Robert Amter – Colorado Real Estate Journal – June 2012

The Mayans had it right. 2012 may be the end of the world – at least the commercial mortgage-backed securities world – with a strong probability that commercial banks also will be caught up in the refinancing crunch. Many loans made on commercial real estate properties in 2007 (near the top of the bubble) had five- year balloon payments and many of these loans may come to maturity in 2012. Refinancing CRE properties today may not be easy. Lend- ers at the height of the bubble relied on rental income streams that were substantially higher (in many cases) than today’s rents. Vacancy rates also were lower then and buyers were looking at purchases using cap rates that seem like part of a different world than we live in now. Many properties today will have values significantly lower than they did in “the old days.” Some are underwa- ter. Some may be worth more than the loan but not by much. Some may already be in or fac- ing foreclosure. CMBS lenders are coming back slowly but underwriting with much more caution than they used to do. The same thing can be said for commercial banks and life com- panies.

If a CRE borrower can’t find an institutional lender to pay off his upcoming balloon payment, what choices will he have? The most probable source of cre- ative refinance in today’s mar- ket is a “bridge loan” lender.

These lend- ers run that gauntlet from hedge funds and invest- ment banks in New York to other “pri- vate capital” lenders (both national and local). Rates may vary tre- mendously between the bridge lenders. The owner of the CRE prop- erty must allow time to research and find the right lender for them. On the bright side of things, finding a bridge lender can lead to a profitable outcome for the borrower.

Both CMBS pools and com- mercial banks typically are not happy to own property or to hold nonperforming loans in their portfolio. This often moti- vates them to be willing to con- sider taking a discounted pay- off on their loans. However, the CRE borrower faces a difficult Catch 22 scenario. Before CMBS and commercial bank lenders are willing to discuss discount- ing their notes, they want to know that their borrower has a new lender who can close a payoff in a relatively short time frame. The CRE borrower has to find a new lender without knowing (for sure) if he can actually get a discount – but can’t get a discount without a new lender.

The best solution to this dilemma is for a borrower to work with a group that is expe- rienced in dealing with these typesofdiscountednotepayoff loans. Hedge funds and invest- ment banks can be good choic- es, but typically they will not look at loans under $5 million (or, in many cases, even larg- er amounts). National private capital lenders have experience in these types of loans but the borrower, for obvious reasons, must use extreme caution in dealing with out-of-state lend- ers. If a CRE borrower can find a local private capital lender with experience in working on discounted note payoff loans, then this may offer the best choice in today’s lending cli- mate to get the job done. The borrower needs to exercise due diligence in working with the local lender but, by using his own attorneys and other professional sources, this due diligence may be accomplished and a relationship with the local lender established.