Forbearance trumps Foreclosure
For the time being, Forbearance apparently trumps Foreclosure!
Do you have a commercial real estate mortgage coming due and see no way, at present, to pay it off or refinance? Or perhaps you’ve been through this stressful drill during the past year, and the old bromide, ‘Take one day at a time’ has new and sobering meaning for you. If so, and in either event, I know just how you feel. As we’re oft wont to say, ‘Been there, done that!’
With that stated, however, what is one (i.e. borrower) to do when faced with, 1) imminent default, 2) loan balloon with no replacement lender and property worth less than the debt, or 3) loan balloon with no replacement lender and a property worth more than the debt? First step is ‘education’. If you didn’t read Creighton Weber, Nick Bertino, & Tony Petosa’s (Wells Fargo) recent (August 2009), excellent two page special report on this very subject, ‘What to do when your loan comes due!’, contact this Blogger for a free copy (via Blog reply or MHIndustry HOTLINE: (877)MFD-HSNG or 633-4764.
Next step? Well, that depends on your particular circumstances and the terms and conditions of your commercial real estate loan(s). Right now (i.e. remainder of 2009 and into 2010 – and hopefully, longer) many, if not most, lending institutions ‘have been reluctant to foreclose’*1; and some special servicers (i.e. “… party designated to ‘work – out’ loans or foreclose on loans, if they go into default” CW) have opted to forbear rather than foreclosure.
In a recent issue of PERE magazine, Sam Zell (i.e. Think ELS, Inc., as in Equity Lifestyle Properties, Inc., formerly MHC, Inc.) was interviewed for his views on this and related realty topics. Sam argued that ‘despite declines in property values of at least 30 percent, banks (are) willing to let borrowers “carry” their loans beyond maturity, even if they (have) little chance of paying them off.’
“Everyone is talking about this giant balloon of loans coming due,
that the end of the world is coming because we’re never going to be
able to refinance. Instead, we have a scenario of extend and pretend.
If an owner has no equity, just an option – a hope certificate – why
would he sell unless he was under complete distress? He’ll extend
as long as he can keep paying the debt service and the lender will
leave him in place.”
End result, in Mr. Zell’s opinion? “I don’t think there are going to be significant grave dancing opportunities in equity this time round, other than in the hotel business.” *2 So, that confirmation brings faint hope to those faced with (maybe) imminent default and either of the two ‘loan balloon with no replacement lender’ situations.
But not everyone sees this favorable – though – personally or corporately – stressful scenario continuing for long into year 2010. The following is quoted from the Executive Summary of Urban Land Institute’s (‘ULI’) recently released, prestigious, annual tome Emerging Trends in Real Estate:
“…the commercial real estate industry hits bottom in 2010, suffering
a surge of painful write downs, defaults, and workouts. Massive
government infusions finally build up loss reserves in financial
institutions to levels allowing them to foreclose or strike deals with
many over leveraged borrowers.” *3
The tome’s author goes onto state: “…2010 will be the worst time for investors to sell properties in the report’s 30 – year history, but will offer a much – improving environment to buy (with cash).” *4 – no limiting equity opportunities to the hotel sector here.
So when do these confusing, and again, yes – stressful debt and equity aberrations end? Probably not until sometime after 2015, according to Emerging Trends.
“Debt markets will remain severely compromised – resuscitated banks
will increase lending slowly, employing strict underwriting standards
and requiring significant equity stakes from borrowers. Moribund
CMBS (Commercial Mortgage Backed Securities) markets remain
entangled in complex workouts of failed multitranched structures
with mounting levels of troubled loans maturing through 2015.” *5
Care to share your unique ‘loan due scenario’ with readers of this Blog? Then reply directly to this Blog, phone above MHIndustry HOTLINE, or write GFA c/o Box # 47024, Indianapolis, IN. 46247.
Important Reminder! Compilation of 21st annual ALLEN REPORT is just about complete. More landlease community portfolio owners/operators listed this year (125) than last. Given the altered landscape of MHIndustry & LLCommunity trade press reporting, this year’s ALLEN REPORT will only be available, as a free lagniappe, to Allen Letter paid subscribers, or through direct purchase for $134.95 from PMN Publishing @ (317) 346-7156. Credit card orders welcome! If you own and or manage this unique type income – producing property report, you need the 21st annual ALLEN REPORT as a handy and ongoing reference resource to the asset class benchmark statistics. GFA
1. Quoted from RCAReport published by NAR @ Fall 2009, p. 1.
2. PERE magazine, November 2009, p.22.