Commercial real estate will never be the same again ...

David Goldsmith

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Colony Capital may lose control of 2 largest CMBS hotel portfolios
Negotiations with lenders on the portfolios that total 15K rooms have only yielded short-term forbearance

When Colony Capital revealed in May that it was in discussions with lenders after having defaulted on $3.2 billion in hotel loans, the Tom Barrack-led firm cautioned “there can be no assurances that the company will be successful in such negotiations.” In fact, at the time the Los Angeles-based investment firm had already defaulted on a forbearance agreement following earlier negotiations with one lender.
Now, Colony is in jeopardy of losing control of its two largest CMBS-financed hotel portfolios — the 89-property, 8,585-key Tharaldson portfolio and the 48-property, 6,402-key Inland portfolio. Both are on track to be transferred to the control of receivers as negotiations with lenders have failed to yield long-term solutions, court filings and servicer commentary show.

The fate of the Tharaldson (or THL) portfolio still depends on the outcome of a lawsuit. In mid-June, CMBS trustee Wells Fargo sued Colony Capital over defaults on the $768 million loan on the portfolio. Special servicer KeyBank National Association is acting on behalf of the trustee in the suit.

Due to the economic impact of coronavirus, the suit notes, the operating deficit at the properties is expected to total between $15 and 25 million over three months, a deficit which Colony is “unwilling or unable to fund.” These deficits also put numerous franchise agreements at risk, which would further impact the properties’ value, and will require the lender to make protective advances.

The Tharaldson and Inland portfolios are two of seven hotel portfolios Colony Capital currently owns, and which the company considers to be “legacy” assets as it focuses increasingly on digital properties like cell phone towers, optic fiber networks and data centers.

Both portfolios stretch across the country: Tharaldson hotels are in the Midwest, West Coast and parts of the Northeast and the South; while Inland properties are scattered around the Northeast, South, Southwest and West Coast. The larger hotels in the Tharaldson portfolio include the 206-key Courtyard Dunn Loring Fairfax in Virginia and the 203-key Courtyard Newark Elizabeth in New Jersey. The Inland portfolio includes the 229-key Sheraton San Jose Hotel and the 214-key Four Points by Sheraton Pleasanton, both in the Bay Area.

According to the suit, Colony first defaulted on a monthly loan payment in April, after which Wells provided a very short forbearance period of just one month. Colony then defaulted on the forbearance agreement as well by failing to make the subsequent May payment.

“Given the precarious position of the hotels and the millions of dollars [Wells Fargo] will be required to advance to maintain hotel operations,” Wells seeks to appoint a receiver to operate the hotels, KeyBank’s lawyers note. The special servicer nominated JLL’s receivership practice to take over the properties.

Once in receivership, the Tharaldson portfolio properties would then be foreclosed on or sold, according to the suit. That process could take several months, given the scores of hotels in nearly two dozen states.
Colony and KeyBank did not respond to requests for comment. Colony has until the end of this week to respond to KeyBank’s complaint.

As for the Inland portfolio, Colony and the lender on that $780 million CMBS loan have agreed on a receivership transition without having to go to court. The two sides have not been able to negotiate a loan modification. But the note said Colony “has agreed to an orderly transition of the properties to a receiver since agreeable terms for a loan modification could not be reached.”

Colony was previously a junior mezzanine lender on the Tharaldson portfolio, which at the time included 135 hotels in 28 states, and took control of the hotels in 2017 after prior owner Whitehall defaulted on the debt.
Colony owns a 55-percent stake in the Tharaldson portfolio alongside “certain managed investment vehicles.” According to loan documents, those vehicles include Colony Distressed Credit Fund II, Colony THL Co-Investment Partners, and a partnership of South Korean co-investors.

The Inland portfolio, meanwhile, is one of two portfolios that Colony owns 90-percent stakes in alongside minority partner Chatham Lodging Trust.
The U.S. hospitality industry continues to face serious uncertainty, as occupancy rates declined last week amid growing concerns about a second wave of coronavirus infections. CMBS loans are likely to be a major stress point because servicers have little leeway to make meaningful loan modifications, industry experts say.


David Goldsmith

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Market Extra
The open secret in commercial real estate is that owners regularly take cash out of properties — here’s a look at how much

There is nothing to ‘stop the hammer from coming down,’ says one lender

It’s an open secret that commercial real estate owners take cash out of buildings.
When they do, unlike homeowners, criticism often is sparing. After all, hotels, shopping centers, office towers and other commercial buildings are run as businesses, where the whole point is to reap a profit.
“The real-estate industry is all about taking cash out, and on a tax-deferred basis, at that,” said Scott Tross, co-chair of real estate litigation and dispute resolutions at Herrick Feinstein, a law firm. “That’s nothing new. But in may respects, what’s happening now is reminiscent of what happened ten years ago or so.”

