Coverage
PERSON OF THE WEEK: When an intricately structured commercial mortgage deal completed during the securitization era runs into trouble, arranging a modification palatable to all parties could be an impossible dream. Karl E. Geier, a transactional shareholder at the Walnut Creek, Calif., office of real estate law firm Miller Starr Regalia, explains why every tranche poses a new potential problem, and what lenders, borrowers and other stakeholders might learn from these experiences.
Q: The commercial mortgage industry has been awaiting a major wave of foreclosures for a while now. When do you think the highest foreclosure volumes will finally hit?
Karl E. Geier: You have to go back to the precipitous downturn in financial markets and the related drop in commercial real estate values to find a turning point.
Loans that were funded before that time will be hard to refinance in the current market due to the double whammy of lower appraised values and lenders requiring lower loan-to-value ratios, even if the specific property continues to cashflow. It will be hard to find new lenders willing to take out the previous financing, especially with securitized loans and conduit facilities.
If you assume that the affected loans were consummated sometime before the fall of 2007 and do the math, you will find many three-, five- and seven-year mini-perm loans maturing on commercial properties and going into foreclosure over the next 18 to 24 months, if not sooner.
Add to that the number of failed workouts in commercial construction loans, and you will see an accelerating trend in commercial foreclosures between now and mid-2011.