DALLAS—Even with today's strong commercial real estate market, there are nearly 2,500 loans that are distressed. This is a balance of more than $41 billion. According to Hart Advisors Group, real estate borrowers have the chance to make compelling offers to lenders for distressed deals that need to be worked out. GlobeSt.com caught up with Tanya Little, CEO of Dallas-based Hart, to get her take on distressed loans.
GlobeSt.com: What types of distressed workouts are being done today and how are those different from the workouts that were done last year?
Little: The workout structures are similar; however, the terms are structured more in favor of the lender. For example, a typical split note where the lender discounts a senior note and puts a “B” or “hope note” in place, would traditionally have cash flow going to pay down the senior note or be deposited into a reserve for tenant improvements and leasing commissions. In the case of a recent commercial mortgage-backed securities (CMBS) restructure, the servicer required all cash flow go to pay down the “B” note, and adequate tenant improvement, leasing commissions and debt service reserves were put in place at the time of the modification.
GlobeSt.com: What are the current trends you are seeing in loan workouts? Do you expect these trends to continue?
Little: We continue to see activity in discounted payoffs, auctions and split note structures. These have traditionally proven to be good resolutions depending on the asset and market. I expect them to continue in the future, reviewed on a case-by-case basis.
GlobeSt.com: What kinds of offers are required to achieve a discounted payoff?
Little: While vacancy was once viewed as a negative, today it is viewed as an opportunity. Borrowers looking for discounts from lenders should be prepared to pay upward to stabilized values even if the asset is not stabilized today. Lenders and special servicers want to ensure they capitalize on the improving market.
GlobeSt.com: What do you think the next steps are for special servicers of these troubled loans to reach a reasonable settlement with a borrower?
Little: Values today are highly subjective and can have huge swings in leasing assumptions and cap rates. Borrowers seeking a “discount” in today's market should be prepared to pay a substantial premium to the perceived market value. In addition, navigating the CMBS special servicing world has become even more complex as servicers themselves are seeing less fee income opportunities with dwindling distressed portfolios.
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