Colorado Real Estate Journal – Jan. 2012

Many analysts now predict that the next shoe to drop in the credit crisis will be massive defaults in commercial real estate loans. There are two primary reasons for the predicted problems in the commercial real estate lending arena. The first problem is the steadily increasing vacancy rate in office, retail, and industrial properties. The Urban Land Institute recently predicted that “2009 will be the worst year for commercial real estate since the 1991-1992 industry depression”.

The second reason for concern is the fact that massive amounts of commercial real estate debt will be coming due in the next few years. Over 160 billion dollars of commercial debt will come due in 2009 alone. In the next three years over 500 billion dollars of commercial real estate debt will mature. A recent article in the Wall Street Journal discussed the fact that many banks and institutional lenders are paralyzed and not willing to renew their existing commercial real estate loans, even their performing loans, not to mention their unwillingness to consider funding new commercial real estate loans.

For many owners of commercial property with maturing loans, the problem will be how to get from point A (being caught in a frozen commercial lending market) to point B (the time when commercial real estate lending begins to loosen up). One option for these owners, as well as for prospective buyers of commercial property will be to work with private capital lenders, sometimes called “hard money lenders”.

Hard money lenders have historically been able to fund real estate loans to borrowers to whom bank and institutional lenders are not willing to lend. In the next few years even borrowers who typically could obtain conventional financing may no longer be able to do so. The trade off is that hard money lenders price their loans substantially higher than institutional lenders. The difficult choice that may confront commercial borrowers in the upcoming year or two is whether they would rather pay rates in the 10% to 12% range and keep their property or let their property go back to their lender.

The same choice will confront buyers of commercial real estate who may be able to find good real estate at bargain prices but may not be able to find traditional lenders willing to finance their acquisition loans. Private capital lenders normally place the greatest emphasis on funding loans with a conservative loan to value – normally not more than 65% LTV, and in today’s market, frequently lower. Their loans are short term with typical maturities between 6 months to two years. Payments are usually interest only with no amortization required.

In the 1980/90 real estate downturn, nimble investors made large fortunes. In the current credit crisis the large gains may accrue to the investors who are perceptive enough to recognize how to use private capital to retain or acquire property that will achieve significant gains once the normal credit spigots are open again.

Robert Amter is President of Montegra Capital Resources, LTD, a Denver based private capital lender.