The real estate industry is quite cyclical. Unfortunately, many investors who participated in the last round of shopping center construction are finding themselves in trouble. Worse, many are in deep trouble but don’t even know it. While institutional investors may be better prepared to weather the storm, many of today’s investors are individuals who bought into CMBS financed deals. These are the folks most at risk.
According to a recent Reuters article, Wells Fargo estimates there are $38 billion of CMBS loans in the retailing sector maturing between now and the end of 2017. That figure comes from a larger figure of $128 billion in maturing CMBS loan in all sectors. The loans made to finance retailing space are in particular trouble.
Retailing has always been cyclical and rises and follows the economy. When the public believes the economy is good, they spend money. Otherwise when people feel a downturn they preserve their assets and put off many nonessential purchases.
A new dynamic has also entered the marketplace and its timing couldn’t be worse. Main Street retailing is losing ground to the online world. Many people make their purchases online at places like Amazon or at the online sites of traditional retailers (e.g. sears.com).
Individual investors often forget that CMBS loans are typically 10 year loans with a balloon payout. This is very much unlike a 20 or 30 year declining balance home loan. Loans that were taken out at the height of the real estate bubble are now coming due. For loans that finance the retail sector, the outlook is bleak.
How bleak? The Reuters article quotes an investment banking consultant that says half of all regional malls will close over the next decade!
Adding to this mess is the false sense of security that many investors have. Obviously, if a mall has already lost its anchor tenant and the center can’t generate enough cash to pay the loan, the money troubles are obvious. In many cases, however, the rent rolls are more than sufficient to pay the loan, insurance and taxes with enough left over to make distributions.
If a project has the monthly income, why won’t the loan be renewed?
Banks and other lenders look beyond the current cash flow. They look at long range outlooks and look at the lease expiration dates of major tenants.
Houses versus Retail Space
Your home is valued primarily by its condition and the property it sits on. The asset itself has value. Retail centers are primarily valued by their current and projected revenue stream. Sure, if the roof is caving in that would have an impact on value but the real value is in the rent roll.
Hope for CMBS Investors?
The earlier that owners begin planning, the easier it is to find a solution. This is especially true for properties that enjoy real equity. Unfortunately, many unsuspecting borrowers / investors fail to realize that their equity can be wiped out overnight.
Properties owned by institutional investors begin planning years before their loans mature. Properties owned by many individual investors, however, tend to be far less organized and often rely on a promoter or professional manager. Some of these promoters have done an abysmal job of keeping investors informed and preparing for loan maturities.
People think of a default in terms of missing a payment. Defaults come in many flavors, however. There is the typical payment default (missing a monthly mortgage payment), a nonpayment or nonmonetary default (losing an anchor tenant) and maturity defaults (a balloon payment comes due at the end of the term).
Contrary to popular opinion, a lender or CMBS trust does not have to renew and probably won’t renew a note in a retail building with vacancies and expiring leases. When the lender or noteholder won’t renew upon maturity, the loan goes into special servicing. In most cases, that means default interest, late fees, legal fees and the like. Any equity you enjoy could soon be wiped out.
Worse, we find that some special servicers have identified properties with significant equity and have actively worked to acquire the property for their own portfolio. Shockingly, most CMBS financed loans permit this.
The takeaway from this post is to be prepared as soon as possible. If you find yourself in special servicing with no way out or want to prepare for an upcoming loan maturity event, contact us right away. For more information, contact attorney Christopher Katers at [hidden email] or by telephone at (414) 777-0778. ou can also visit our text searchable blog or visit our CMBS loan workout and refinance page.
The law firms of MahanyLaw and Judge, Lang & Katers have joined forces to protect investors and fight banks, mortgage companies and special servicers that engage in predatory practices. Based in the Midwest, our rates are reasonable and our reputation and reach nationwide.
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