Is there still a distressed market? One would argue, not in Dallas-Fort Worth. But across the country we are still experiencing a recovery, and national and global situations make for unstable economies.
With that said, I believe today’s owners look at asset conditions, new loans and markets in a whole new light. Although our Texas markets have more than recovered, keep that distressed word in your vocabulary—it’s likely to return in the future.
Recently I’ve had several calls regarding preforming loans that are on the brink of default “ if we lose one more tenant,” or from owners who have been funding minimal shortfalls for years in hopes that the asset would rebound after the downturn. A word of advice: Preemptive actions can often offer a better outcome than waiting for default, especially if you have debt on an asset that is teetering on the edge of solvency.
If you’re concerned your CMBS loan might be headed for delinquency, waiting until the last minute to try and accomplish a restructure, or funding shortfalls for long periods of time, lessens your options for success. I’ve been cautiously optimistic about the commercial real estate market for the past couple of years now. Even so, recent news of a small increase in delinquent CMBS loans for the first time in 13 months and the monthly transfers to special servicing prompts me to nudge you if you have a CRE loan concern.
The key to getting the best possible loan workout is to seek advisement before default threatens your loan. Many borrowers believe they cannot work with the servicer managing their loan until the mortgage is in default. If your CRE property is underperforming, you may want to explore a possible workout, even if you are not currently prepared to default on the loan.
By waiting too long, you could lose considerable leverage and put yourself at risk of paying higher lender fees. Advising your loan servicer of concerns before default can often allow for additional creativity so the asset can perform and both parties can successfully resolve the problem. Additionally, with pending maturities in the next three years, extensions are commonplace, often with modifications at the same time.
Borrowers looking for discounts from lenders should be prepared to pay upward to stabilized values even if the asset is not stabilized today. Special servicers want to ensure they capitalize on the “possibility.” In an improving market, vacancy is opportunity for value. Once considered negative, vacancies can now be viewed very positively. This is especially true in stronger markets like Texas because they offer an upside to sign new, more landlord-friendly leases.
I believe the continued trend of discounted payoffs, maturity extensions, auctions and split note structures will continue well into the future. These types of deals have traditionally proven to be good resolutions for assets depending on the market and asset circumstance. Loan workouts are usually structured to favor the lender, but proactive borrowers may be presented with the chance to make compelling offers for distressed deals.
Values today are highly subjective and may be based on huge disparities in leasing assumptions and cap rates. In addition, navigating the CMBS special servicing world has become even more complex as dwindling distressed portfolios offer servicers less fee income opportunities.
So, if you’re concerned that your CRE loan is stressed or headed for default, you have an upcoming maturity or want to review options to sell with a CMBS loan in place, don’t wait too late to see what options are available to you. Taking pre-emptive action may mean the difference between keeping your property and losing it.
Tanya Little is founder and CEO of Hart Advisors Group LLC. Contact her at [email protected].
