Experts: Lenders more inclined to work out commercial loans

Phoenix Business Journal - by Mike Sunnucks, Chris Casacchia and Jan Buchholz Friday, February 26, 2010

Distressed commercial loans — whether for office, industrial, retail or even multifamily housing — have a better chance of getting a mortgage modification than underwater homeowners, local real estate experts say, because those lenders have more at stake.
Commercial property owners often have a greater ability to turn around a distressed financial situation than individual borrowers. They can bring in new tenants, they have more access to capital and credit, and they can find investors and business partners, said Craig Hannay, president of Phoenix-based Hannay Investment Properties.

Lenders are taking a more flexible and active approach when it comes to troubled commercial mortgages, said Bob Young, first vice president of investment properties for CB Richard Ellis in Phoenix. Like their residential brethren, an increasing number of Phoenix commercial real estate loans are underwater because of the market and economic slides, he said. Banks have been criticized for not modifying distressed home loans.

David Larcher, executive vice president of Vestar Development Co., said at a real estate forum in Phoenix this month that as many as half of the commercial mortgages in the Valley are underwater.

Banks will become increasingly willing to rework commercial loans as the sector continues to struggle, said Beth Jo Zeitzer, president of ROI Properties in Phoenix. The changes that are made, she said, likely will come in the form of interest rate reductions and term extensions.

John Randolph, a real estate and finance attorney with Phoenix law firm Sherman & Howard LLC, cited two recent cases in which lenders started to foreclose on commercial buildings, but delayed those proceedings to give the borrowers more time to restructure loans. He would not provide specifics, citing client confidentiality.

Azim Hameed, another real estate and banking attorney with Sherman & Howard, said banks will try to extend mortgage terms for commercial borrowers who might be able to offer some cash in exchange.

“The loan modification usually includes a partial repayment of principal by the borrower to the bank. In exchange, the borrower gets an extension of the term of the loan for six months or a year,” he said.

Such deals can be worked out, Hameed said, because a partial principal repayment increases the bank’s liquidity. Extending the term of a loan gives the borrower time for the economy to turn around and the opportunity to find new sources of cash to repay the loan, such as new equity investors, a new loan or a perhaps a property buyer.

Arizona’s three dominant banks — Bank of America, Well Fargo Bank and JPMorgan Chase & Co. — say they want to work with both commercial and residential borrowers.

“Wells Fargo is working with commercial borrowers to restructure their loans and provide an opportunity for them to weather the current economic downturn,” said Dean Rennell, president of Wells Fargo Arizona Business Banking.

Rennell said Wells looks at tenants and vacancy rates when considering modifying commercial loans on rental properties, and the owner’s financial viability for owner-occupied properties.

He said lenders have more flexibility in adjusting commercial mortgages than home loans because home mortgages are highly regulated consumer transactions that frequently are owned by investors who dictate the terms. The banks are servicers of those mortgages, so they may not be able to rework or restructure the loans.

In contrast, he said, a commercial real estate loan usually is owned by the bank, so it can renegotiate terms.

Other real estate experts agree that because home loans were securitized and have been sold among banks and investors, lenders currently holding home mortgage notes are less willing to agree to modifications.

Zeitzer said that’s because lenders have more to lose when a large office building or shopping center goes into foreclosure than a single home in Peoria or Buckeye. She said short sales seem to be a more efficient means of working through distressed home loans.

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Hannay Investment Properties: www.hannayproperties.com

ROI Properties: roipropertiesaz.com