Because the commercial loan modification industry is so new we have noticed that many people who are considering using our services present us with similar reservations. We have tried to answer some of these points below. If you have any questions about your particular situation, please respond to this email or simply call me at my office.
“My attorney can handle this.”
Many attorneys who are now advertising themselves as commercial loan modification specialists have no real experience performing commercial loan workouts. Currently in the U.S. there are more attorneys working in the legal profession than there is work to support them all. This has forced many attorneys to become generalists who try to capitalize on the latest trends such as car accidents, home loan modifications and even commercial loan modifications. Commercial loan modifications require an in depth knowledge of the mortgage financial markets along with an understanding of what banks are looking for in a commercial loan modification proposal. Our commercial loan modification proposals are over 50 pages long and take our staff of commercial real estate analysts over 40 hours to prepare.
“I am going to try to modify my commercial loan on my own”
We encourage every commercial property owner to first try and modify their commercial loan themselves by contacting the bank directly. This is certainly the most affordable solution. Unfortunately, commercial property owners are having little success using this approach. Banks are looking at borrowers who attempt a modification on their own with a jaundiced eye. The banks are assuming that the property owner is trying to take advantage of the overall economic decline in the U.S. and the poor performance in the commercial real estate sector to lock in a better interest rate and a higher net operating income. Banks are more inclined to consider a modification proposal that comes from a disinterested third party of commercial real estate experts who have a long track record in the industry with years of success.
“I am going to wait and see what happens.”
Regardless of what decision an owner makes concerning his or her distressed commercial property, the sooner a decision is made the better the outcome tends to be. Ignoring the bank or lender will only create more animosity and distrust in the relationship while possibly hampering any future efforts to reach a mutually beneficial loan modification. Even if a property owner is unable to make full mortgage payments to the lender on a monthly basis there are specific steps that can be taken to show good will towards the lender that might help your case in the future.
“The fees are too high.”
For the majority people who own a commercial property in financial distress the commercial loan modification solution is the most affordable option. Most commercial properties will not qualify for a new loan or refinancing under the new, tighter underwriting guidelines imposed by banks and lending institutions. Even for the property owner who is fortunate enough to qualify for refinancing this option can actually be more costly if environmental, appraisal and bank fees are taken into account. Furthermore, most commercial properties are purchased using full recourse loans. Many owners who are facing foreclosure risk losing their entire life savings and the prospect of personal bankruptcy if the lender enforces a deficiency judgment. When compared with the cost of bankruptcy and financial ruin the fees involved in a commercial loan modification are truly the most affordable option for most commercial property owners.
The fallout from the great recession can be seen on almost every Main Street in America in the form of empty storefronts to abandoned and foreclosed homes. One area of the real estate market that has been the hardest hit by the real estate collapse has also received the least amount of attention in the mainstream media. More than any other class of commercial real estate, hotel and motel owners have seen the worst effects of the real estate downturn nationwide. While it is estimated that commercial property prices on average have declined 40% from their 2007 peak, the drop in prices for hotel and motel properties has reached a staggering 50% on average. I can testify from personal experience working as a commercial loan modification specialist with hotel and motel owners that in many areas of the country the drop in prices has been substantially greater than 50%.
Here are some mind boggling statistics about the hotel and motel real estate market:
U.S. hotels are now seeing a record low occupancy of 45.1%. According to Smith Travel Research this is the lowest January rate since they began tracking statistics in 1987. The fact that hotels are now bringing a much lower amount of income has forced many property owners into foreclosure.
In the past two years 40,000 U.S hotel employees have been laid off.
According to Fitch Ratings hotel values have fallen by 50% from their peak in 2007. This has severely impacted the ability of hotel and motel owners to refinance their commercial loans which are coming due. Hotel owners are now finding it almost impossible to sell their hotels for what they owe on their mortgages.
According to Trepp, a company tracking commercial real estate loans, securitized hotel loans reached a delinquency rate of 15.7% at the end of February. These securitized mortgages represent one fourth of all commercial hotel loans.
