Forecast for how local CMBS loans will play out: hazy

circuitcityhqThe delinquency rate for commercial real estate loans is climbing in Richmond.

That could mean more distressed property will hit the market this year as lenders get tougher on borrowers. And that, in turn, could mean a few more bargain-basement prices for investors willing to bet on a recovery.

Delinquencies for CMBS loans in Richmond have risen to 6.78 percent from 4.56 percent at the beginning of last year. When BizSense first examined the local CMBS market in April 2009, the rate was just under 2 percent.

“CMBS” is short for commercial mortgage backed security. The way they work is the bank makes a loan to a commercial property owner and the debt is bundled with other loans and sold to investors as securities. Issuance of CMBS loans peaked in 2007, with $234 billion in loans. The market dried up in 2008 and 2009.

The Richmond market has 335 active CMBS loans totaling $2.55 billion, according to real estate tracking firm Trepp.

Of those, 14 loans are in foreclosure or bank-owned and equal $126.5 million in unpaid balances.

The biggest CMBS default in Richmond to date is Deep Run III, part of the former Circuit City headquarters at 9954 Mayland Dr., which first stopped paying in July with a loan balance of $31.2 million. The property was owned by Inland Western, a REIT based in Illinois.

As it and other properties return to the market, investors seem ready to try and pick them up for a steal. Take the main Circuit City headquarters building, Deep Run I. That building also went back to the lender after the property trust that owned it stopped paying the loan. The building was foreclosed on with an unpaid balance of $15.5 million and was later bought by local developer Pruitt  Associates for just $3 million. (You can read more about that in an RBS story here.)

Among the other properties taken back by lenders are the former Sheraton West hotel on West Broad with a debt of $29.5 million, several apartment complexes and several shopping centers including Chesterfield Marketplace, Chesterfield Crossing and Hungarybrook Shopping Center.

Another nine loans, totaling more than $32 million, are more than 60 days delinquent.

The Philadelphia-based owners of the Chesterfield Apartment building at 900 W. Franklin St. are 90 days delinquent on their CMBS loan of $9.9 million. Other apartments in trouble are Riverside Apartments and a group of apartments on Chamberlayne Avenue in Northside.

In Chesterfield, the loans on Midlothian Crossing Shopping Center and Luskin’s Plaza have matured with unpaid balances, and Alverser Commons is 90 days delinquent.

In Mechanicsville, Brandy Hill Plaza is 90 days delinquent with a debt of $7.93 million.

regencysquareBut the biggest delinquency the Richmond market will be hit with in 2011 is Regency Square mall. The owner, Taubman Centers, said late last year that it plans to default on its $72.7 million loan due later this year. The loan was originated by Bank of America. Trepp still lists the property as current.

“That was a mistake when it was made,” said John B. Levy, principal of John B. Levy & Co. investment bank. “It was not a question if it was going to default. It was a question of when.”

The loan was issued in 2001. A couple of years later, the mall was facing stiff competition from Short Pump Town Center and Stony Point Fashion Park — also owned by Taubman.

“What they probably looked at is that it wasn’t worth any more time and money to be invested,” Levy said.

Delinquencies aside, it remains uncertain what will happen to those loans that are current but will mature in 2011. In Richmond, 20 loans that total $183 million that will come due this year. Those borrowers face uncertain prospects. Many property owners have lost tenants as a result of the recession and don’t have the cash flow they thought they would when they got the loan.

Over the past year or so, many lenders showed they were willing to restructure deals, in some cases writing down huge parts of the balance, Levy said.

“Last month we closed on the restructure for a deal where a lender forgave $10 million in principal in the D.C. metro area,” Levy said. “When you talk about a $10 million loss, they didn’t do it because they liked us, but it was in their best economic interests.”

That writedown amounted to more than half the loan, Levy said.

“That was a pretty good hit. I wouldn’t say it is atypical, but we have done deals that have written off up to 70 percent of the principal. That’s tremendous,” Levy said.

On the other hand, other property owners might not be so lucky. In part, Levy said because the economy is improving and more capital is flowing into the system.

“Lenders are less likely to be tolerant if they think there really is a chance you can pay them off,” Levy said.

Mike Lieber, president of AEGIS Financial Solutions in Fredericksburg, agreed that it is unclear how lenders will act this year.

“There were good trends in modification last year, which helped a lot,” Lieber said. “The thing that is yet to be seen is whether banks will continue to write down loans or refinance them. It is sort of a roll-by-the-seat-of-your-pants proposition.”

Some of the loans coming due include several apartments, the Hilton Garden Inn on Cox Road, Oak Hill Plaza on Mechanicsville Turnpike, and Robious Hall Shopping Center on Robious Road.

Lieber said his firm is inundated with requests from owners whose loans have matured and the bank has refused to roll over the loans.

“Depending on the type and location of the property, the bank may or may not be real excited about taking the property back,” Lieber said.

“Some of these guys have been delinquent since the middle of last year and the bank hasn’t taken the property back, and they are coming to me looking for ways out to refinance and get rid of the old loans.”

One option that is starting to open up again: CMBS.

Although mostly active in bigger metro markets, CMBS started to make a comeback with about $13 billion in loans issued last year, and Standard & Poor’s projects up to $40 billion in loans for 2011.

“I think probably what we are going to see, if new issuance of CMBS continues to be as strong as it is projected to be, that it will offset some of the delinquency,” Lieber said. “Which is really just sweeping the dirt under the rug.”

circuitcityhqThe delinquency rate for commercial real estate loans is climbing in Richmond.

