ago it was common to see commercial loans underwritten with loan to value ratios of 85%, now the new standard is 60%. Most commercial loans are 5 or 10 year loans that balloon. This means that in 2010 there will be a record high number of loans ballooning and no banks or lenders ready to provide financing on these properties. For many commercial property owners the best option that they have is to initiate a commercial loan modification. The apartment building owner who has seen his occupancy fall from 85% to 50% has no chance whatsoever right now of refinancing his property without resorting to a hard money lender whose rates average between 10% and 20%. Hard money loans for most business owners under financial hardship are not a realistic solution that will allow him or her to stay in business.

A commercial loan modification offers the property owner the possibility of extending the terms of his or her loan with the lending institution while lowering the interest rate dramatically and occasionally even lowering the loan principal. Compared to losing the business or paying astronomical interest rates with a hard money lender, a commercial loan modification is the commercial real estate owner’s best option. However, before signing on the dotted line, a commercial real estate owner must do their homework and find out exactly who will be negotiating with their lender and how much experience that company or person has actually performing successful commercial real estate loan modifications.

Experience is the key to success in commercial loan modifications. If you type in “Commercial Loan Modification” into the Google search engine you will find dozens, if not hundreds of companies that are now offering commercial loan modification services across the United States. As of right now, this is an unregulated industry that doesn’t require any kind of licensing or qualifications. This means that literally anyone can put a sign on their door and call themselves a commercial loan modification company or expert. It is truly a case of caveat emptor. The commercial real estate owner is wise to begin his search by investigating the background and experience of each company that he is considering doing business with. Remember, the best salesman may not do the best job on your commercial loan modification.

Ask these questions about the commercial loan modification company:

1) Does the commercial loan modification company have lawyers on staff?

2) Does the company only do commercial loan modifications or is most of their business conducted doing residential loan modifications?

3) Does the commercial loan modification company have references from successful commercial loan modifications that have been performed?

4) What are the backgrounds of the key executives? Do they have a long career and track record in the commercial real estate industry?

5) Does the company offer a money back guarantee on their services?

6) Does the company have qualified and experienced lawyers on staff?

7) How is the Google reputation of the company? What kind of information comes up in the search results for Google when you type in the company name?

Has the company published articles or information in any recognized industry journals or websites?

Ask these questions of the person who will be performing your commercial loan modification negotiation:

1) Who is the actual person that will be negotiating with the bank on my behalf?

2) How many years of commercial real estate experience does this person have?

3) Does the commercial loan modification negotiator have any industry designations such as the Certified Commercial Investment Manager (CCIM)?

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

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!

For immediate help with your

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

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.

According to Reis Inc., a New York real-estate research firm that tracks vacancies and rents in the top 79 U.S. markets, the vacancy rate reached 7.8% this summer, which is normally a strong period for rentals. And, the rate is expected to rise even further in the fall and winter, when rental demand is weaker, pushing vacancies to the highest levels since Reis started keeping records in 1980.

What is Causing the Increase in Vacancies?

One word: unemployment, which is close to 10%-a 26 year high. It seems that the high jobless rate is leading would-be renters to double-up or move in with family or friends.

How to Profit From High Vacancies

Because apartment building prices are tallied according to the income and expenses of the property many apartment building prices have fallen drastically due to increased vacancies. In many areas of the country apartment building prices have fallen 30% to 40% from their peak. This is probably the best time in the last 30 years to buy an apartment building at a great price. As the economy recovers so will your net income and the value of your investment.

I encourage you to get started right away. The fist step is to educate yourself by ordering
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Fannie Mae is now offering a new program aimed exclusively at commercial real estate owners who are unable to make their monthly mortgage payments. The new program called the Payment Reduction Plan (PRP) comes as welcome relief to many apartment building, office building and shopping center owners who have seen drastic decreases in vacancies over the past twelve months. These vacancies have seriously impeded commercial property owners’ ability to pay their mortgages. PRP allows commercial owners to negotiate with their loan servicer for up to a 30% reduction on their commercial mortgage payments.

According to the Fannie Mae website the “The PRP provides a borrower with temporary payment relief while the servicer and borrower work together to find the appropriate permanent foreclosure prevention solution. PRP offers an additional foreclosure prevention solution for borrowers who are ineligible for the Home Affordable Modification Program (HAMP).”

Under the PRP monthly commercial loan payments can be reduced up to 30% off of the total principal and interest only. The program is strictly for non owner occupied and investment properties.

The Fannie Mae website explains that “during the maximum six month period of forbearance, the servicer should work with the borrower to identify the feasibility of, and implement, a more permanent foreclosure prevention alternative. The servicer should evaluate and identify a permanent solution during the first three months of the forbearance period and should implement the alternative by the end of the sixth month.”