500 hotels across the U.S. have already been foreclosed upon by their lenders since 2008. However, most of these hotels have continued to stay in business.
For example, a client of ours purchased a flagged hotel in central Florida for 4.25 million dollars in 2005. A recent bank ordered appraisal came in at only 1.5 million dollars. The client currently has a loan on the property for 3.2 million dollars. The main reason for the decline in the value is the fact that occupancy has steadily dropped by 20% year over year for the past three years. Occupancy in 2007 was a solid 60%, occupancy in 2008 fell to 40%, occupancy in 2009 was only 20%. It goes without saying that the hotel owner was unable to continue to pay on his loan on the cash flow being generated on a 20% occupancy level. If there is any good news for hotel owners experiencing this kind of financial distress it is the fact that banks are not eager to take back possession of hotel properties.
Managing and operating a hotel business is not a realistic option for banks whose main area of business is lending money. Furthermore, it is estimated that a repossessed hotel that has no management in place automatically loses about 50% of its value. In these circumstances, the best way for a bank to guarantee a loss on their investment is to repossess the property.
In fact, banks are more willing than ever to negotiate with hotel owners who are facing financial distress because of a drop in business and the overall recession.
Commercial real estate analysts have predicted that approximately 1.5 trillion dollars of commercial loans will be maturing between now and 2013. Most of these loans were initiated during the peak times of real estate valuation, between 2005 and 2007. Since 2007, however, commercial real estate owners have watched as their investments have dropped in value by an average of 40%. Commercial real estate investors who have a loan that is now coming due are facing a dire situation. Most commercial properties purchased with financing during the past five years simply will not qualify for financing of any kind as underwriting guidelines and liquidity have changed dramatically. Below are the steps that a commercial property owner should take when they are evaluating their position for extending the terms of their existing commercial loan, attempting a loan modification or seeking a new loan.
1) Be proactive — The time to start planning for your commercial loan maturity was yesterday. Time is not on your side during this process. If you haven’t started already, then begin immediately to prepare yourself for a process that will be laborious and require some difficult decisions.
2) Be Realistic — Take a close look at any loan that will be coming due in the next year. Figure out the debt service coverage of the property if it had to be financed using today’s appraised value. Begin to contact commercial mortgage brokers and banks to see if your property will qualify for a new loan using today’s valuation and today’s underwriting guidelines.
3) Maintain the property —- With rents and occupancy dropping in most markets across the United States many commercial property owners are finding that their net operating incomes have dropped as well. Facing a shortage of cash flow many owners are tempted to cut back on preventative and cosmetic maintenance. This could prove to be a big mistake. When trying to extend the terms of your commercial loan or obtaining a commercial loan modification the lender will certainly look closely at the physical condition of your property. Lenders want the best quality commercial properties in their portfolios to weather the economic storm.
4) Be Honest — In tough financial times like these, commercial property owners have to be honest when examining the prospects for the long term success of their venture. After examining the true financial condition of their property many commercial real estate investors may find that alternatives such as short sales or deeds in lieu of foreclosure make more economic sense than holding on to an asset whose value may take decades to recover.
5) Make a plan — It is never too early to make a plan. Don’t wait for the lender to tell you what to do. If you wait for the lender for guidance than they will automatically have the upper hand. Borrowers who are looking for a commercial loan modification should come to the bargaining table with a well conceived plan that demonstrates their need for help and shows the steps that will be taken to ensure the modification is a long term success.
Commercial Loan Modification USA is now hosting an exclusive weekly webinar with Adam Von Romer of Commercial Capital Advisors, LLC. Adam Von Romer, our chief bank negotiator, is a commercial real estate broker and CCIM who has successfully performed commercial loan workouts for dozens of banks over the past 20 years. The commercial loan modification training webinar is free to attend and is created to inform commercial property owners how the commercial loan modification process actually works.
The effect of recent government legislation on commercial loan workouts.
The potential economic damage that could result from massive commercial real estate foreclosures.
Government strategies to deal with the commercial loan crisis.
How banks are approaching the commercial loan modification process.
What banks are looking for in a commercial workout proposal.