By that, Tross was referring to the deluge of late payments, defaults and foreclosures that swept up some of the biggest names in U.S. commercial real estate in the wake of the 2007-08 global financial crisis, and saddled their investors will losses.

“You had people borrowing as much money as they possibly could, none of it on a recourse basis. And if things move in their direction, that’s great,” he said. “If they don’t move in their direction, they just hand back the keys.”
‘If you want the upside, you need to take the downside too.’
— Shlomo Chopp, managing partner of CPS, a commercial real estate workout firm
That threat of borrowers walking away once again looms over the commercial real-estate market. But instead of financial institutions spreading toxic assets across the globe, it’s now because of the coronavirus, which forced much of the U.S. economy to shutter in March, and months later still is spreading unabated in many American cities, as well as in Brazil and is rising again in parts of Europe.

Another new twist is that borrowers, ahead of this downturn, pulled more equity out of U.S. commercial buildings than ever before, when they have refinanced in the commercial mortgage-backed securities (CMBS) market, a key source of loans for hotels, skyscrapers, warehouses and other business properties that end up packaged into bond deals.
MarketWatch asked credit-rating firm DBRS Morningstar for a historical look at cash-outs on properties refinanced in the CMBS market, a source of funding that took off in the mid-2000s.
They tracked $136 billion worth of total cash-outs, versus nearly $47 billion of equity put into refinanced properties over the last 17 plus years. The bulk was extracted not during the last decade’s real-estate boom as might be expected, but between 2013 to 2019, a period when CMBS financing came roaring back and commercial real-estate prices skyrocketed.

Cashing in on rising prices
Why does any of this matter now? Debt relief conversations already started in April, a month into the first round of coronavirus lockdowns, between the hardest-hit commercial property borrowers and their lenders.

Since then, delinquent CMBS loans have climbed to nearly 10%, rivaling the worst levels of the global financial crisis, as shown in this Deutsche Bank chart.

Bank-held loans likely follow the climb
And it’s likely not only borrowers with CMBS loans that are falling behind. Deutsche’s analysts said they expect bank-held commercial property loans to follow the delinquency spike already evident in CMBS, in a client note this week.
Furthermore, the commercial real estate finance industry, and now lawmakers wielding a draft bill from U.S. Rep. Van Taylor of Texas, detailed here, want the Treasury Department to help relieve commercial property stress by offering landlords direct equity injections.

that it may be construed as “a bail-out for large landlords, a group of rich and well-connected beneficiaries.”
Shlomo Chopp, managing partner of CPS, a commercial real estate workout specialist, said it is the prerogative of property owners to take cash out of buildings. “If you increase the value of the property, you have the right to take cash out,” he told MarketWatch.
“But we also live in a capitalist society. If you want the upside, you need to take the downside too.”

David Goldsmith

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International real estate investment tumbles in Q2 with US hardest hit
Americas CRE deal volume collapses to $43B in Q2 2020 from $141B in Q2 2019

Real estate markets worldwide saw investment sales fall in the second quarter, but none as much as the U.S.
The Americas region saw deal volume fall to $43 billion in the second quarter of 2020, a 70 percent drop from $141 billion a year ago, according to a new CBRE report. That’s the biggest drop of any major market.
Hotels were the hardest hit sector in the Americas, with deal volume collapsing by 90 percent. Even the relatively resilient industrial sector saw a 50 percent decline. Deal volume in the office and apartment sectors both fell by 72 percent.

Globally, commercial real estate deals totalled $109 billion in the quarter, a 57 percent decline from the total of $251 billion a year ago, according to the report.
“The continued surge of Covid-19 cases in the U.S., Brazil, and parts of Latin America will hinder the rebound of investor activity in those areas,” the report says, although “as testing, tracking and treatment capacities grow, and confidence improves, H2 is expected to be stronger. Increased clarity on pricing and the rental outlook will also tempt discount-seeking investors to re-enter the market.”

In the Europe, Middle East and Africa (EMEA) and Asia Pacific (APAC) markets, where initial waves of infection were more successfully suppressed, CRE investment saw a somewhat less severe slowdown. EMEA deal volume fell 38 percent year over year in the second quarter, while the APAC region saw a 46 percent decline.

Outcomes also differed at the country level, with markets like Germany and Poland declining less than the U.K. and France in Europe, and markets like Australia and South Korea outperforming China, Japan and Singapore.
For the full year, CBRE has revised its global investment forecast downwards from a 32 percent decline to a 38 percent decline, “in light of recent sluggishness in the Americas pandemic control and economic recovery.”

