Commercial Mortgage Loans'  Instablog

The commercial real estate sector has been in a slow motion collapse for a year-and-a-half now. Plummeting property values, driven by the economic slow-down, have dissolved huge amounts of equity that had existed prior to the recession. Now, although the buildings do have an inherent, underlying value, a large percentage of commercial real estate acquired in '05,'06 and '07 are virtually worthless to the investors who bought them.

They can not be refinanced, they can not be sold and few are willing to inject enough capital into them to make them financially healthy again. An already battered market finds itself facing a virtual tsunami of offices, retail outlets, warehouses, hotels and apartment buildings that are about to be abandon by, or reposeessed from the investors who borrowed hundreds and hundreds of billions to buy them.

The problem is massive and the resolution will involve massive financial pain and suffering. Banks will fail, developers and investors, large and small, public and private will go out of business, misguided legislators will attempt to shift much of the burden onto the taxpayers in doomed, budget busting bailout attempts and much wealth will evaporate. All this will happen over an extended period of time.

Walgreens (NYSE: WAG) recently announced that they will be gradually slowing organic growth of new stores from a planned 5% down to 2.5%-3% starting next year through 2011. But Walgreens is a big chain, and even considering the slowdown there should be 30 to 50 new Walgreens outlets popping up on street corners around the country every quarter for several years to come.
 
The Walgreens model calls for most new stores to be built by developers, owned by investors and merely leased to Walgreens. But with the credit crunch still squeezing borrowers, the question becomes where will the capital to build all those stores come from?

Lately, plenty of Walgreens loans were originating from a fairly obscure lending platform known as "credit tenant lease" or CTL financing. CTL loans are underwritten in a very different manner as-compared to traditional commercial real estate mortgage loans. In CTL finance the properties lease, not the physical real estate itself, is considered the primary collateral backing the loan. Each deal is underwritten based on the structure of the lease and the financial strength of the tenant who signs it, rather than the underlying value of the building and the credit of the borrower.

To fund CTL loans commercial mortgage banking firms would issue private placement mortgage bonds and sell them to fixed income investors. The bond buyers providing the liquidity for CTL financing were often pension funds, endowments, trusts and insurance companies, all with insatiable appetites for dependable, secure income.