How to indentify if a commercial property and commercial owner are a good candidate for a successful workout.
There are 500 billion dollars of commercial loans coming due in 2010 and many more billions in delinquent commercial loans sitting on the books of major banks.
Banks are acting aggressively right now to foreclose on commercial property owners.
If you purchased an apartment building or other commercial real estate property in the last five years you have probably seen the value of your investment plummet by at least 40%. Now is the time to protect yourself from over reaching banks and avoid foreclosure. Attend our commercial loan modification training: Register Here Now
Please join us as we interview Adam Von Romer of Commercial Capital Advisors, LLC. Adam is our chief bank negotiator and has been performing successful commercial loan workouts for the past 20 years. Register Now
***If you are unable to attend our scheduled live webinar, please download a copy of a recent webinar Here
What properties and borrowers qualify for a commercial loan modification?
How a commercial loan modification can help a commercial real estate owner stay in business.
Why banks are eager to perform commercial loan modifications.
If you are a commercial real estate owner who owns a property in financial distress or if you know of someone who is, this might be the most important event that you attend all year.
Below is a letter written by Chris Dodd the top Democrat on the Senate Banking Committee to Ben Bernanke asking him to recommend that banks begin to modify more commercial loans. Will they listen?
February 22, 2010
Ben S. Bernanke
Chairman
Board of the Governors of the Federal Reserve System
20th Street and Constitution Avenue, NW
Washington, DC 20551
Dear Chairman Bernanke:
I write to express my concern about the state of the commercial real estate (CRE) market and the potential impact on the financial system and the greater economy.
Recent reports and testimony indicate that while the economy is showing signs of stabilizing, the CRE market continues to face significant challenges. The Congressional Research Service, for example, reported last month that commercial mortgage defaults and losses are at unusually high and increasing levels. According to the report, delinquency rates for commercial mortgages climbed from 4% at the end of the third quarter of 2009 to more than 6% in January 2010.
I understand that you have been raising concerns about the CRE market as well. Indeed, in a speech before the Economic Club of New York in November 2009, you stated that “poor fundamentals have caused a sharp deterioration in the credit quality of CRE loans” and that these “pressures may be particularly acute at smaller regional and community banks.”
Others also have expressed concerns. At a hearing last month before the Congressional Oversight Panel (COP), a Federal Reserve official testified that “Federal Reserve examiners are reporting a sharp deterioration in the credit performance of [CRE] loans in banks’ portfolios and loans in commercial mortgage-backed securities,” and warned that more than $500 billion of CRE loans will mature each year over the next few years. This point was reinforced in an oversight report published by the COP this month, which stated that nearly half of CRE loans at present are “underwater” and that the largest “loan losses are projected for 2011 and beyond.”
In response to the growing concerns, I understand that last October the Federal Reserve and other agencies on the Federal Financial Institutions Examination Council released a policy statement on prudent commercial real estate loan workouts to “assist examiners in evaluating institutions’ efforts to renew or restructure loans to creditworthy CRE borrowers.” I appreciate your efforts to coordinate action in addressing this critical issue and ask that you keep me informed as to your progress. While it may still be relatively early in the process, I would like you to provide an update on how this guidance is helping to stabilize the CRE market. In addition, I would like an explanation of how the Federal Reserve has addressed the CRE issue so far, and what additional steps you plan to take.
I believe that the weakness in the CRE market requires prompt and robust responses from the regulators to guard against harmful effects on financial institutions and the economy. I urge you to redouble your efforts to provide appropriate oversight of this vital component of our economy, and look forward to working with you to bring much needed stability to the CRE market.
Hotel loan modifications have become an economic necessity for many hotel and motel owners across the United States. Commercial lending on hotels has almost come to a stand still while billions of dollars hotel loans are coming due. Many hotel owners are seeking hotel loan modifications because the income they are generating is not enough to pay for their expenses and debt service.
