As some parts of the country shutdown again, many observers expect to see the full economic falloutof COVID-19 in the third and fourth quarters.

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You can put Yieldstreet's SeniorDirector of Real Estate Mitch Rosen in that group. In Q3 or Q4, hethinks there could be a lot of distress in the market.

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Right now, Rosen says about 90percent of the lenders that he is talking to are working throughfundamental issues with their borrowers.

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"The court systems and thegovernmental view on the situation is to work with your borrowers,"Rosen says. "Don't take drastic action and punitive measuresagainst people. Act in good faith if they're a good borrower. Ithink that's a broad message that's been prevalent in themarketplace in commercial real estate."

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But that can't go on forever. "Ifwe see a much slower recovery, I don't see how assets like hotels,retail, some office properties that are vacant and condos don'tencounter some real pain in the third and fourth quarter as we gointo 20121," Rosen says. "It is deal and borrower dependent. ButI'm of the view that we've certainly not seen anything close to thewave of issues that will arrive."

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Rosen says the main questionsrevolve around what strategies borrowers and lenders take ifproblems start bubbling up in the Fall.

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"I think people don't realize howlong the workout process is in commercial real estate," Rosen says."With the public markets, you can drop 40 percent [of value] inthree weeks, but real estate doesn't work that way. The peaks andtroughs are far longer in duration, and the distance between themis also much longer. I think the impact of what we see now is notgoing to be felt for six to nine months out, at least."

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If borrowers have confidence andsee the light at the end of the tunnel, Rosen says they may putmore capital into their assets or find some rescue equity. But ifthe borrower cashed out equity and their basis is zero, they don'thave a lot of options. "I think you'll see a lot of guys get thekeys back," Rosen says.

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Rosen predicts that many ownersof hospitality properties will hand the assets over to theirlenders.

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"In their mind, it's good moneyafter bad trying to salvage these, given where their basis is andwhere they think cashflow can go in the next one, two to threeyears," Rosen says. "So they're making a bet to keep the cash theyhave on hand and rebuild the business."

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Some borrowers are alsonegotiating with lenders to modify and maybe reduce their loanbalance and take a hope note.   The special servicers tookthat approach in 2008 and 2009. "In many cases, I would say itworked better if the borrower kept the asset," Rosen says. "Thelender stayed current, at least on the note piece. And in somecases, they got recovery on the hope note, which was not expectedwhen the deal was cut."

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Leslie Shaver

Les Shaver has been covering commercial and residential real estate for almost 20 years. His work has appeared in Multifamily Executive, Builder, units, Arlington Magazine in addition to GlobeSt.com and Real Estate Forum.