But “a global rebound of activity is still expected to arrive before the end of year, given the general improvement in the ability to manage Covid-19,” the report concludes.

David Goldsmith

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Lenders overstate some commercial properties' ability to repay mortgages - WSJ
Aug. 11, 2020 10:27 AM ETUBS Group AG (UBS)By: Liz Kiesche, SA News Editor16 Comments
  • A study of $650B of commercial mortgages that were originated from 2013 to 2019 found that even during a normal economy, mortgaged properties' net income often trailed the amount underwritten by lenders.
  • While the underwritten amount should be a conservative estimate of how much a property earns, the actual net income falls short of the underwritten net income by 5% or more in 28% of the loans, according to a study of almost 40K loans by two finance academics at the University of Texas at Austin.
  • The numbers were higher for loans originated by UBS (UBS +0.7%), Starwood Property Trust (STWD +3.2%) and Goldman Sachs (GS +3.1%), the study found — income was overstated by more than 5% in more than 40% of the loans those companies originated.
  • Starwood told the Wall Street Journal that it has "consistently experienced strong performance across its portfolio of originated loans."
  • The UT-Austin study's findings suggest that loans sold to investors before the pandemic often overstated income and could have more trouble keeping up with payments in the event of a recession.
  • One of the industry's associations, the Commercial Real Estate Finance Council, asserts that the UT-Austin study is flawed. It should use long-term cash flow to assess the underwriting, said CREFC chairman Adam Behlman, who is also a Starwood executive.
  • Furthermore, originators identified in the study had lower-than-average default rates on their loans. "Defaults are the ultimate barometer of the quality of the underwriting," he said.
  • The research comes as the commercial mortgage-backed securities industry has been seeking help in the wake of the pandemic and large parts of the market have been excluded from the Fed's $2.3T economic rescue package.
  • John Griffin, a finance professor and co-author of the study, notes that the originators appear to be aware of the practice of overstating net income — loan originators charged higher interest rates for loans with overstated income, which implies that the loans are seen as riskier.
  • The UT research isn't the first to notice the discrepancy. In February 2019, the SEC received a complaint that pointed to a pattern of inconsistent numbers in different financial reports providing income for the same property in the previous year.
  • Interested tickers: BXMT, CLNC, LADR, HASI, CLNY, ARI

David Goldsmith

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How a co-working firm’s bankruptcy endangers CMBS loans
Properties’ cash-flow risks would trickle up the chain, report warns

Hit hard by its subtenants’ inability to pay on time, an affiliate of executive suites and co-working company International Workplace Group has filed for Chapter 11 bankruptcy protection.
The bankruptcy filing, by RGN-Group Holdings, does not augur well for properties where IWG, the company behind Regus and Spaces, is the biggest tenant. The sites’ cash flow risk will likely also spread to CMBS loans backed by IWG-leased properties, according to a recent report from Kroll Bond Ratings Agency.

Nearly $13 billion across 151 CMBS loans is backed in part by offices where IWG is a tenant, according to the Kroll report. The Kroll analysts warn that even though IWG has proactively sought rent deferrals and lease modifications from its landlords, the bankruptcy filing means the company can seek to have rents dismissed.

IWG is the largest tenant at 30 properties backing $493 million in CMBS debt and is the sole tenant at three properties backing $69.4 million in CMBS debt, according to the report. The biggest loan secured by a property where an IWG affiliate is the only tenant is 1800 Vine Street, a recently renovated 60,000-square-foot office owned by Archway Holdings in Los Angeles.

Still, the late-August bankruptcy filing does not spell doom for all loans backed by Regus or Spaces locations. IWG also tends to sign leases and file bankruptcy petitions through single-purpose limited liability companies. That allows part of IWG’s portfolio to enter bankruptcy without affecting other, financially stable locations.

Bankruptcy filings also show that Regus, the executive suites arm of IWG, is one of the biggest creditors of RGN-Group Holdings and the dozens of other single-location companies tied to IWG that have filed for bankruptcy in the last few months, according to the report.

The coronavirus pandemic and subsequent shutdowns have raised concerns about the coworking industry’s immediate future, with some industry experts speculating about what a WeWork bankruptcy would mean for commercial real estate. But WeWork Chairman Marcelo Claure said the coworking giant is on track to be profitable (as he defines the term) by the end of 2021.

David Goldsmith

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Hotel and retail mortgages dragging down recovery
Spreads on the BBB-rated CMBS market are higher than prior to the pandemic

Mortgages backed by hotels and retail properties are struggling — and attracting yield-hungry investors willing to tolerate the risk, the Wall Street Journal reported.
As the risk that the loans will fail increases, so does the yield of the securities into which they are bundled. One way to measure that risk is to compare that yield to what super-safe 10-year Treasury notes pay. At the moment, the difference between those two numbers, called the spread, is high.