Delinquencies on hotel loans have reached a staggering high of 15.3% in January according the recently released Trepp Deliquency Report. In January of 2009 the rate was only 1.7%. The increase in delinquencies for hotel loans is another sign of the poor economic times experienced by the U.S. as a whole. The problem for hotel and motel owners is only expected to get worse. Commercial properties around the country are finding that they are not producing enough income to cover their expenses and debt service.
Hotels and motels are typically the most volatile class of commercial real estate and they react quickly to transformations in the economy. Travel is an expense that many corporations can curtail very quickly in a recession. The results of companies cutting back on their business travel can be directly seen in the large occupancy decreases at hotels and motels around the country.
Many hotel and motel owners are now seeking hotel loan modifications. As the unemployment rate has reached as high as 20% in some major economic areas such as Detroit and 10% average for the nation as a whole many hotel owners have seen their occupancies drop by as much as 80% in some areas. This is understandable considering the fact that a lot fewer families have the excess capital available to spend on vacations or travel. Business travel has all but dried up as a result of the economic downturn. Many hotel and motel owners have found that they can no longer afford to keep making their full mortgage payments and many others have decided to stop paying their mortgages all together.
According the many real estate analysts commercial real estate prices have declined by 40% on average. In some areas of the country this number has reached as high as 60% and we have even reviewed specific hotels and motels that have lost as much as 80% of their 2007 values. Almost every hotel or motel owner who purchased their property in the past 5 to 7 years now finds themselves owing more on their property than what it is worth and in the middle of the worst recession that the U.S. has ever seen.
Solutions for hotel owners are not easy to come by. It is now almost impossible to find financing for hotel and motel properties as most commercial lending institutions have either stopped lending entirely or changed their underwriting guidelines so drastically as to exclude all but the best deals from being financed. To make matters even worse, the Congressional Oversight Panel released their February report entitled “Commercial Real Estate Losses and the Risk to Financial Stability” where they predict that over 500 billion dollars of commercial balloon notes will be coming between now and 2011. Meanwhile, there are no banks sitting on the sidelines to refinance these properties.
The current economic times leave few options for hotel and motel owners who are in financial distress. The most recent hotel owner client of Commercial Capital Advisors, LLC is an nationally flagged chain hotel in Orlando, Florida. They purchased their property in 2007 for 4.25 million dollars. The most recent appraisal for the property came in at 1.5 million dollars. This represents a loss of over 2 million dollars in equity in just a three year period of time.
For many hotel and motel owners facing a similar situation, the best option they have is a hotel loan modification. In many cases a successful hotel or motel loan modification will be able to lower interest rates, give an extended period of forbearance, extend the balloon date for the note and occasionally reduce the balance of the mortgage.
For more information about commercial loan modifications for hotel properties visit:
The Congressional Oversight Panel released their February report entitled “Commercial Real Estate Losses and the Risk to Financial Stability” on February 10th. The 189 page report can be viewed in its entirety here: www.scribd.com/doc/27008229/Commercial-Real-Estate-Losses-and-the-Risk-to-Financial-Stability. Typical of government reports of its kind the authors are long on explanations, coupled with impressive analysis, but short on solutions.
At least the report does make one thing clear, they are worried. In fact the opening paragraph follows verbatim: “The Congressional Oversight Panel is deeply concerned that commercial loan losses could jeopardize the stability of many banks, particularly the nation‘s mid-size and smaller banks, and that as the damage spreads beyond individual banks that it will contribute to prolonged weakness throughout the economy.”
This is hardly breaking news. Journalists, economists, and real estate analysts have been watching and waiting for the collapse of the commercial real estate market and its aftermath for the past three years.
So what is the government plan for dealing with the commercial real estate meltdown? I have searched far and wide and I haven’t been able to find any clear cut or decisive plan that any government agency has created so far for dealing with the problem. Furthermore, if the results of previous programs that have been levied to prevent and slow the residential real estate foreclosure crisis such as The Home Affordable Mortgage Program, or HAMP, are any indication of the government’s ability to deal with the commercial real estate loan crisis than the U.S. economy could be if for real trouble.
