During the past several years, commercial real estate values have risen dramatically, fueled in large part by easily available credit at historically low interest rates.
Unfortunately, all good things must come to an end. With the economy weakening in general and the ongoing capital markets “credit crunch,” most industry insiders would agree that the inevitable cyclical downturn is either imminent or already present. Simply stated, many commercial real estate owners who took advantage of the recent go-go years and leveraged their real estate assets as much as they could will not be able, in the coming months, to access replacement refinancing proceeds sufficient to retire the existing loans encumbering these assets.
Recent market events have caused interest rates to rise generally and lenders to be more conservative in their underwriting, resulting in lower loan proceeds available to owners. Additionally, the weakening economy will likely result in an increase in tenant defaults, which of course would negatively impact the cash flow needed to repay a mortgage loan. Accordingly, lenders who own commercial real estate loans will likely see an increase in the near future in the number of these loans that go into default. These lenders should be encouraged to develop a systematic approach to these loans before the defaults start to mount. Armed with such an approach, lenders will be able to quickly formulate a strategy for each distressed loan and to act quickly and decisively in dealing with the applicable borrowers, with the goal of course to maximize the lender’s return on its initial investment in the most efficient manner possible. This article attempts to assist lenders in developing such an approach.