There are more than two trillion dollars in commercial loans that will mature within the next couple of years. With values down an average of 40% or more, refinancing is next to impossible for most property owners but workouts may save the day.
September 30, 2010 (Newswire.com) - Why is Commercial Modification THE Business Solution for 2010 and Beyond?
Because from the mid 90s to 2007 commercial real estate financing exploded along with residential. While it didn't receive much fanfare it grew at an exponential rate due to the creation of CMBS (commercial mortgage backed securities) loans. These are loans where a "conduit" lender funds commercial loans and then sells the entire portfolio or "pool" of loans as a security on wall street.
Consequentially lenders financed commercial loans that were not necessarily safe. High ltv (loan to value), low DCR (debt coverage ratio) deals with inexperienced or low personal asset borrowers led to a fall out.
These loans were done as 5/25 or 7/30 or 10/30s for the most part, meaning 5 yr term with a 25 year amortization. Those loans are now coming due. In the mean time the market has experienced a drop in values averaging 43% or more across the U.S.
Properties purchased for 1 million dollars in 2003 - 2005 are worth almost half or 500k - 600k due to rising CAP rates and lower NOI caused by tenants going out of business or not renewing.
This has created a huge problem for banks and investors in CMBS loan pools as the loans mature with no new financing available. Many will default simply because they could not secure new financing and not because they lack cash flow to pay.
Enter Commercial Modification or Debt Restructuring as a solution. Banks now realize as does the federal government that if we don't modify these loans (ala residential) they will default causing a tsunami of debt, bank failures, increased unemployment and financial chaos on wall street.
The IRS, FDIC and Treasury have begun to act by extending TALF, Issuing a Policy Statement on Commercial Modifications and Eliminating the tax liability for investors of CMBS loans who work to modify those in distress while loosening the language for what is in fact a "distressed" property.
Looking forward through 2012 there will be more than 2 trillion in commercial loans coming due. At present there is no solution for the fact that the conduit loans and CMBS market are for the most part shut down.
For those who get in now, establish themselves and treat the clients fairly the opportunity to earn huge while saving commercial investments and jobs as well as keeping performing loans on the positive side of the ledger for banks and lenders is virtually unlimited.
For property owners with maturing commercial loans, modification may be the only way to avoid losing their investment and maintaining much needed cash flow.