Consider lower-rated commercial mortgage-backed securities — those rated BBB, or one level above what’s commonly called junk status.
The spread for an index tracking the BBB-rated CMBS market and the 10-year Treasury note was 5.1 percentage points on Thursday. Although that’s a far cry from the 11.2-point spread in April, it is still more than twice the 2.4-point spread before the pandemic, according to the Journal.

For CMBS indexes that include more hotel and retail properties — CMBX 9 and CMBX 6, respectively — the spreads reached close to their April and May highs on Wednesday.
The spreads are rising as more loans run into trouble. About 8.8 percent of outstanding commercial loans were delinquent as of last week, according to Trepp, the Journal reported.

Some investors are seeing the higher spreads as an opportunity. KKR recently closed a $950 million fundraising round for its second real estate fund that is investing in single-B newly issued deals. Matt Salem, KKR’s head of real estate credit, told the Journal he is optimistic because the commercial real estate market has rebounded quickly.

CMBS loans are viewed as riskier than traditional loans because the agreements that the servicers of the loans have with bondholders make them more difficult to restructure.

David Goldsmith

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Troubled commercial properties see values fall 27%: report
Recession triggered by Covid-19 has devastated hotels, malls and other commercial properties

Commercial properties such as hotels and malls may have lost as much as a quarter of their value as the pandemic devastated the retail and hospitality businesses, along with other sectors.
The value of the collateral for commercial mortgage-backed securities has been written down by 27 percent on average when properties get into trouble, the Financial Times reported, citing data from Wells Fargo.
New appraisals are done when commercial real estate property owners fall behind on their mortgage payments, and the loans are handed to a special servicer.

Wells Fargo’s data also shows that the number of appraisals is going up, with 68 triggered in September alone.

Hotels, which have been struggling thanks to the collapse of the tourism industry, have experienced big losses in value. A Crowne Plaza hotel in Houston, for example, was valued at $25.9 million, down by 46 percent from its valuation in 2014 when its loan was bundled into a CMBS deal. The Holiday Inn La Mirada outside of Los Angeles was recently valued at $22.1 million, a dip of about 27 percent since its loan was securitized in 2015.

“The longer this crisis goes on, we will move into a valuation problem,” said James Shevlin, president of special servicer CW Capital.

David Goldsmith

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Manhattan CRE deals hit lows not seen since 2009
Just 21 commercial sales recorded in the borough in Q3

Commercial real estate sales in Manhattan have taken a major hit because of the pandemic.
There were just 21 commercial real estate transactions in the borough in the third quarter of 2020, according to Bisnow, citing Avison Young’s quarterly report. That’s the lowest number of deals recorded since the third quarter of 2009, in the aftermath of the Great Recession.
And even between the second and third quarter, sales slid by 30 percent, according to Bisnow.
Sales volume in Manhattan in the third quarter declined to $1.1 billion, a 74 percent decrease from the previous year. Two deals accounted for a good chunk of that: Savanna’s deal to buy 1375 Broadway for $435 million in July from Westbrook Partners, and RFR Realty’s purchase of 522 Fifth Avenue from Morgan Stanley for $350 million. Those deals were under contract prior to the coronavirus.

There were also big drops for property types within the commercial sector: Development sales volume totaled $141 million, a 56 percent drop from the previous year. Retail saw only one transaction during the quarter, a $1.5 million deal sold in foreclosure, according to Bisnow.
And in the multifamily market, there were just nine sales in the third quarter totaling $121 million, an 82 percent decline from the previous year.
If this downward trend continues, commercial sales volume could total $8.4 billion in 2020, according to Avison Young principal James Nelson. That would be a 69 percent drop from the 10-year average.

David Goldsmith

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Hudson’s Bay, Simon Property Group hit with $846M foreclosure lawsuit
Lawsuit alleges nonpayment at 24 Lord & Taylor and 10 Saks locations

Wilmington Trust is suing a joint venture between Simon Property Group and Hudson’s Bay Company for allegedly failing to make mortgage payments.
Ten Saks Fifth Avenue and 24 Lord & Taylor locations are named in the lawsuit, which was filed earlier this month in Miami-Dade County Circuit Court, the South Florida Business Journal reported.

The lawsuit alleges that the borrowers have not made any payments since March. Wilmington, which filed the complaint as part of a commercial mortgage-backed securities trust, is suing Saks Dadeland Leasehold LLC, which leases the Saks Fifth Avenue at Dadeland Mall in Miami.