HAMP began just over a year ago as a program designed to help homeowners modify their mortgages. The modifications were designed to lower the monthly payments that homeowners make on their mortgages in an effort to prevent foreclosures. The goal of HAMP was to create 3 to 4 million permanent home loan modifications. Instead, as of now HAMP has only created a mere 66,465 permanent modifications. In a recent report on the number of total foreclosures in the U.S for 2009, www.RealtyTrac.com showed a total of 3,957,643 foreclosure filings (default notices, scheduled foreclosure auctions and bank repossessions) on 2,824,674 U.S. properties in, a 21 percent increase in total properties affected from 2008 and a whopping 120 percent increase in total properties affected from 2007. To make matter even worse, a full 25% of homeowners are living in homes that are worth less than their mortgage balances. It really is only a matter of time before these people realize that it is better to walk away from their homes than to continue to pay on a liability that has a strong chance of decreasing in value even more. Based on these figures and circumstances it is clear that HAMP has so far been an ineffective program.
Banks are now reporting to Congress that they have failed to convert many temporary HAMP modifications into permanent modifications because the borrowers were not giving the banks the necessary paperwork they need to complete their files. In a familiar refrain, the banks are once again blaming the borrowers.
Sadly, one of the only solutions that the Congressional Oversight Panel suggests for dealing with the potential catastrophe of the commercial real estate market are more loan modifications. However, one is left to wonder, if the banks have failed to hire and train the necessary staff to successfully handle the influx of residential loan modifications under the HAMP program than how are they going to handle the larger and more complex task of modifying commercial loans? At least the government had a program in place to deal with the residential loan modifications. The plan now is to leave it up to the banks.
Commercial loan modification can provide a welcome relief to commercial property owners who are behind on their commercial mortgage payments or have seen a drastic decrease in their property values because of a hardship such as increased vacancies. Commercial loan modifications offer the commercial property owner the ability to keep their property, increase their cash flow and avoid foreclosure. The first point to consider when examining commercial loan modification options is to determine what entity has underwritten your commercial loan. The vast majority of commercial loans fall into one of four categories: commercial mortgage backed securities, life companies, Fannie Mae and FDIC insured banks. The focus of this article is the current situation for the commercial loan modification of commercial mortgage securities.
According the Mortgage Bankers Association’s 3rd quarter report, the “Commercial/Multi-family Delinquency Rates for Major Investor Groups”, commercial loans underwritten by commercial mortgage backed securities (CMBS) have seen an increase in delinquency rates to a new high of 4.06 percent. The delinquency rate for CMBS is now the now at the highest level ever recorded. This presents a serious problem for many commercial property owners who have loans that were packaged as CMBS because the commercial loan modification process for these loans can be a cumbersome and difficult process that is further complicated by the fact that there are many levels of ownership that must be considered during the commercial loan modification process.
CMBS are designed to build in a certain level of defaults. The problem the industry is facing now is that defaults have increased well beyond what had originally been projected. Now the bond holders of the securities are facing the prospect of losing their investment capital. CMBS loans are structured with different levels of bond holders. Those at the top of the ownership chain, generally banks, will recover the most money in the case of a foreclosure. Those at the top are referred to as senior bond holders. The bondholders who took on more risk, expecting a greater return, are known as the junior bondholders. The rights of bondholders are protected by agreements such as the Pooling and Service Agreement (PSA) which provides voting rights to junior bondholders. The differing interests between senior and junior bondholders can make a commercial loan modification a difficult and lengthy process.
For example, an apartment building might have an outstanding loan balance of $20 million, but the actual value has dropped to $15 million. The borrower might agree to support the debt at the current value of $15 million if the $5 million is written off. If you make this proposal to the senior bond holders they will probably agree but the junior bondholders, at the bottom, will probably end up eating most of that write off and will not be willing to take the loss. In fact, if the junior bondholders are dealing with three or four of these discounts at the same time, they could get totally wiped out and realize a 100% loss on their investment capital.
For this reason, those investors who stand in the first loss position are very adverse to approving a write-off. Different lenders and bondholders on different rungs of the ladder have different interests. It can be difficult to work out a successful commercial loan modification.
