Using the Web and social media to sell real estate

Since October 2007 there has been a 43% decline in value of commercial real estate and an additional drop between 17 and 20% is anticipated this year, and probably is not going to stop any time soon, actually the credit crunch will continue probably until 2014.

Learn the secrets of commercial loan modification.

Vacancies have increased 40 basis points (0.4%) in May 2010 which is the greatest increase in history and the overall decrease for the first half of 2010 is 200 points (namely 2%). There are 3.5 trillion dollars worth of loans that are outstanding and that are about to come due in the next 12 to 14 months due to the illiquidity in the credit market. Before granting any loan or renewing a loan, banks are watching very closely two parameters that are important in commercial real-estate: debt-to-income ratio (the amount of money coming in as compared to the debt payments to be made) and debt-service coverage ratio (the amount of cash flow available to meet interest and principal payments).

So even if it is a performing asset, the banks decide not to move forward with the financing and leave the commercial property in what is called “strategic default” or “technical default”.

The “Congressional Oversight Panel” estimates 1.4 trillions in commercial loans that are going to reach their terms in the very near future. The largest losses are scheduled to begin in 2011 and it’s going to be in the range of 200 to 300 billion dollars.

The Board of Governors of the Federal Reserve issued a policy statement advising financial institutions to extend and restructure loans whenever possible, but who gets to decide whether a loan is going to be extended or not. Find out in this thorough video explanation.

Roberto Mazzoni

It is a simple concept and yet it will have a sweeping effect: banks are less comfortable in lending money in commercial projects than before and have reduced the loan to value ratio to 65%, which means that they will give you 650 thousand dollars on a one million dollar property provided you put 350 thousand of your own money in the deal.

Loan to value in commercial real estate loans has changed dramatically.

This would all be fine if the lending application were started today and if the market were stable or growing. Yet in the majority of the scenarios, with very few exceptions like Texas, the value of commercial properties is going down and many of the loans that will become due or will have to be renewed by the end of this year and next year have been given four or five years ago, when the market was booming and when banks were more comfortable in working with a 70% loan to value ratio.

And the 65% is not actually even related to the cost of reproduction of the building (how much would it cost to build it again), yet it is based on the “as is” value calculated today that might be quite far from the original value calculated 5 years ago. Some experts in loan evaluation say it might well turn out to be 60% or 55% of the real loan to value ratio once you factor in a series of elements that banks are now considering in reducing the actual value of the property.

This video gives you the varied opinions of commercial real estate experts based on what is going on today in the market.

Roberto Mazzoni

Banks today aren’t lending based on the value of the real estate any more, but they base their decision on the “existing relationship2 which means the potential global income of the sponsor asking the loan. If you want a loan from a bank, it’s relationship driven, that means they want you to be local and to have all of your checking accounts with them. Basically, they want to have your money at hand before they lend any of theirs.

Restructuring commercial loans often now requires that the bank fails in the first place.

The majority of the commercial real estate developers are in dire straights, trying to hang on with their nails, to restructure their debt on anything they built from 2005 and 2007, but many local banks won’t even talk to them. So how does the relationship play in this case? Many banks know very well that the minute they begin a short sale or loan restructuring process, which means discounting the amount owed and negotiating new terms, their own balance sheet will start to suffer greatly and they will see a domino effect of a number of their commercial borrowers doing the same. They don’t want to foreclose because they can’t take the capital hit.
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Therefore they sit tight, insisting that developers and owners in general continue paying a loan that they can’t pay and hoping the problem will go away without actively tackling it. When this happens, the best thing that the developer or the owner of commercial real estate can hope for is that their bank goes under. Once the bank fails, it goes to the FDIC (Federal Deposit Insurance Corporation) and then the FDIC reduces the value of the asset and brokers it off to another bank which will be in the position now to negotiate.

Listen from an expert in the field about some real life stories that are happening right now.

Roberto Mazzoni

There has always been a second market for securing loans on real estate and it has been managed by insurance companies that have been providing long term funding for both residential and commercial properties. After the bubble burst a couple of years ago, all these companies suspended their activities in this area waiting to see how the situation was going to evolve and now they literally loaded with money and aching to lend it out on worthwhile projects.

Insurance companies can provide alternatives to commercial foreclosures.

Now they are offering loans at rates as low as 5.5% but the loan to value percentage is much tighter, namely they are willing to fund only 65% of the value of the property, while the borrower needs to come up with the remaining 35%, pretty much in line with what is currently being done by many banks.
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But they become a solution for those trying to avoid foreclosure and willing to put some cash to restructure the loan, which means using the insurance companies as a vehicle to bring the bank to terms and getting a discount on the current loan and then move it to the insurance companies putting in some cash to make it balance again.

A typical real life example given is a property originally worth 12 million where the owner now has to bring 5 millions to the table in order to avoid foreclosure and start with a new loan which could be transferred to an insurance company with the bank forfeiting 3 millions on the outstanding balance and the owner adding 2 millions of his own cash to secure a new long term loan that will allow him to weather the storm.

Listen to the video by Del GoForth that gives you a totally new view at how insurance companies can play a key role in the resolution of the upcoming commercial real estate foreclosure tsunami.

Roberto Mazzoni

Where is the commercial real estate market going? And is it going anywhere in the first place? George Hurst, experienced commercial broker with Coldwell Banker Commercial, tells us that we are at a dead stop right now: increasing vacancy rates, falling rents, unemployment, the resulting decreasing cash flow will reduce the borrower’s capability to repay her loan, bringing forth a surge in foreclosures.

The commercial building market is coming to a stop.

Additionally, the now reduced values of the commercial properties bring about a very high loan to value ratio when the time comes for refinancing, making it impossible to renew the current loan, but requiring the owner (borrower) to come up with a substantial amount of cash just to keep the financing in place for a property that is already under water.

Today when you go to a bank to get a commercial loan you cannot use “performing income” any more as a basis for your financing. As the properties are less and less performing and therefore you need to reduce your evaluation. Sales of commercial properties have decreased of over 80% and the recent reduction in unemployment in some areas is mainly due to temporary jobs.

The health of commercial real estate depends mostly on the overall condition of the economy and it will likely stay weak for the foreseeable future. Some estimates say that by the end of 2012 we might see a slow change, but that is still a matter of opinion since many changes could come about in the economy by that time. The effects will be felt anyway up to the end of 2020, which is ten years from now. There are definitely factors that could help stimulate a faster recovery, but that is scenario that we are looking at right now.

The economic growth has returned slightly, there is a 3% increase in the first quarter of 2010 of the USA GDP (Gross Domestic Product – a measure of an economy that adds the total market value of all finals goods and services produced in a country in any given year at the current prices).

Yet that is tempered by unemployment which is increasing the vacancy rates constantly, and such increase has been slowed down so far by long term leases held by major corporations, granted back in 2005, 2006 or 2007 for class A properties (the highest quality) but when those will start to fall out, the rate of space available will increase dramatically, particularly in class A properties, and the lower classes (B and C) will fall right behind in succession.

The commercial loans that will go in default are estimated between 1.4 and 2 trillion dollars. There is an estimate of about 40% of current loans that are upside down, but Deutsche Bank has estimated that over 75% of the existing commercial loans will be difficult to roll over (renew). So the key opportunity is for investors to start a buying campaign on these properties that are ready to go in default, but the challenge is to establish a correct value for those properties, knowing that the market is still on a slide and that economic conditions are still unstable.

Roberto Mazzoni