One effect of the rise in foreclosures is the glut of commercial buildings banks are forced to take back. For the past few years commercial property owners opted to spend less on maintenance of the building and using these cash reserves for things such as mortgage and tax payments. However, as times get tougher, tenants downsize or out right move out, and mortgage payments are missed, owners are less inclined to worry about deferred maintenance items. Now that banks are slowly taking back these properties, they are forcing owners to stay current on preventative maintenance and building upkeep.
This issue for the banks is they are getting these buildings back in much worse shape than they had imagined. Some owners have completely neglected their property simply because they know they are headed to foreclosure so they have no incentive to maintain the building. This has forced banks to get tougher during their annual inspections of properties. Most loan documents have certain requirements for the owner to maintain the property at a certain level. Typically these clauses aren’t enforced since owners understand the importance of upkeep in attracting and maintaining tenants.Furthermore, if a building owner elects to refinance their loan, banks will look harder at the property to assure it is being properly maintained. Should an owner not wish to replaced damaged windows or repair roof leaks, the bank can simply reject the refinance offer until these items are repaired.
The last thing a bank wants is to own real estate, especially real estate that requires time and abundant maintenance.
Interest Only Loans Are Back
Many real estate professionals felt part of the reason for the real estate downfall was the issuance of loans with interest-only periods. This was a concern because when the interest-only period is over the monthly payment skyrockets once principal is included. Few can predict the cash flow of a commercial building a year or two down the road, especially if a significant tenant goes dark leaving a huge loss of income. This creates a catastrophe if the expiring interest-only period coincides with decreased income.
In the first quarter of 2011, reports show that interest-only loans are back in demand. A full 24% of the loans that were securitized in the first quarter of 2011 were structured with some sort of interest-only period, according to John B. Levy & Company. It begs the question if history will repeat itself and we are heading towards the same cliff.
Quiet End to “Extend and Pretend” in Commercial Lending
One are of contention in the recent real estate downturn has been the reluctance of lenders to outright foreclose on defaulted loans. Investors argue the lenders preferred method known as “pretend and extend” is only prolonging the downturn and delaying the recovery. However, banks are quietly putting this method to bed.
Today, lenders are foreclosing on roughly 70% of troubled loans and modifying only 30%. This is a change from roughly 80% of troubled loans being modified in 2009.
Additionally, the market has seen a rise in real estate buyers who are hoping to purchase distressed assets at pennies on the dollar only to flip them for a substantial profit. This increase in cash flow in the market has caused prices to rise 4.2% since August 2010.
No comments:
Post a Comment