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Old 03-16-2010, 06:36 PM
 
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Default Interesting comments about commercial real estate

In the hard copy version of Dallas Business Journal there was an article called Year of the Foreclosure re: commerical real estate. Course, we've heard a lot of talk about the coming commerical real estate crash. I thought this article was interesting in how the lenders were trying to handle it.

From the article:

"Many lenders, however, continue to practice a policy of 'extend and pretend,' in which they 'pretend' that real estate loans are still worth their full value and make loan modifications so that borrowers can avoid going into default and banks don't have to recognize losses on their assets..."

"As long as commercial properties continue to produce enough income to cover debt, the lenders will continue to let them ride instead of foreclosing..."

"The question is how long lenders will continue to try to work with borrowers before taking properties back..."

"Lenders have generally been willing to extend if the property is performing...If the property is not performing, they are left with foreclosure as the logical option..."

"The foreclosures will be healthy for the market, because properties need to be re-priced to reflect their true values..."


And re: multi-family properties, the article said:

"So far, 'extend and pretend' has been the modus operandi for lenders..."

It said in recent month investors are returning to the multi-family market after being scared away. "The investors' return is likely to prompt lenders to initiate foreclosure proceedings because they'll know buyers are out there for the properties the lenders take back....They are going to be more aggressive in taking product back because now there is a vibrant market for selling these properties."

So, I thought it was interesting to see how lenders are trying to control the situation. They extend and pretend loans until they know they can resale the property. Once they know they can resale, then they foreclose.

I wonder if this is what is happening in residential real estate. The lenders are just doing whatever they have to do to buy time - like screwing up the remodification paperwork, waiting forever to foreclose - while they wait until the buyers come back and then when they do, they'll foreclose more aggressively.

In another article, same issue and topic, someone talked about how commercial real estate foreclosures are necessary to re-price the market. "If you are totally upside-down in an asset, why continue to pump more cash into it?"

Anyway, I thought it was interesting.

Last edited by FarNorthDallas; 03-16-2010 at 11:03 PM..
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Old 03-16-2010, 09:40 PM
 
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The major difference between the owner occupied residential property and commercial property is that latter generates a return from operations while the former generally does not do so until a sale...

I do think that the lenders have reasons to be somewhat strategic in dealing with both the massive numbers of underwater owner occupied properties and the smaller number but potentially nearly as costly mess of commercial properties. The difficulty is that there is no magic "all clear" signal that lenders will use to determine when it is the right time to seize and resell assets. The prudent course is for lenders to avoid having any signficant inventory, as the costs of keeping such properties in a condition to make them sellable is high, and the odds of recovering costs is low...
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Old 03-14-2012, 09:20 AM
 
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Old 03-14-2012, 09:33 AM
 
Location: Chicago
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Quote:
Originally Posted by chet everett View Post
The major difference between the owner occupied residential property and commercial property is that latter generates a return from operations while the former generally does not do so until a sale....
Yes, and the commercial property expense still provides one of the best shelters for corporate incomes/taxes, especially beneficial to own a commercial property that is leased by a business you own.
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