Is this the new normal for commercial RE lending?

[Runum]

Owner of shopping center in a prominent part of town is going to lose his property due to foreclosure even though he is current on the loan. Bank wants out of note. If this is the new norm why would anyone want to get into commercial RE?

Camp Bowie shopping center owner might be forced into foreclosure | Business | Dallas Bu...

 

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[Cat Man Du]

Burgher said he's been told by Wachovia Bank that it wants payment on the $36.5 million loan that matured this month.

This is scary. Usually the loans are rolled over when NOT in default and they weren't. They must have either had DEEP pockets or it had good CASH-FLOW with that many vacancies.:seeya:

 

[hatterasguy]

My friend is big into commercial stuff like this. He said what banks have been doing is not calling the notes due. If they owner is making payments they have just been letting sleeping dogs lie so to speak. Or trying to work out a deal with the owner to keep them making payments.

It makes sense the values have dropped so much that they will only lose by pulling dumb crap like this.

I suspect either Wachovia has someone else that wants to buy this property, or they are just stupid. Probably stupid, I rate them at Bank of America level.

 

[andviv]

Banks can call the notes at any times, so it seems.

In the first case the note is due (probably a balloon and the note matured) and the bank does not want to make any extensions, they simply want the money or the property.

The other case is more interesting... a new note holder calling the note cause they probably want the property.

This second scenario makes wonder if I could buy a note for a property I want but is not in default, call it, and then foreclosure on it if the current owner does not cover the total amount after me calling it... hmmm.

 

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[Russ H]

adviv is right-- this signals a potentially very dangerous (or if you're a lender, phenomenally lucrative) turn in the commercial RE market.

If no one is doing big loans, the owners can't refi.

If they can't refi, the loans can be called.

And if they're called, the owners lose. Everything.

So the banks/lenders squeeze out all the players, and take the pot.

Very, very interesting.

-Russ H.

 

[randallg99]

Banks can call the notes at any times, so it seems.

In the first case the note is due (probably a balloon and the note matured) and the bank does not want to make any extensions, they simply want the money or the property.
...

the article said the note matured. commercial loans typically have reset periods at which time (whether it's every 5 or 7 years or whatever) when rates are re-set. The bank has the option at that time to renew the loan or let it mature

Banks can only call in loans for violations of the agreement including default of payment, changing of property use, deteroriating financials, etc which can occur before the re-set.

and banks absolutely do not want real estate. They need the cash flow.

Do they have someone in wings waiting to take the note? Highly unlikely.... it's a silly strategy to sell a good performing loan for a discount.

The only thing I suspect is that the large lenders who are "too big to fail" know something about the government's stance that we don't or they're placing very large bets.

 

[andviv]

the article said the note matured. commercial loans typically have reset periods at which time (whether it's every 5 or 7 years or whatever) when rates are re-set. The bank has the option at that time to renew the loan or let it mature

Banks can only call in loans for violations of the agreement including default of payment, changing of property use, deteroriating financials, etc which can occur before the re-set.

and banks absolutely do not want real estate. They need the cash flow.

...

Yes, that is 100% correct... in the first case described. However, this is the second point I was referring to...

From the article:

A year ago, a Dallas real estate company lost the Overton Centre office building in southwest Fort Worth in a foreclosure to a lender that had taken over the note in a merger and then called it, even though the owner was current.
Banks nationwide are trying to reduce their debt exposure, the Mortgage Bankers Association said in a report Thursday.

​

​

This is the part that is a concern for me... how does this work?

I'd love to understand it to see how can I profit from this situation.

 

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[randallg99]

I emailed 2 friends- 1 large commercial RE owner and another VP of large bank... I'll get back to you with answers.

 

[randallg99]

me: hey how does the bank do this? the owner is not in default but wachovia is calling the loan?


Friend: wachovia obviously had the center appraised and it is probably underwater. According to the regs they can not renew the loan. The owner does not have the $$ nor the will to pay down the mortgage.

me: Just because its underwater makes it callable?