JPMorgan Chase, Column Financial and Bank of America provided the $846.2 million loan in 2015 for 36 properties in Florida, New York, New Jersey, Illinois, Massachusetts, Michigan, Maryland, Pennsylvania, Virginia, Connecticut, Ohio, Texas, California and Georgia.

A spokesperson for Hudson’s Bay told the Business Journal that the lawsuit has “no impact on Saks Fifth Avenue, its stores or its operations” and that the company is disappointed that “in the context of a global health crisis, the lenders would choose litigation over cooperation.”
Hudson’s Bay acquired Saks Fifth Avenue in 2013, and previously owned Lord & Taylor before selling the chain to Le Tote in 2019.
Lord & Taylor has been hit hard by the pandemic; the parent company it filed for bankruptcy in August, and announced that it would close all of its remaining locations.

David Goldsmith

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New York’s CRE woes could spread nationwide: investors
$3B in loans backed by NYC commercial real estate is delinquent

Investors are betting that trouble in New York City’s commercial real estate market will spread nationwide.
Prices for debt backed by hotels, restaurants and retail in New York City — among the hardest-hit sectors as the pandemic emptied out tourist destinations this year — have fallen and new loans have slowed, leaving bankers and the real estate industry bracing for further declines, the Wall Street Journal reported.
Daniel McNamara, a principal at MP Securitized Credit Partners, said he is betting prices for some CMBS indexes will fall, according to the Journal.
“Distress in financial markets was all about residential mortgage-backed securities in 2008 and energy in 2015,” McNamara told the Journal. “In 2021 it will be all about commercial real estate and the securities linked to it.”

Citing Trepp, the Journal reported that more than $3 billion worth of loans backing commercial property in the five boroughs are delinquent, and loans in creditor negotiations amount to an additional $4 billion.

Other investors say trouble may be more property-specific. For example, a subsidiary of Brookfield Asset Management in September successfully placed a $1.8 billion loan backed by One Manhattan West into CMBS. The 67-story tower is more than 90 percent leased with major tenants including consulting firm Accenture and the National Hockey League.
“Any property that looks destabilized needs to lease up,” Matt Salem, head of real estate credit at KKR, told the Journal. “That doesn’t mean we’re redlining parts of New York City, but we need to make sure there’s durable cash flow for the near future.”

David Goldsmith

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Commercial property tax delinquencies jump 50%
Property taxes account for more than 40% of NYC’s tax revenue

Delinquency rates on commercial property taxes have increased by about 50 percent since last year, according to an analysis by Crain’s.
Commercial properties — including retail spaces, offices and factories — were the most behind on their tax bills, with a 3.6 percent nonpayment rate on the first tax deadline in July. As of Oct. 15, the number of properties in arrears rose to 4 percent, according to Crain’s.

Property taxes account for more than 40 percent of the city’s tax revenues, with real estate taxes accounting for more than half of that amount, according to Crain’s. A drop in property tax collections could strain the city’s budget, which has already been battered by the pandemic.

Properties with an assessed value of more than $250,000 have to pay taxes every January and July. Experts are closely watching the Jan. 1 tax deadline to gauge the health of the commercial property market, according to Crain’s.
After commercial property taxes have become past due for about three years, they are eligible to be sold at an auction with the money from the sale going to the city.
This year, however, the tax lien sale has been rescheduled three times due to the pandemic. Mayor Bill de Blasio initially pushed it to September, and Gov. Andrew Cuomo subsequently signed an executive order barring any liens from auction until October. He later postponed the sale until Nov. 3. [

David Goldsmith

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Loan Purchases: Lenders and Investors Weathering the COVID-19 Economic Downturn to Find Opportunity

