Thursday, November 12, 2009

Commercial Real Estate Crisis 2010

Do you think that the residential real estate crisis is bad? It is. The culprit: financing. First easy money, then no money for buyers.

Along comes commercial real estate, right behind residential. The predictions are that it will be worse. Much worse.

Commercial Real Estate Loan Cycles
Residential real estate loans are generally for 30 years, paid down over the entire time span. Commercial loans can have 20 or 30 year amortization schedules, but they generally have 5-10 year calls. The balance is due in 5-10 years. Generally this means refinancing the property every 5-10 years.

What Happens if You Can't Refinance a Commercial Loan?
It's an interesting thing- a borrower pays year after year on their loan, and then they can't refinance. Do they stop paying? No! Many times payments continue. Does that mean it's a performing loan? Absolutely not. The loan is outside the terms of the agreement and since it hasn't been repaid, it is in default. Yes, in default even though it is being paid each month. From a bank's financial perspective it means the exact same thing as if the loan wasn't being paid.

When a Bank Has a Loan in Default
There are two ways to be in default: 1. Stop paying on the loan each month. 2. Don't pay your balloon payment. Either way the bank bank has to set-up reserves and takes a massive loss.

Welcome 2010- From Bad to Worse
When did the easy financing start? In the early 2000's. So what time is it? Time to refinance all of those easy-money commercial loans! Guess what? Not possible. There is no money for commercial refinancing. The banks have today, and will have many more tomorrow, a massive amount of defaulting commercial loans.

The Opportunity
There will be opportunities to purchase loans that are "performing" from a monthly payment viewpoint but in default because they haven't been repaid. Who will purchase these loans or properties? People with cash. Individuals. Partnerships. REIT's. Hedge Funds. Wan't to get into commercial real estate? Start learning now how to put people together to raise cash and purchase performing assets in default for a fraction of market value as determined by the rents collected and net income on the property.

Agree? Disagree? Interested in putting a commercial real estate investment group together? Let me know. I'd love to talk.

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