Is Your Commercial Loan Coming Due?
Commercial real estate analysts have predicted that approximately 1.5 trillion dollars of commercial loans will be maturing between now and 2013. Most of these loans were initiated during the peak times of real estate valuation, between 2005 and 2007. Since 2007, however, commercial real estate owners have watched as their investments have dropped in value by an average of 40%. Commercial real estate investors who have a loan that is now coming due are facing a dire situation. Most commercial properties purchased with financing during the past five years simply will not qualify for financing of any kind as underwriting guidelines and liquidity have changed dramatically. Below are the steps that a commercial property owner should take when they are evaluating their position for extending the terms of their existing commercial loan, attempting a loan modification or seeking a new loan.
1) Be proactive – The time to start planning for your commercial loan maturity was yesterday. Time is not on your side during this process. If you haven’t started already, then begin immediately to prepare yourself for a process that will be laborious and require some difficult decisions.
2) Be Realistic – Take a close look at any loan that will be coming due in the next year. Figure out the debt service coverage of the property if it had to be financed using today’s appraised value. Begin to contact commercial mortgage brokers and banks to see if your property will qualify for a new loan using today’s valuation and today’s underwriting guidelines.
3) Maintain the property — With rents and occupancy dropping in most markets across the United States many commercial property owners are finding that their net operating incomes have dropped as well. Facing a shortage of cash flow many owners are tempted to cut back on preventative and cosmetic maintenance. This could prove to be a big mistake. When trying to extend the terms of your commercial loan or obtaining a commercial loan modification the lender will certainly look closely at the physical condition of your property. Lenders want the best quality commercial properties in their portfolios to weather the economic storm.
4) Be Honest – In tough financial times like these, commercial property owners have to be honest when examining the prospects for the long term success of their venture. After examining the true financial condition of their property many commercial real estate investors may find that alternatives such as short sales or deeds in lieu of foreclosure make more economic sense than holding on to an asset whose value may take decades to recover.
5) Make a plan – It is never too early to make a plan. Don’t wait for the lender to tell you what to do. If you wait for the lender for guidance than they will automatically have the upper hand. Borrowers who are looking for a commercial loan modification should come to the bargaining table with a well conceived plan that demonstrates their need for help and shows the steps that will be taken to ensure the modification is a long term success.