There is a potential tidal wave building right now in the commercial real estate market with $1.7 trillion of outstanding CRE debt on bank books. Currently, most commercial loan defaults are occurring as the note balloons. Commercial property values have dropped by 40% in most areas of the country and with stricter underwriting guidelines most commercial real estate owners are finding it impossible to refinance their loans.
The commercial loan modification industry is relatively new. Many commercial real estate owners don’t know what to expect of the commercial loan workout process. At Commercial Capital Advisors we understand your concerns and we want every one of our clients to feel completely comfortable with the loan modification process. We believe that a well educated investor is our best asset.
1) The first step we take in the modification of your commercial loan is our free consultation. Simply call us at 954-727-3316 or fill our request for the free report “Is a Commercial Loan Modification Right for me? During our first conversation we will ask some basic questions about your commercial property, your loan and most importantly what your goals are. During this initial consultation we will complete your intake form which describes the parameters of your situation.
2) Your commercial loan modification consultant will submit your intake form to our underwriters who will examine the information and decide whether you are good candidate for a commercial loan modification. Our underwriter may ask you at this time to supply any additional information which will give a more complete picture of your actual situation. Once our underwriters receive your intake form it will usually take between 24 and 48 hours to receive your pre-approval.
3) When your commercial loan modification request has been pre-approved your consultant will contact you and send you our retainer agreement and a borrower authorization which permits us to communicate with you lender. You will also be asked to supply the underwriter with the following documentation:
Rent roll for the past 12 months. (ledger book or rent receipt for each unit)
Copies of all bills for the last 12 months. (Utilities, landscaping, elevator, pool, roofer, etc.)
Copies of all leases or rental agreements. (Only one lease is needed if all leases are exactly the same except for dollar amount)
Copies of all service contracts. (Elevator, heating/air-conditioning, maintenance, etc.)
Copies of all notes and mortgages.
Copies of the latest loan payment cards.
Copy of escrow instructions from your purchase of the property.
Copy of partnership agreement relevant to the subject property.
Amount of depreciation you took last year, method of depreciation, and your remaining basis in the property.
Any other pertinent information you believe will assist us in representing your best interests.
4) After we receive the necessary documentation along with your retainer agreement your commercial loan modification moves along to our Commercial Loan Modification Underwriters.
Many commercial real estate owners have questions about exactly how long the commercial loan modification takes from beginning to end. The following commercial loan modification underwriting time line should help people understand exactly how the process works. Please remember that the chronology below is just an example of an average commercial loan modification and the practices may change from lender to lender and even within the same organization depending on the size of the loan.
Research and Underwriting
File is submitted and reviewed
Collection of all required documents (additional documents may be requested)
Notice of appearance presented to Lender
Establishing Lender guidelines for submittal
Financial Reconstruction of File (Present Value, Market Value, Stabilized Value)
Market Analysis, comparable sale, rental rates, velocity study
Legal department review of Note, Mortgage, Deeds (Legal Sufficiency)
Creation of initial workout package
Delivery of Proposal
Submittal of initial package to Lender
Receipt Confirmed and verified
Review with Special Asset Manager/Loan Officer
Request for comments
Review of comments and counter proposal if necessary
Request modification/workout letter terms sheet and commitment
Finalization of Modification
Lender approval
Review Lender modification documents
Present documents to client with recommendations
Present modification documents to Lender with comments or executed
Receive Lender acknowledgement and recordation if required
Case is closed and electronically stored.
The anticipated time between intake and settlement is usually between 60 and 90 days with the majority of cases falling somewhere around the 60 day mark. Notices of Default (NOD), Sales Date Notices, and other judicial proceeding can substantially shorten the time we have to react therefore the refund policy at the point is void as is the rescission period.
If no judicial action has been taken and we are unable to obtain a modification for the client the entire fee will be refunded to the client less the $3,500 research and processing fee. All monies not due and owing will be escrowed and the client will be provided an “escrow letter” indicated where the money is escrowed and who is holding the escrow typically we have our attorney hold it in a local commercial bank.
