Many small US companies and investors holding commercial properties are facing a financial crisis. Banks usually re-evaluate this type of mortgage loan at the five or 10-year term mark. They have the option of renewing it or asking the owner to pay it off.
The issue for many owners is that banks have become less likely to extend any loans which don’t appear to be good bets for them.
It’s difficult for business owners to appear creditworthy coming out of the global recession and the years of tight consumer spending that followed. Brent Case, the president of Coldwell Banker Commercial Atlantic International Inc., pointed out recently that a number of small businesses have lost their reserves during the recession and that they simply don’t have the savings that banks are looking for as a buffer when the time comes to refinance a commercial mortgage.
As a result, a number of small property owners must scramble to find a lender that will cover the outstanding loan. If they can’t arrange alternative financing, they will lose their property through foreclosure.
Commercial properties with a value of $276.2 billion in mortgages are expected to become due this year. According to New York commercial mortgage research firm, Trepp LLC, this is the highest amount to date.
Several of these loans were made before the financial crisis of 2008, when property values were at their highest and owners were counting on steady income to make payments on the loan.
In some cases, the loans became due at the height of the recession but banks were willing to offer extensions during tough economic times. Some analysts estimate that up to 60 per cent of commercial real estate mortgages that became due were extended during this time.
Now that the extension periods have been coming to an end, borrowers are faced with ballooning payments that they aren’t able to make. Banks are now more willing to go ahead with foreclosure proceedings. They have more capital than they have had in years and are prepared to take a loss on a loan, if necessary.
With the number of loans becoming due in 2013, and banks less likely to refinance loans, these problems may continue for a few years. As of the middle of 2012, about a third of loans becoming due through 2016 were under water. This means the property was worth less than the amount of the loan, according to figures released by Trepp.
Analysts are not predicting a collapse in the commercial real estate market. A report which was released in January found that 60 per cent of $399 billion in “troubled” commercial real estate properties which have been tracked since 2008 have either been refinanced with a lender or bought by a third-party investor.
The report, prepared by Real Capital Analytics, evaluated properties valued at more than $2.5 million. Matthew Anderson, managing director at Trepp, points out that small properties “are much less attractive to the banks, especially larger banks.”
