Commercial Real Estate: Distressed Borrowers not Distressed Properties

An interesting comment on CNBC regarding commercial real estate caught my attention. The guest (I wasn’t paying close enough attention to catch his name) suggested that the problem with CRE isn’t so much distressed properties rather it is distressed borrowers.

This makes a lot of sense, though I think it might be a mistake to extend it to the entire CRE market. For instance, I suspect that there are a lot of properties in the retail sector that are truly distressed and will remain so for the foreseeable future.

But back to the subject. While outside of retail, CRE is showing strains, objectively the decline in fundamentals hasn’t been that drastic. Vacancies are up and rents are down but not viciously. In normal times it would be a manageable situation. A few tweaks in capital structure, a little more equity and maybe some concessions from the lender would normally have been sufficient to put the situation right.

Unfortunately the excess utilization of leverage, overly ambitious cap rates based on proforma NOI growth and the difficulty of renegotiating securitized loans have combined to create a problem that requires massive tweaks. It’s not that the properties are performing that poorly in relative terms, it’s that the borrowers are massively under water with little prospect for restructuring.

The end result is still likely to be significant foreclosures of CRE with resales substantially below the prices the properties fetched several years ago. Put more simply, CAP rates are going to come back to reality. If you buy the argument that the fundamentals aren’t that bad then, it could be one of the best buying opportunities since the early 1990’s.

An aside here. If this interests you, look for B- or C+ properties in close proximity to core A office properties. You’ll attract a lot of tenants that want the prestige of the area or that need to be close to clients that locate in the A buildings. Your rents will be at a discount to the A property rents, but will be substantially above rents in more remotely located sub-A markets, and you may not have to pay much of a premium over them.

So if you’re looking at a real estate play, CRE might be something to keep an eye on. Sooner or later a lot of properties are going to come back to the financial system and they’ll have to be disposed of.

Comments

[malach hamo...:]

distressed borrowers in the public market offer opportunities too; the unsecured bonds or notes of some 2nd tier reits are selling at highly distressed levels even as there is real equity value in their more junior preferred and common shares.

often the gains on these notes will be accelerated as these reits use available cash to repurchase notes at a discount (but at prices higher than on can purchase same).

it's not exciting, but it sometimes works.

Apr 27 08:05 PM

[mrmillergd:]

Without the debt cushion, firms can't afford a speed bump.

Apr 27 11:46 PM

[Alok Swain:]

1) One other thing I noticed especially after reading CLP earnings release and I quote "In the first quarter we repurchased $96.9 million in notes for $70.6 million, representing a 27.1% discount or net gains of $24.3 million or $0.43 per share. To date we've improved our equity position through our repurchase program by approximately $50 million."

2) You can read here.
seekingalpha.com/artic...

3) The point being those who have access to credit (line) are buying back their own debt at a discount and making capital gains.

4) And whats more they are eventually taking their un-encumbered properties and borrowing against it from Fannie Mae for between 5% to 6% or so and then paying off their credit line. Wow!

5) Same company read "Earlier this week we locked the rate with Fannie Mae on an additional secured facility to provide financing of $145 million with a 10-year term and an interest rate of 5.29%. We're adding one additional property to this facility, which will bring total proceeds to approximately $155 million. The facility will be secured by eight multi-family properties and is expected to close later in the second quarter."

I consider that a wonderful strategy. Sort of like bond arbitrage. See. :-))

On Apr 27 08:05 PM malach hamovess wrote:

> distressed borrowers in the public market offer opportunities too;
> the unsecured bonds or notes of some 2nd tier reits are selling at
> highly distressed levels even as there is real equity value in their
> more junior preferred and common shares.
>
> often the gains on these notes will be accelerated as these reits
> use available cash to repurchase notes at a discount (but at prices
> higher than on can purchase same).
>
> it's not exciting, but it sometimes works.

Apr 28 11:49 AM

[Bestsolutio...:]

You Gotta Luv CA.
They have the solution to the Subprime Mortgage Crisis,
all the foreclosures and short sales.To finally stop the falling
home prices and stabilize the housing market.
As per WSJ article( Google:Tax Credit Gives California Builders A Lift )
Some economists state it is doing nothing to help but it also generates
increased TAX revenues as well as Sale tax revenues on household items
and CREATES employment......THIS IS FOR NEW HOMES PURCHASE!!!

PLEASE APPLY THE SAME PRINCIPLE TO ALL THE UNDERWATER,
DEFAULTING AND SOON TO BE DEFAULTING LOANS and turn the "toxic"
bad loans INTO 100% asset based AAA loans.

The "EVERYBODY WINS PLAN" is simple and it is profitable.
A longer term loan at very low interest rates that


MAKE ALL THE HOMES AFFORDABLE.