Friend: No. my guess is that the term expired and there was a large balloon due. Wachovia is behaving very irrationally but not uncommon. If a loan is under water, it is classified as non performing and the bank must start taking reserves against earnings regardless of borrower performance. The regulators have bound the hands of banks by insisting that higher reserves be taken. Therefore, banks can not be "patient."



Andviv, this leads me to believe the wording in the original article is poorly written. It's leading us to believe the loan was called in the middle of the term, but that's simply not the case. You'll agree that banks are very screwed up, but they're not stupid enough to cost themselves more money by calling in a loan that's considered performing before renewal. It's when the loan is renewed is when the loan gets a different classification.

Hope this helps and let me know if you have more questions. I won't know the answers, but I'll try to get them

 

[andviv]

Yeah, that makes a lot of sense when the loan has matured, and then it is up to the lender/note-holder to decide what to do...

So, if the asset is worth less than expected during the life of the loan, the lender has the authority to revise if it still makes sense and may call the loan.

This leads to me believe there is a business opportunity here... If an asset is under-water you could make an offer to the lender to buy the note. Once you control the note you call it due as it is underperforming. You take control of the property through foreclosure at a discount, or the owner pays you off the note at full price and you make money in the spread of what you paid for the note and its face value.

This opens a huge door for taking advantage of many properties that are underwater but still performing...

Am I missing something here?

P.S. Randallg99, Rep++ for reaching out to find more info. Thanks a lot.

 

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[Runum]

Makes sense. I was kinda worried last fall, that the bank wouldn't renew a balloon note I have on a 3 unit property. I wasn't sure the current evaluation would hold up. They didn't blink an eye and renewed it with lower interest rate. Thanks for the info Randall

 

[randallg99]

So, if the asset is worth less than expected during the life of the loan, the lender has the authority to revise if it still makes sense and may call the loan..

We're probably just getting down to the semantics, but the loan really cannot be called just because the value of the property went down; However, the bank/lender has the option to renew or NOT renew the loan at the end of any term. A commercial loan is broken into terms (usually 5 years, but there are different structures) that allows the parties to revisit the deal as it approaches the end of a term.

At the term expiration, a lender can renew the loan with an updated interest rate or a newly modified term. Or the lender will tell the buyer/mortgagee to seek other forms of financing for the property and make the lender whole. This is where the problem lies. Like many others I know, this owner from TX was most likely scrambling to find someone roll the existing loan into but has only run into walls.

remember, as a loan matures, the bank evaluates the property as if you're applying for the first time and no bank is touching an upside down property. Maybe this is where the opportunity lies?

This leads to me believe there is a business opportunity here... If an asset is under-water you could make an offer to the lender to buy the note. Once you control the note you call it due as it is underperforming. You take control of the property through foreclosure at a discount, or the owner pays you off the note at full price and you make money in the spread of what you paid for the note and its face value..

I know of people who seek distressed notes on commercial real estate and it's a real cut throat business. You'll need deep pockets and a lot of patience. The payout is when you can acquire the property and sell for an amount hypothetically higher than what you paid for the note, or payout can be just being made whole on the note. Some of these people are highly successful, but current market conditions calls for more dd and patience.

If you can fill the need of owners obtaining loans, then you've hit the biggest motherlode of them all....

 

[randallg99]

yesterday I spent a lot of time with "turnaround specialists" and if there's an opportunity in today's market, this is it:

Hold hands with small business owners and navigate them through difficult times of diminishing profits (or increasing losses)...

Anyone with a heartbeat and drive could have opened a business or bought real estate a few years back taking advantage of loose credit. And they would have looked brilliant regardless of background and ability.

But, what's being revealed today is that many of those people were absolutely ill-prepared to operate their entities. They lacked business acumen to the point that some biz owners did not even know their companies margins when asked, or even rent per foot they were paying.... quite the eye opener, really.

I think many of these people are stuck like deer in headlights and need some coaching to get them out of the problems and into profitability by negotiating with their landlords on their behalf, bringing new ideas for marketing, review financials to seek cost cutting measures, evaluating operations for efficiencies, etc...