As the COVID-19 pandemic continues to take its toll on the country and on economic markets, commercial real estate is feeling a significant impact. A growing number of tenants of all types are failing to pay rent, property owners are watching cash flows and asset values decline, property valuations are becoming difficult to determine, and lenders and servicers are seeing a growing number of borrowers that are unable to satisfy the financial obligations under their loan documents. Some of these borrowers may be unable to refinance loans that are approaching maturity or approaching the end of agreed upon forbearance periods. Lenders and servicers may not be willing to extend forbearance periods or meaningful workouts may not be viable given property cash flows or valuations. For many of us in the commercial real estate industry, this is reminiscent of the Great Recession. However, one key difference is that even the most thoughtfully underwritten real estate loans secured by desirable properties are vulnerable this time, and the rate of loan defaults is increasing.
The CARES Act provided limited payment forbearances to certain multifamily borrowers of federally backed mortgage loans. Banks, life insurance companies, REITS and other CRE lenders and servicers have prophylactically offered short-term forbearance options to borrowers who are unable to meet their financial obligations. For many borrowers and lenders, however, these initial forbearance periods will soon expire. With continued uncertainty about tenant occupancies in multiple classes of properties, low or non-existent demands at hospitality properties, severely impacted cash flow, capital calls on debt funds and lending REITS, and COVID-related disruptions in the CMBS market, many lenders and servicers will be unwilling (or unable) to extend these forbearances into 2021 or to make any meaningful modifications to the loan documents. The road to recovery may be many months and in some sectors, such as hospitality, years long. The long recovery time may be a factor some lenders rely upon to sell their debt instruments. Lenders may be eager to quickly sell loans secured by properties with longer recovery periods, but they may be willing to wait for incremental improvements in the economy to sell loans secured by more stable property classes at higher prices. With the results of the recent election and the news that a potential COVID-19 vaccine may be widely available in the first or second quarters of 2021, lenders may not have to wait as long as they originally thought for a recovery (except, perhaps in the hospitality or retail spaces). As such, lenders may decide to restructure existing debt, or if they are willing to sell, may not do so with a large discount.
Even in this uncertain market, opportunity exists. Lenders have the opportunity to clear their books of non-performing loans, generate liquidity and avoid the hassle and expense of loan workouts, receiverships, foreclosures and potential litigation. Real estate debt funds that are facing redemption calls may be forced to sell their non-performing debt in order to quickly raise capital to satisfy such redemption calls. There is also opportunity for cash-flush real estate investors that have been waiting for a dip in the market to occur. With funds in hand, many investors are eager to purchase distressed and defaulted loans at a bargain price, often with the ultimate goal of gaining control of the underlying borrower or property through foreclosure or deed in lieu of foreclosure. For such an investor, it can be a win-win proposition. If the real estate and the loan recover, the investor will benefit from debt service payments on a loan amount that is greater than the investor’s investment, and it will earn a potentially significant premium when the loan is paid off. If the loan continues in default, the investor will be able to exercise its rights and remedies under the loan documents and ultimately become the owner of the property.
In both bull and bear markets, there are a number of complex business issues, legal documentation decisions and due diligence matters that buyers and sellers should consider before closing on the purchase and sale of a real estate secured loan, mezzanine loan or loan participation interest. Sellers should always conduct due diligence on potential buyers to make sure they have the wherewithal to close and they should hire competent legal counsel to protect them from unwanted post-closing liability. Buyers should undertake a complete due diligence review of the underlying loan documents and loan file and review all aspects of the real estate itself; particularly in light of the fact that many loan sales are “as is, where is.” In doing so, buyers should consider the typical items, including financial statements, leasing reports, title documents and policies, surveys, estoppel certificates, environmental reports and property condition reports. Buyers should also undergo a thorough analysis of the bankruptcy and other litigation risk associated with the borrower, any loan guarantors and the property.
During the Great Recession and in prior downturn markets, determining the value of underlying real estate assets could be accomplished with relative ease based on data from prior recessions, assumptions regarding continuing tenancies and the availability (or lack) of equity in the market. However, one significant difference between the debt sales that closed during the Great Recession versus the current market will be the difficulty in determining the value of the underlying real estate assets. The pandemic and the resulting stay-at-home orders have detrimentally affected tenants across the full spectrum of businesses in a way that has not occurred in prior downturns. As a result, sophisticated loan buyers and sellers must undertake a thorough analysis of the current tenancies at a property, including rental payments and delinquencies, rent forbearances or modifications, tenant credit worthiness, and tenant bankruptcy risks. Buyers should also be on the lookout for litigation commenced by borrowers to evict tenants or pursue lease guaranties. This is especially important for buyers who ultimately want to own the real estate and will therefore inherit those lawsuits and their inherent risks and costs. All of these tenant-related risks can drive down the market value of the real estate and the loan, and the difficulty for the parties is in their determination of how much. One result of the difficulty in determining property values, will be a corresponding difficulty in placing a price tag on the sale of the debt. Sellers and buyers may be at odds when it comes to the purchase price of real estate loans and the price may also be driven by the number of potential buyers in the market. Many new opportunity funds have formed since the Great Recession and they have liquidity to deploy, which may result in a bidding war for many of the same debt sales.
In addition to the typical due diligence considerations, sellers and buyers should examine how the timing of exercising remedies can affect the marketability and desirability of a particular loan. For example, a buyer looking to own the underlying property may be particularly attracted to a loan where the seller has virtually completed a foreclosure because the buyer can close on the purchase of the loan, then immediately complete the foreclosure and step into ownership of the property. In so doing, the buyer can sidestep certain bankruptcy risks and hopefully avoid any need to deal with the original borrower. Alternatively, if a seller has not yet taken any action on a defaulted loan, the buyer will need to formulate a plan for what to do after acquiring the debt. Things that should be considered are whether a receiver is necessary, the timing and cost for completion of a foreclosure, and whether there are any borrower bankruptcy risks or other litigation risks. In addition, if the capital stack includes mezzanine or subordinate debt, a potential buyer may want to strategically acquire the defaulted mezzanine loan as the foreclosure process under the UCC can potentially be completed in a much shorter time frame than a mortgage foreclosure under state law. In such an instance, the buyer will need to carefully analyze any intercreditor arrangements between the lenders to fully understand and appreciate the rights of each lender.
With the pandemic lingering on and the economy continuing to struggle, it is certain that the rate of commercial real estate loan defaults will continue to rise. Lenders are weighing the need to sell off bad loans and investors are assessing their willingness to take on the risk inherent in a loan purchase, and at what purchase price. What is certain is that the purchase and sale of distressed debt will become a thriving industry, as it was in the Great Recession. Opportunities abound for lenders to reset and for smart investors to acquire highly desirable properties for pennies on the dollar. But any successful transaction will require business savvy and legal acumen.
Stroock’s national team of accomplished real estate counsel is highly experienced in the world of distressed assets, loan sales, and loan purchases. Whether you are selling or buying, our team of specialists will help you navigate the opportunities and the pitfalls and provide you with a clear path to achieve your business objectives.

