“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.

Sincerely,

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.

http://www.usatoday.com/travel/hotels/2010-03-19-hotels19_CV_N.htm

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.

Some of the topics to be covered in upcoming commercial loan modification training webinars include:

• 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

In our free commercial loan modification training webinar you will learn:

1.  What is a Commercial Loan Modification?
2.  What properties and borrowers qualify for a commercial loan modification?
3.  How a commercial loan modification can help a commercial real estate owner stay in business.
4.  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.

I look forward to seeing you there! Register Here Now

Who should attend our Commercial Loan Modification Webinar?

• Apartment Building Owners
•  Strip Mall Owners
•  Office Building Owners
• Hotel and Motel Owners
• Commercial Real Estate Agents
• Commercial Mortgage Brokers
• Certified Public Accountants
• Real Estate Attorneys

Sincerely,
Ted Karsch
Commercial Capital Advisors, LLC

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:

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.

According the Mortgage Bankers Association’s 3^rd 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.

As an illustrative example I will use a real life situation of a client of mine in Tampa, Florida. We won’t use their real names for privacy purposes and we will use the fictional name of Blue Harbor Apartments for their property. They own a 250 unit apartment building that they purchased for 8.3 million dollars in 2006. In the last year they have seen occupancy drop to 65%. This increase in vacancies has severely hurt their net monthly income. Their monthly rental income is now $92,000.00. Their expenses, including the mortgage payments are $118,000.00 a month. They are currently coming out of pocket over $20,000.00 a month just to hold on to the property. The loan they have is held by a major international bank and is amortized over 25 years at an interest rate of 7.5%. They are in a tough situation because the value of their property on today’s market is approximately 6 million dollars. They are unable to refinance with another lender because they don’t have any equity in the property. The only choice they have is to try to modify the commercial loan.

Before contacting me, the owners of Blue Harbor Apartments tried to contact the bank directly. The owner spoke directly to a bank vice president who told him that they were unwilling to negotiate. Many people might wonder why a bank wouldn’t negotiate with an apartment building owner who is in this type of situation. There are actually a few reasons. The first reason is that the owners of Blue Harbor Apartments haven’t missed or been late on any mortgage payments. Banks sometimes are reluctant to modify a loan that is performing well. The other reason is that banks are now being approached daily from owners who are trying to modify their own loans. Banks are not usually willing to negotiate the terms of an existing commercial mortgage unless there is a verifiable hardship. Many property owners are hoping to modify their loans simply to save money and make their properties more profitable when there is no real hardship. In the case of Blue Harbor Apartments the hardship is the fact that vacancies have climbed so high and the income has dropped so precipitously.

After an unsuccessful attempt to modify their own commercial loan modification with the bank the owners of Blue Harbor Apartments began to look for a law firm to handle the situation for them. There are many law firms that have jumped on the loan modification bandwagon by offering loan workouts while charging a monthly fee for their services. While there are surely many competent and knowledgeable attorneys who are facilitating commercial loan modifications, the vast majority of them have a lot more experience in the residential market. Unfortunately, the experience in residential loan modifications doesn’t translate well to the complexities of the commercial real estate market.

Finally, the owners of Blue Harbor Apartments decided to contact a company that specializes only in commercial loan modifications. The owners of Blue Harbor Apartments made a good decision to research the marketplace thoroughly and find a company that has real experience negotiating with banks on behalf of commercial real estate owners. When you are investigating different companies to help you modify your commercial loan look for a company that specializes only in commercial property. The company should also offer a money back guarantee if they are unable to facilitate a successful commercial loan modification. You should read over any contract that you sign and also have your real estate attorney read over the contract. Ask the company you are investigating what their success rate has been and also find out if they have had experience negotiating with the bank who holds your mortgage. Ask as many questions as possible and do your best to educate yourself about the process as much as possible. This will ensure that you will have the greatest chance for success.