Just a thought.

 

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[GlobalWealth]

yesterday I spent a lot of time with "turnaround specialists" and if there's an opportunity in today's market, this is it:

Hold hands with small business owners and navigate them through difficult times of diminishing profits (or increasing losses)...

.

I am trying to work with a guy here to help him through this process right now. This guy is on my advisory board and he is going through some rough times. He has WAY too much debt in a declining industry that is reliant on the housing market. His debt service has now exceeded his monthly profits.

The problem here is an irrational ego. He is doing about $2m/yr in revenue, but was doing about $3m. At $3m he was covering his debt load, but not now. He is on a slow path to insolvency. His only option is to get the lender to modify the note, but his ego (thus far) won't allow him to do this. In order to get the lender to modify, he will have to default. And this is too emotionally hard for him. He keeps thinking things will improve any day, and this is the problem; they may not as he is tied to the housing market.

He has already cut and cut and cut and now the only thing left to cut is debt service. The debt is partially backed by RE, but mostly cashflow based on the good years of 3-4 years ago.

I have seriously considered this as a business to help small business owners work out these situations, but there is the ego to contend with and this is the challenge (at least in my friends situation).

I have given this guy a realistic solution, but he is not willing to pull the trigger because he thinks things will turn around. I hope he is right, but I don't like to make business decisions based on hope.

 

[andviv]

Hope is robbing him time and, while hoping is less painful, reality is that action must be taken. Inaction is also a decision, and in cases like this, it usually does not work cause the turn around takes longer than needed.

The plan I have in my mind, and am working the details on how to implement it correctly, is this:

For those home owners in default (haven't really looked into the details of commercial, not sure how different it would be), contact the lender, offer to buy the note and use a hard money loan or private money, get the owner to sign the deed to you (and/or the money provider) and then dispose of the property at a low price for a quick sale. A lot of winners if this whole scenario pans out correctly.

I think a similar plan could be put in place for businesses, although I have no real clue how this would work for these notes, not nearly familiar with the lending side of business loans.

 

[GlobalWealth]

Hope is robbing him time and, while hoping is less painful, reality is that action must be taken. Inaction is also a decision, and in cases like this, it usually does not work cause the turn around takes longer than needed.

The plan I have in my mind, and am working the details on how to implement it correctly, is this:

For those home owners in default (haven't really looked into the details of commercial, not sure how different it would be), contact the lender, offer to buy the note and use a hard money loan or private money, get the owner to sign the deed to you (and/or the money provider) and then dispose of the property at a low price for a quick sale. A lot of winners if this whole scenario pans out correctly.

I think a similar plan could be put in place for businesses, although I have no real clue how this would work for these notes, not nearly familiar with the lending side of business loans.

I am assuming here you are talking about buying the note at a big discount, right? For example a house bought for $200k with 10% down but now has a market value of $120k is $60k upside down. The note (assuming interest only payments) is now at $180k. If you could buy the note for $90-100k, this could be a good deal. Then you could rent the place back to the current homeowner and do a rent-to-own or just a rent deal. Should be able to be done with very positive cashflow.

 

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[andviv]

Correct, buying the note at a deep discount from its face value.

No, my strategy wouldn't involve renting back to the owner, instead, have the owner walk away from the property --cash for keys, or foreclose if needed-- and then sell the property for a profit.

The reason I don't want to deal with renting to the existing owner is cause here in the states there are many states that are banning this as it has been used by some people to screw the owners. I prefer to avoid the potential legal issues with this.

 

[Bilgefisher]

I worry about this when the housing market corrects and interest rates are much higher. The bank will do what they can to get those notes from 5% to 12%. Plus they will have become much more proficient at dealing with defaults.

 

[randallg99]

I worry about this when the housing market corrects and interest rates are much higher. The bank will do what they can to get those notes from 5% to 12%. Plus they will have become much more proficient at dealing with defaults.

which is exactly why you need to buy your properties based upon year 1990-1995 valuations. There are many deals to be had right now.