David Goldsmith

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Staff member

CMBS market faces staggering losses even with vaccine hopes​

Demand for malls, hotels and office space may be forever altered as experts say Covid has changed shopping, work habits for good

Investors in the $550 billion commercial mortgage-backed securities market could see hefty losses as real estate sectors will continue to struggle after a Covid vaccine becomes widely available.
Morgan Stanley is projecting that losses for CMBS deals backed by dozens of different loans could average about 5 to 8 percent, according to a Bloomberg report.

Demand for malls, hotels and office space could drop even as vaccine distribution becomes widespread as experts believe that companies and consumers have changed their shopping and work habits for good.

Many notes rated in the BBB range could be forced to pay investors far below their face value, Bloomberg noted, citing Morgan Stanley’s commercial real estate research unit. And even some AA notes might see a valuation decline in several transactions.
Malls, in particular, are taking a hit during the crisis with property values falling and many loans heading back to special servicing. In August, Walden Galleria, a large mall near Buffalo, New York, was reappraised at a value of $216 million, a 64 percent drop from 2012.

David Goldsmith

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Commercial real estate’s looming distress problem​

About $126B worth of commercial properties could sell at distressed prices

Covid-19’s effect on commercial real estate will continue long after 2020 comes to a close.
About $126 billion worth of properties within the sector — hotels, offices and retail spaces, to name a few — will sell at distressed prices by 2022, Bloomberg News reported, citing data from CoStar Group. That’s higher than what came onto the market in the two years following the Great Recession in 2008.

Sales of these troubled assets could hit as much as $321 billion by 2025 — and in a worst case situation, the total could reach $659 billion, according to a CoStar.

Mortgage delinquencies for hotels and retail assets are skyrocketing due to the pandemic. On the office side of things, it remains unclear when, or even if, companies will will bring employees back once it’s safe to do so, but some are predicting hefty losses.
Private equity and hedge funds have raised billions of dollars to pour into these distressed real estate assets.

David Goldsmith

All Powerful Moderator
Staff member
Sunrise Mall sold for barely over 20% of 2005 price.

Sunrise Mall Sold For Nearly $30 Million​

The property was purchased by Urban Edge Properties, which redevelops retail properties.​

MASSAPEQUA, NY — The Sunrise Mall has been sold for nearly $30 million, according to an announcement Monday.
Urban Edge Properties said it purchased the shopping center in Massapequa from Unibail-Rodamco-Westfield for $29.7 million, plus up to an additional $6 million. The mall has 1.2 million square-feet of retail space with anchor tenants that include Macy's, Sears and Dick's Sporting Goods.

“Sunrise Mall is a unique asset with a prime location in a dense, attractive region along the southern shore of Long Island,” said Jeff Olson, CEO of Urban Edge, in a statement. “This acquisition provides a terrific opportunity for Urban Edge to leverage our redevelopment expertise in repurposing underutilized land and creating value.”

Urban Edge said it sees a lot of potential in the mall, which is located right on Sunrise Highway in Nassau County. The mall is currently 65 percent occupied.
New Jersey-based Urban Edge manages, develops and redevelops retail spaces.

The seller, Westfield, purchased the mall for $143 million in 2005, according to Newsday.

The American shopping mall saw its Golden Age from 1956 to 2005, when 1,500 malls were built across the country. But no new enclosed mega-mall has been built since 2006.

