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Problems Predicted in Commercial Nonperforming Loans

Chicago-As time passes and more stress occurs in the commercial mortgage-backed securities market, there will be more activity surrounding nonperforming loans in this area, which will push buyers and sellers to get involved with these loans, according to Michael Newman, president and CEO of Golub & Co.

"It will be interesting to see how it all plays out. The CMBS stuff will be the most stressful, given the structures of those deals. You never knew who your lender was. Nowadays, in a regular deal, you don't always know your lender. By definition, in CMBS, you didn't know your lender because they sold all the pieces off," said Mr. Newman, whose company is active internationally in real estate development, acquisitions, asset and property management, leasing and corporate real estate services.

Buyers and banks are able to write down these nonperforming loans and maybe not sell them but work them out directly. "Those that can't do it will sell their notes and take their losses," he said. "Buyers will either try to work these loans out with the borrower or purposely not so they can get at the asset themselves. That will cause further problems and further stress."

Everyone saw the collapse of the residential market and now problems are slowly moving over to the retail side, with defaults and foreclosures occurring at shopping centers."There wasn't a lot of talk on the commercial or office side before," Mr. Newman recalls. "Hotels were struggling and shopping centers had issues because of retail. You felt the office sector, perhaps industrial, you'd have to see issues there."

Lenders are going to see more credit issues with these commercial tenants, because they can't pay their rent, he explains. "They are going out of business. They are consolidating. They stop paying rent and need a rent reduction. On the other hand, you have the loans. You weren't hearing about these commercial loans."

For office or retail, it's important to do due diligence whether buying the note or whether you are the borrower who is talking to the lender. "You still have to try to figure out what might happen in the future, which is difficult," he adds. "If the buyer of the note, if they are getting a steep enough discount, there may be a little less due diligence. It's hard sometimes on the note side to get good due diligence and get information." Within the next two or three years there are going to be huge problems in CMBS. The leverage was not super high. There are so many tranches and so many interested parties at different levels, it's too much of a conflict.

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