For commercial property-owners and their banks, loan modifications provide a viable solution for the impending increase in distressed-property scenarios. And from new-condominium-construction projects standing vacant to struggling mom-and-pop shops in this deteriorating economy, every ominously posted for-lease sign represents a new source of fee revenue that mortgage brokers can no longer afford to ignore.

In fact, with their origination skills and their client and lender relationships, brokers are in a prime position to help investors and property-owners caught between the credit crunch and the growing irrelevance of capitalization rates.

When renters were plentiful and price-per-square-footage was twice the current market rate, commercial property-owners often qualified for inexpensive, short-term loans -- generally with a fixed rate for three, five or 10 years. Today, however, net operating income (NOI) is dropping to par or below the debt-service-coverage ratio (DSCR) calculated in the past.

In helping clients seek loan modifications, your approach therefore will be to convince the bank that because the property's annual NOI divided by the depreciated market value has diminished cap rates, there is a hardship for mitigating the previously underwritten mortgage terms.

Where to start

Many business-owners are looking for a life-preserver to help them through today's market. More specifically, they want an exit strategy. Mortgage brokers are in a prime position to help.

In fact, commercial loan modifications present a full-service consultative solution. The mortgage expert can become an entrusted, long-term advocate for the struggling investor by analyzing all sides of the transaction and then maximizing the cash flow.

The loan-modification process typically begins with the broker compiling the borrower's supporting financial documentation. This typically includes:

• Rent rolls;
• Year-to-date balance sheets;
• Profit-and-loss statements;
• Tax returns with all schedules intact;
• Mortgage and business bank statements; and
• An executive summary outlining the hardship.

After collecting the required documents, you must go through a due-diligence period -- typically, about seven days -- to determine how to structure a case for negotiating with the bank's or lender's special-assets department.

Contrary to popular belief, commercial loan modifications often take less time than residential modifications, and the decisionmaker can be engaged earlier in the game. Generally, the process appears to take about 60 days from beginning to end.

Seek outside help

Negotiating with the bank on behalf of a client also will require a real estate attorney's legal expertise and an experienced underwriter's processing acumen. Therefore, it is prudent for mortgage brokers to align themselves with a team of experienced commercial real estate and legal professionals.

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