David Goldsmith

All Powerful Moderator
Staff member

The restaurant industry is in the midst of a complete and total meltdown that is unlike anything that we have ever seen before.

If you ask Google how many restaurants there are in the United States, it will tell you that there are 660,755, although that number is a few years old. But for the purposes of this article, that is a good enough estimate. Americans love to eat out, and restaurant workers are some of the hardest working people in the entire country. So it is incredibly sad to see more restaurants constantly going under. In some cases, restaurants that have served their communities for decades are deciding to permanently close their doors. For example, over the weekend Sammy’s Roumanian Steakhouse in New York City announced that it had finally reached the end of the road

RecommUnfortunately, Sammy’s is far from alone.
In fact, in a recent article that he penned for Fox Business, Adam Piper lamented the fact that more than 100,000 U.S. restaurants have gone out of business during this pandemic…
State and local governments have wielded the coronavirus pandemic as license to steal freedom and opportunity in pursuit of unprecedented omnipotence. Unreasonable, unnecessary and hypocritical actions have forced over 100,000 restaurants to close and endanger countless others.
And according to Bloomberg, the true number of dead restaurants is now over 110,000…
More than 110,000 restaurants have closed permanently or long-term across the country as the industry grapples with the devastating impact of the Covid-19 pandemic.
Just think about that.

More than one out of every six restaurants in the U.S. is already gone, and the National Restaurant Association is warning that there will be more carnage in the months ahead because the industry is in “an economic free fall”
“The restaurant industry simply cannot wait for relief any longer,” Sean Kennedy, executive vice president of public affairs at the association, said in a letter to Congress. “What these findings make clear is that more than 500,000 restaurants of every business type — franchise, chain and independent — are in an economic free fall.”
This is what an economic depression looks like.
With tens of thousands of restaurants sitting empty, and with tens of thousands of others not paying rent, the stage has been set for a commercial real estate disaster of unprecedented scope and size.
Of course there are millions of square feet of office space and retail space that are not being productive right now as well. In a recent article, Lee Adler referred to this looming commercial real estate nightmare as “a monster in the room”…

I think that if there’s anything that illustrates the head in the sand problem of the banks, it’s this. Commercial real estate (CRE) finance. There’s a monster in the room. All that empty space. No longer income producing.
For now, big financial institutions are doing their best to hide their coming losses, but according to Adler for certain sectors the losses will simply be unavoidable
Multifamily will take a haircut but will survive. My guess is that industrial, while overpriced and overvalued, will produce enough income to get by. Office and retail? Kiss it goodbye. It’s done. Over. Kaput.
Sadly, he is right on target.
The coming commercial real estate crisis is going to make the subprime mortgage meltdown of 2008 and 2009 look like a Sunday picnic.
And the longer this pandemic stretches on, the larger the losses will ultimately become.

For residential real estate, the big story is that hordes of Americans are fleeing both coasts and are moving to smaller communities in the middle of the country.
So even as housing prices drop substantially in major cities on the east coast and the west coast, they are rising rapidly in cities such as Pittsburgh, Boise and Austin
Smaller metropolitan markets like Pittsburgh, Cleveland, Cincinnati, Indianapolis, Kansas City, Boise, Idaho, Austin, Texas, and Memphis, Tennessee are seeing some of the strongest price gains in the nation now, according to the Federal Housing Finance Agency. Prices in those cities are now at least 10% higher than with a year earlier.
And as I discussed yesterday, we are actually starting to see hyperinflation for high end properties in desirable rural and suburban areas of the country.
Just recently, a friend sold a home that is located not too far from us for a price that almost made my eyes bug out of my head. I literally had a difficult time believing the insanely high price that they were able to get, but this is what happens in a hyperinflationary environment.

2020 may have been a “personal financial disaster” for 55 percent of all Americans, but thanks to the hyperinflation in the stock market the wealthy have more money to throw at high end real estate than ever before.
Unfortunately, all of this wild money printing is not going to be able to prevent the coming crash in commercial real estate.
No matter how much money they have, many Americans are simply too afraid of COVID to eat out right now, and that will remain the case for the foreseeable future.
And we are going to continue to see more Americans migrate away from the large cities on both coasts, and more businesses in those core urban areas will continue to fail.
As the commercial real estate crash unfolds, a lot of financial institutions simply won’t be able to make it without government help.
So will the federal government bail them out?
You never know, but every dollar the federal government borrows and spends just makes our long-term problems even worse.
All of the dominoes are starting to fall, and we are still in the very early chapters of this horrifying economic collapse.
Unfortunately, most Americans still don’t understand what is happening, and most of them have no idea that economic conditions will soon get even worse.