 

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[andviv]

which is exactly why you need to buy your properties based upon year 1990-1995 valuations. There are many deals to be had right now.

I am not seeing those numbers in my area, at least not in residential. Randall, are you getting deals like this these days? Are you getting listings of commercial with valuations like that in your area?

 

[randallg99]

I am not seeing those numbers in my area, at least not in residential. Randall, are you getting deals like this these days? Are you getting listings of commercial with valuations like that in your area?

my offers are based on yr1990-95 metrics regardless of listing prices. I am putting in 4 offers at 4pm today.

 

[Russ H]

Andres-

There are areas of the Bay Area where foreclosed houses are at 1985 prices (Fairfield, CA is an example).

-Russ H.

 

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[Cat Man Du]

I am not seeing those numbers in my area, at least not in residential. Randall, are you getting deals like this these days? Are you getting listings of commercial with valuations like that in your area?

Here in south Fla. The banks are seling the foreclosures at .30 cents on the dollar. $100,000 Mtg. property SOLD for $30 -35,000. Makes sense to just BUY the prop.:smxF:

 

[kwerner]

The plan I have in my mind, and am working the details on how to implement it correctly, is this:

For those home owners in default (haven't really looked into the details of commercial, not sure how different it would be), contact the lender, offer to buy the note and use a hard money loan or private money, get the owner to sign the deed to you (and/or the money provider) and then dispose of the property at a low price for a quick sale. A lot of winners if this whole scenario pans out correctly.

...my strategy wouldn't involve renting back to the owner, instead, have the owner walk away from the property --cash for keys, or foreclose if needed-- and then sell the property for a profit.

I'm with you on this strategy! BIG potential here. If you want more info on this, you might PM / call Reipro, I believe this is one of the strategies he specializes in.

What do you need to get started on this? It would be my pleasure to offer any assistance that I can to help you; I would consider it an opportunity to partially pay back the many times you've helped me.

 

[bflash98]

We had a bank wanting to sell use(the company I previously worked for) some loans below face value on some very good commercial property. These were non-preforming loans. The tenants were payaing their rent but the owner was using that cash flow to pay other people instead of making loan payments. The FDIC told the bank to get the loans off of their books by a certain date. The bank then hired a 3rd party financial company to pitch the deal around.

The big risk is if the owner declares bankruptcy which is what ended up happening. The face value of the note was $14 million and the bank wanted to sell it for $7 million. It had a great local liberal arts school as it's tenant. So the deals are out there just a matter on finding the right people who know about them.

 

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[andviv]

Here in south Fla. The banks are seling the foreclosures at .30 cents on the dollar. $100,000 Mtg. property SOLD for $30 -35,000. Makes sense to just BUY the prop.:smxF:

Very cool... what banks you working with?

 

[andviv]

I'm with you on this strategy! BIG potential here. If you want more info on this, you might PM / call Reipro, I believe this is one of the strategies he specializes in.

What do you need to get started on this? It would be my pleasure to offer any assistance that I can to help you; I would consider it an opportunity to partially pay back the many times you've helped me.

Thanks!

We should definitely talk more...

 

[Cat Man Du]

Very cool... what banks you working with?

In my land almost ALL of them.....B of A, Morgan, etc. It's a buyers PARADISE!!:great:

 

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[andviv]

In my land almost ALL of them.....B of A, Morgan, etc. It's a buyers PARADISE!!:great:

I know Wells Fargo and Chase are also working quick in FL. Actually, they are moving so fast I sometimes can't believe these are the same banks that couldn't get anything done in the past two years.

 

[andviv]

my offers are based on yr1990-95 metrics regardless of listing prices. I am putting in 4 offers at 4pm today.

Andres-

There are areas of the Bay Area where foreclosed houses are at 1985 prices (Fairfield, CA is an example).
-Russ H.

Well, found some data to back your comments...

Chart of the Day - Home prices down 35% since 2005 peak