Know lenders' potential actions when a commercial borrower is in trouble

Richard H. Zahm, founder and principal, Second Angel Bancorp

As published in Scotsman Guide's Commercial Edition, January 2010.

By 2013, $2 trillion in commercial mortgages are expected to come due, with $250 billion this year, according to the Associated Press and other sources. Many of these loans could default.

It's severely difficult for borrowers to refinance, and that's likely getting worse. Reduced demand has created higher vacancies, decreased rents and a sharp increase in cap rates. As such, in a short period of time, commercial properties have lost considerable value -- as much as 40 percent in some areas. At the same time, funding has become tougher to find.

Commercial property-owners are therefore increasingly finding themselves underwater and at risk of default. For commercial mortgage brokers, it's important to know the options and approaches that lenders consider when faced with defaults.

Needs vary, and there's no cookie-cutter solution for all loans. Lenders and borrowers must consider time, expense and the impact an approach will have on other properties and on a loan portfolio as a whole.

With this in mind, what options are available, and what are lenders' considerations when determining what to do with a loan at or near default? There are seven primary remedies lenders may seek.

1. Note sales

Lenders may remove nonperforming loans from their books by selling the debt to third parties.

Here, interaction with the borrower isn't an issue. The headache of late or no payments is transferred to another lender or investor, along with concerns of the property losing value and increasing the loan-to-value ratio and risk.

If the loan is sold for less than the note's face value, the lender realizes a loss. But the sale also cauterizes the wound.

Another approach in this category involves the sale of subordinate interests in the note to other lenders or investors. This decreases the risk of loss by spreading it among different lenders or investors while maintaining the original lender relationship.

Page: 1 2 3 Next