Where is the other shoe?

Ever since the residential real estate bubble popped, investors, owners and lenders have been waiting for commercial real estate loans to cause chaos to the financial markets.

So far, that hasn’t happened. Owners of commercial mortgage debt have been reluctant to default on borrowers because the value of the assets has fallen so much. But with large amounts of real estate debt coming due over the next several years, many borrowers are worried, especially those that have lost tenants and equity as a result of the downturn.

Real estate investors and firms that service bad loans have been licking their chops, according to two industry insiders at an Urban Land Institute luncheon Tuesday. The duo offered their insights on what they see happening over the next year and a half.

Peter Locke
, principal of New York-based real estate investment firm Spectrum Group Management, said he has been waiting for most of his career for the expected flood of distressed assets that will become available for bargain prices.

But so far, Locke said, it has been a slow trickle of troubled commercial properties.

“It’s been frustrating, waiting for this opportunity to open up. Since Lehman crashed, there have been some deals, but they have been few and far between,” said Locke.

Things have been turning around since last fall, as banks and note holders are more willing to come to terms with real estate investors, he said. Locke said he expects a re-pricing of assets in the short term that will start making transactions more frequent.

Locke said that in the next 12 to 18 months he expects more deals to get done as commercial mortgages come due, and special servicers — the firms that deal with the borrower when the loan comes — have to decide whether to sell bad loans for a loss or hold on to the property and hope they get a bigger return later.

And that boils down to what is in the best interest of the investors that own pieces of the securitized mortgage.

The other speaker, Sam Kupersmith from the Atlanta office of Kansas-based Midland Loan Serving, offered that point of view. When a loan goes bad or matures with a balance due, it comes to him, and he decides whether to let the borrower restructure the loan if they can, to foreclosure, or to sell the note or property to a third party.

And it isn’t always an easy decision.

As an example, Kupersmith said he recently oversaw the sale of a shopping center, whose previous owner couldn’t pay a $12.5 million dollar balance, to a receivership for $6 million.

“[The mortgage investors] took a 50 percent hit on that deal,” said Kupersmith.

It’s possible that they could have held on to the property and stabilized it by getting a third party to manage the property and later sell it for around $8 million. But that was too risky, he said.

“That $6 million could have also turned to $3 million in three years,” said Kupersmith.

“Some investors don’t want to sell because the hit is so large they can’t take it. Those are the deals Peter wants to buy for $3 million.”

Kupersmith said it is often easier to sell, because stabilizing a distressed property costs too much money.

“It is a hard call to pull the trigger on losses that are [too big]. That is the biggest problem with the system right now,” said Kupersmith.

In the coming year or so, he said, he expects lots of workouts between borrowers and special servicers as loans come due.

“[Borrowers] will have to pay to play if they want to keep [their property],” said Kupersmith. He said that means putting another 10 percent down in exchange for a one- to two-year extension.

Richmond snapshot

A few distressed properties in the Richmond area have changed hands in the past year. Below is a list of a few we covered.

Circuit City headquarters

After the national electronics retailer went belly up, headquarters owner Lexington Property Trust defaulted on its CMBS mortgage with a $15.5 million balance. That loan was serviced by Berkadia Commercial Mortgage. Thalhimer is listing the 288,000-square-foot office building for $11 million. (You can read more here.)

Chesterfield Marketplace

Texas-based Tabani Group defaulted on its $20.2 million balance on the Chesterfield Marketplace, a large shopping center at 1000 Carmia Way. Special servicer CWCapital took over the property in December. The center was impacted adversely by the loss of anchor tenants Linens & Things and The Room Store.

Sheraton Richmond West

The 372-room hotel was foreclosed on last June when the private ownership group defaulted on its $29.5 million CMBS loan. Special servicer CW Capital took back the hotel and got a third party, Pyramid Hotel Group, to manage the property. You can read more here.

Al Harris covers commercial real estate for BizSense. Please send news tips to [email protected]

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larolaneBrettJim Recent comment authors
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“It’s been frustrating, waiting for this opportunity to open up. Since Lehman crashed, there have been some deals, but they have been few and far between,” said Locke.

Good. Firms like Locke’s may eventually “win” if the commercial market does go south but I’m pulling for the folks who are working to make positive contributions, not the vultures who bet against them.


I’m with Jim, screw that guy. Sounds like Rockefeller, “buy when blood is running in the streets.”


jim and brett: please stop eating the paint chips.