That could mean more distressed property will hit the market this year as lenders get tougher on borrowers. And that, in turn, could mean a few more bargain-basement prices for investors willing to bet on a recovery.

Delinquencies for CMBS loans in Richmond have risen to 6.78 percent from 4.56 percent at the beginning of last year. When BizSense first examined the local CMBS market in April 2009, the rate was just under 2 percent.

“CMBS” is short for commercial mortgage backed security. The way they work is the bank makes a loan to a commercial property owner and the debt is bundled with other loans and sold to investors as securities. Issuance of CMBS loans peaked in 2007, with $234 billion in loans. The market dried up in 2008 and 2009.

The Richmond market has 335 active CMBS loans totaling $2.55 billion, according to real estate tracking firm Trepp.

Of those, 14 loans are in foreclosure or bank-owned and equal $126.5 million in unpaid balances.

The biggest CMBS default in Richmond to date is Deep Run III, part of the former Circuit City headquarters at 9954 Mayland Dr., which first stopped paying in July with a loan balance of $31.2 million. The property was owned by Inland Western, a REIT based in Illinois.

As it and other properties return to the market, investors seem ready to try and pick them up for a steal. Take the main Circuit City headquarters building, Deep Run I. That building also went back to the lender after the property trust that owned it stopped paying the loan. The building was foreclosed on with an unpaid balance of $15.5 million and was later bought by local developer Pruitt  Associates for just $3 million. (You can read more about that in an RBS story here.)

Among the other properties taken back by lenders are the former Sheraton West hotel on West Broad with a debt of $29.5 million, several apartment complexes and several shopping centers including Chesterfield Marketplace, Chesterfield Crossing and Hungarybrook Shopping Center.

Another nine loans, totaling more than $32 million, are more than 60 days delinquent.

The Philadelphia-based owners of the Chesterfield Apartment building at 900 W. Franklin St. are 90 days delinquent on their CMBS loan of $9.9 million. Other apartments in trouble are Riverside Apartments and a group of apartments on Chamberlayne Avenue in Northside.

In Chesterfield, the loans on Midlothian Crossing Shopping Center and Luskin’s Plaza have matured with unpaid balances, and Alverser Commons is 90 days delinquent.

In Mechanicsville, Brandy Hill Plaza is 90 days delinquent with a debt of $7.93 million.

regencysquareBut the biggest delinquency the Richmond market will be hit with in 2011 is Regency Square mall. The owner, Taubman Centers, said late last year that it plans to default on its $72.7 million loan due later this year. The loan was originated by Bank of America. Trepp still lists the property as current.

“That was a mistake when it was made,” said John B. Levy, principal of John B. Levy & Co. investment bank. “It was not a question if it was going to default. It was a question of when.”

The loan was issued in 2001. A couple of years later, the mall was facing stiff competition from Short Pump Town Center and Stony Point Fashion Park — also owned by Taubman.

“What they probably looked at is that it wasn’t worth any more time and money to be invested,” Levy said.

Delinquencies aside, it remains uncertain what will happen to those loans that are current but will mature in 2011. In Richmond, 20 loans that total $183 million that will come due this year. Those borrowers face uncertain prospects. Many property owners have lost tenants as a result of the recession and don’t have the cash flow they thought they would when they got the loan.

Over the past year or so, many lenders showed they were willing to restructure deals, in some cases writing down huge parts of the balance, Levy said.

“Last month we closed on the restructure for a deal where a lender forgave $10 million in principal in the D.C. metro area,” Levy said. “When you talk about a $10 million loss, they didn’t do it because they liked us, but it was in their best economic interests.”

That writedown amounted to more than half the loan, Levy said.

“That was a pretty good hit. I wouldn’t say it is atypical, but we have done deals that have written off up to 70 percent of the principal. That’s tremendous,” Levy said.

On the other hand, other property owners might not be so lucky. In part, Levy said because the economy is improving and more capital is flowing into the system.

“Lenders are less likely to be tolerant if they think there really is a chance you can pay them off,” Levy said.

Mike Lieber, president of AEGIS Financial Solutions in Fredericksburg, agreed that it is unclear how lenders will act this year.

“There were good trends in modification last year, which helped a lot,” Lieber said. “The thing that is yet to be seen is whether banks will continue to write down loans or refinance them. It is sort of a roll-by-the-seat-of-your-pants proposition.”

Some of the loans coming due include several apartments, the Hilton Garden Inn on Cox Road, Oak Hill Plaza on Mechanicsville Turnpike, and Robious Hall Shopping Center on Robious Road.

Lieber said his firm is inundated with requests from owners whose loans have matured and the bank has refused to roll over the loans.

“Depending on the type and location of the property, the bank may or may not be real excited about taking the property back,” Lieber said.

“Some of these guys have been delinquent since the middle of last year and the bank hasn’t taken the property back, and they are coming to me looking for ways out to refinance and get rid of the old loans.”

One option that is starting to open up again: CMBS.

Although mostly active in bigger metro markets, CMBS started to make a comeback with about $13 billion in loans issued last year, and Standard & Poor’s projects up to $40 billion in loans for 2011.

“I think probably what we are going to see, if new issuance of CMBS continues to be as strong as it is projected to be, that it will offset some of the delinquency,” Lieber said. “Which is really just sweeping the dirt under the rug.”

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