As in California
They have added $10,000 to the $8,000 credit
to purchase new homes.

WHY NOT USE THE SAME TACTIC TO END
ALL FORECLOSURES AND SHORT SALES
AND TURN THEM INTO AFFORDABLE HOMES.
END THE MASSIVE INVENTORY ON THE MARKET
AND STABILIZE PRICES.

The "EVERYBODY WINS PLAN"

ALL LOANS TO BE MODIFIED AT 105% of
FAIR MARKET VALUE.
NEW LOAN GOES ON THE BOOKS
It is a 10 year loan at 4% with a balloon payment
of the balance.

THE LOAN
PER $100,000 will have a PITI payment of
$467 per month fixed for 120 Months.

YES,a $100,000 home will be an affordable residence
for an American homeowner for $467 per Month
...TOTAL PITI (PRIN. INT. TAXES, INS.

A $200,000 home will be $934
TOTAL PITI.

TOO GOOD TO BE TRUE?????

It just may be true using the California way-
Federal contribution of $100 per month for interest
instead of cash gift up front
and State contribution of $100 per month for taxes
instead of cash gift up front.
Both fed and state will benefit from giving.Yes If loans are
FDIC and Home Bank Loans they would be
"Stimulating the cash flow to banks and firm their assets.
The state will more than increase their tax revenues by
giving.Giving back on the 8% of homes in trouble will INCREASE
the income from the other 92%
EVERYBODY WINS!!!!

Too Good To Be True????

you will have to ask me for details of the "EVERYBODY WINS PLAN"
in order to find out how 120 payments of $467 with $100 (Fed) and $100 (State)
pays a $100,000 Note at 4%.

I await your request for free details: bestsolutionsfl at aol dot com

Carmen Basilovecchio
Best Solutions Fl Real Estate
9804 S Military Trail E-10
Boynton Beach,Fl 33436

Basics:
On new loan of $100,000.
10 years payments (120)
at $467,$100,and $100 equals $80,040
which is applied as follows:
PRIN -$15,000
INT -$40,000
TAXES-$15,000
INS -$10,000
THIS REDUCES THE AMOUNT OWED ON THE HOUSE
PER $100,000 TO $85,000.
THIS BALANCE IS PAID IN FULL with a new 30 year mortgage.
HOW THIS FOR "SMOKE AND MIRROWS:
*$40,000 paid to FDIC insured banks or Home Loan Bank
with no government stock issues
*$15,000 paid in property taxes,a net gain
*and if you really want to help the economy how about
$10,000 IN INSURANCE PRIMEUMS GOING TO AIG
TO HELP GET TAXPAYERS MONEY BACK.
HOW MANY JOBS WOULD BE SAVED AND NEW ONES CREATED.
And do not forget ,about 6 million homeowners with excellent credit with EQUITY
(the ignored part) in their home.What do you think they will do the the most
important part of the economy-CONSUMER SPENDING?

PLEASE post,send to Obama,Summers,Geithner,
their think tanks have already stated the solution is in LOWER RATES OVER A LONGER PERIOD OF TIME!!!
This is at NO cost to taxpayers and makes a profit.
bestsolutionsfl at aol dot com

Apr 28 11:53 AM

[Old Trader:]

Alok,

Your comment (and malach's) go to prove the point that there's "opportunity" in every "catastrophy" if one's smart and diligent.


On Apr 28 11:49 AM Alok Swain wrote:

> 1) One other thing I noticed especially after reading CLP earnings
> release and I quote "In the first quarter we repurchased $96.9 million
> in notes for $70.6 million, representing a 27.1% discount or net
> gains of $24.3 million or $0.43 per share. To date we've improved
> our equity position through our repurchase program by approximately
> $50 million."
>
> 2) You can read here.
> seekingalpha.com/artic...
>
>
> 3) The point being those who have access to credit (line) are buying
> back their own debt at a discount and making capital gains.
>
> 4) And whats more they are eventually taking their un-encumbered
> properties and borrowing against it from Fannie Mae for between 5%
> to 6% or so and then paying off their credit line. Wow!
>
> 5) Same company read "Earlier this week we locked the rate with Fannie
> Mae on an additional secured facility to provide financing of $145
> million with a 10-year term and an interest rate of 5.29%. We're
> adding one additional property to this facility, which will bring
> total proceeds to approximately $155 million. The facility will be
> secured by eight multi-family properties and is expected to close
> later in the second quarter."
>
> I consider that a wonderful strategy. Sort of like bond arbitrage.
> See. :-))
>
> On Apr 27 08:05 PM malach hamovess wrote:

Apr 28 05:55 PM