Surviving Distress: An Ugly Roadmap

[IMGCAP(1)]NEW YORK CITY-For building owners as well as lenders the next 12 months are not going to be pretty–despite the incremental positive changes in the capital markets, largely bestowed by government programs. TALF, and–when it is ready to be executed–PPIP, the Treasury Department’s Public Private Investment Program for legacy assets will not be enough to absorb debt that is coming due from CMBS and other lenders, according to panelists in Tuesday’s GlobeSt.com webinar: “Building Owners at Risk: Surviving Distress.” To listen to a full replay of the webinar, click here.

“The banking sector does not have the capacity to effectuate all of the refinancing necessary for CMBS,” said Robert Knakal, chairman of Massey Knakal Realty Services Inc. GlobeSt.com’s Paul Bubny moderated the hour-long session.

A combination of liquidity crunch and–even more potently–loans underwritten at very loose standards–will translate into massive defaults, the panelists agree.

“We will have some owners that will be in default and others with performing loans will be in technical default and nothing on horizon to show this market will be coming back soon,” Knakal said. Macroeconomic indicators–namely unemployment–are also pointing to a continued downturn, he added.

“Another troublesome issue is that many properties will not be able to be refinanced even if liquidity were available,” said Andrew Weiner, partner with Morrison & Foerster. “It is not just a question that the lenders have disappeared. Someone is going to have to take a hit” on these loans that cannot be refinanced because their values are under water. Even if an owner is willing to pay the coupon and the debt is securitized, who is going to refinance over $100 million right now, Norman Sturner, principal Murray Hill Properties in New York City, noted.

Building valuations are another challenge to refinancing, Dean Papas, Partner, Goodwin Procter, said. As these drop–and then the declines in comps are fueled even faster thanks to foreclosures–refinancing becomes even further out of reach.

Currently lenders and borrowers are approaching the situation with a short-term view: they ask to extend loans and lenders–worried about their books–agree. The long term solution is more nebulous–indeed it is still in the process of being defined–”in a world where only a small portion of the properties can justify a refinancing even if money is available,” Weiner said.

[IMGCAP(2)]That said, refinancings are occurring–albeit on a select basis. Deals in the $30-million to $40-million range are being done, Papas says, “but nothing beyond $40 million.

“People are hoping the government programs will reinvigorate lending, but now the only game in town is working with existing lenders,” he points out. Bottom line? The market has to crank through a lot more foreclosures and bankruptcies for some level of normalcy to return, the panelists say.

The government programs will provide a floor of sorts, as Papas suggested. Low interest rates–set by the Federal Reserve, of course–have also allowed more buildings to survive than otherwise, he added. But even federal and Congressional assistance will only go so far, the panelists agree. The government or legislation cannot mandate that lenders refinance a loan, for instance, Sturner said.

Recovery, in short, is going to happen deal by deal and borrower by borrower. “What we are seeing is clients de-leveraging by selling and raising as much capital as they can to infuse more capital” into building and loans that are at risk,” Papas said.