Commercial real estate recapitalization required to avert catastrophe

Commercial real estate (CRE) is a five trillion dollar industry supporting twelve million jobs.  With CRE property values down 40% since 2007, most observers believe that this sector is under severe stress.  We do not have the leisure to adopt a “wait and see” approach.  We must act now to ensure that CRE is not a deterrent to our economic recovery.

Stakeholders in CRE include pension funds, small business owners, construction companies, developers, and lenders (to name a few) who could face a second wave of macroeconomic stress just as conditions are improving.  With a nine percent unemployment rate, this point should give every American pause.

The scope of the problem is enormous.  Total rolling debt maturities from CMBS, insurance companies, and banks and thrifts is $1.42 trillion through 2014.  The Mortgage Bankers Association has reported that two-thirds of commercial securitized loans and one-half of whole loans won’t qualify for rollovers or bank refinancing when they mature. Given the sharp decline in CRE property values, many of these loans will also require additional equity to refinance – a serious problem for most owners and developers, whose balance sheets have been decimated in recent years.

Even so, and strange as it may be, almost all of the related media buzz has been about the distressed banks, how under-reserved banks are hurting, and how government rushed to aid them with many billions of dollars in bailout money that the U.S. Mint couldn’t print fast enough.

There is no question that banks are hurting. But what about the thousands of distressed commercial real estate owners and developers who could be wiped out? They seem to be the forgotten casualty in this crisis, and too few in leadership seem to be doing anything about it.  A further loss of jobs in the CRE sector could be devastating to our fragile economic recovery.

The hard truth about the crisis is that if owners can’t recapitalize their property, they may have to short-sell the property (if they can find a buyer), losing all their investment and – adding salt to the wound – be taxed on the forgiven debt. Alternatively, they may have to declare bankruptcy, or as some already have done out of desperation, just give the keys to the bank and walk away.

There is another option that is better than the aforementioned alternatives. It’s an option that will help mitigate some of the terrible financial pain that owners and developers will feel across the country between now and 2014.  It’s call recapitalization.  The challenge for the owner however is to find the alternative capital sources that will provide the equity and new debt required for recapitalization.

At Impact Business Accelerators, we have spent the past three years identifying well-funded lenders and investors that are ready, willing, and able to recapitalize troubled commercial real estate assets across the capital stack.  Over the next few years we plan to play an active role in the solution to this ongoing and challenging CRE problem.

Posted in access to capital | Tagged | Leave a comment

Leave a Reply

Your email address will not be published. Required fields are marked *