Since early 2009, approximately $161 billion in commercial mortgage-backed securities (CMBS) loans have been transferred by traditional lenders into special servicing. According to recent Fitch ratings reports, FDIC insured lending institutions reported approximately $77.7 billion in noncurrent loans at the close of 2011. Through the remainder of 2012, 5-year loans underwritten in 2007, at the peak of the credit bubble; are set to come due. With many of these loans already listed as nonperforming, alternate resolution strategies are becoming increasingly popular among lenders and servicers.Over the next five years, the remainder of the outstanding 7 and 10 year term (worst performing) CMBS loans will be coming due. Economic conditions, though showing a glint of stabilization, are not expected to improve to the levels needed to adequately support the conventional refinancing needs of these debt loads. As the final wave of peak-bubble vintage loans arrive at maturity, pressure on servicers to approve work out strategies is expected to peak. Options such as modification, liquidation, short sales, discounted payoffs, and loan sales have increased in frequency over the past two years.Of these measures, Fitch recently identified a spike in the execution of loan sales in the second half of 2011 and into the first quarter of 2012. This is especially true for groups of small balance loans (less than $10 million) listed as either sub or nonperforming. Bulk purchases of small balance, nonperforming debt have translated into new securitizations offering potential investors significant returns with properly positioned leverage.Sub and nonperforming loan sales and securitization are expected to bring about a new wave of foreclosures and work out strategies originating from capital investment groups, small private banks, and tertiary level real estate investors. New, small sized investment groups seem to be coming out of the woodwork and purchasing nonperforming loan bundles, along with a new wave of investors funding hundreds of new securitizations for pennies on the originating dollar.As this trend is realized and new primary note holders stake their claims to the troubled assets, commercial property owners face a future of uncertainty. Several regions across the nation are still struggling with high vacancy rates. Of the commercial real estate sectors still working toward stabilization, office space and hospitality remain as the most incapable of finding a footing in a murky recession floor.The recent economic crash has forever changed the landscape of the commercial property market. Small sized office parks/complexes and franchise hotels populate the highest percentages of loans listed as sub and nonperforming. Since the general intent of lenders and investors alike will be to avoid a full recurrence of another valuation-based credit collapse, conditions will most likely never return to the inflated peaks of 2005-2007. For many commercial property owners, particularly those of office parks and hotels, that may very well mean a guaranteed permanent departure from formerly perceived norms, instead of a gradual, yet hopeful progression back toward them.Despite the fact that loan notes may be changing hands, office park and hotel owners (among others) will still be faced with the challenge of bringing their loan current, meeting a looming maturity obligation, or negotiating some form of workout. The bundled sale of debt and new securitization is offering many lenders with acceptable strategies to cut their losses, but the underlying problems driving the nonperformance continue to line the path ahead.Present borrowers of nonperforming assets will be faced with what may seem like a “luck of the draw” when it comes to the sale of their small balance loan. It may depend on the overall investment strategy of the buying entity. Much like the personal investment strategy of “aggressive growth”, the strategy of the capital investment firm purchasing troubled small balance CMBS debt could be “aggressive foreclosure”. Just as likely, many tertiary level buyers could entertain a hypothetical strategy of buying debt at 50% of list and allowing the present borrower to repay on a modified plan of 65% of that balance. To liken this uncertainty to a game of commercial property roulette is actually quite appropriate.Borrowers ultimately faced with the choice of negotiating terms with a new note holder, or facing an expeditious foreclosure, may actually realize a bit of hope. Again, depending upon the investment strategy of the note purchaser, a discounted note sale or other modification of terms may actually be the preferred approach. However, the terms under which a capital investment group or committee are willing to approve a workout option almost always require to the borrower to jump through several veritable hoops; all while agreeing to strict monthly reporting protocols, lock box agreements, and minimum reserve payment stipulations. Such workout terms frequently require the property owners to back the agreement by making additional out of pocket payments. In some cases, modification terms can appear to be just as difficult, if not worse, to accept as a foreclosure itself.No matter what the eventual outcomes of all of the peak bubble loans coming due, accompanied by the bulk resale and securitization of much of the small balance nonperforming debt, only one thing is certain; commercial property owners are going to need some guidance. Commercial loan modification/ consulting organizations have grown over the past few years and often serve as a viable resource for distressed borrowers who wish to save their properties from foreclosure, but require assistance communicating their plight to the note holder. With the right experience and established relationships, such firms are successful in helping borrowers to reach workout terms which are fathomable and worth the near-term sacrifices required to yield a positive, stabilized long-term outlooks.
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