the-commercial-investor.com

In the January 8th edition of the Wall Street Journal article “Commercial Property Loses Shelter” the author details the rising rates of defaults on commercial loans. The defaults are mirroring the Residential Markets … although the default rates are much lower. Not surprising given the cratering of our economy … and the article goes on to tell us how people got in trouble … this is interesting stuff!

WSJ: “An unusually high number of the underlying CMBS loans that are going bad were made and securitized in the past three years. That is a sign that investors overpaid greatly for those properties and that underwriting standards were loose. In many cases banks lent money based on future income assumptions rather than current cash flows …”

The Lenders committed the Commercial Real Estate Cardinal Sin: they believed in Proforma Numbers.

We have always taught our Commercial Property Mentor clients the rule: NEVER buy on Proforma … and now here we find bankers lending on Proforma numbers. No wonder these loans are going sour in the current economy. You must Always Buy on Actuals!

EXAMPLE: One bad loan quoted in the article was $125M originated when the property’s Net Operating Income (NOI) was $6.3M with the Proforma assumption that NOI would rise to $10.5M. When that didn’t happen … the investors fell behind on payments …. DUH !!! That is a 66% run up in NOI without which the loan does not perform.

The Silver Lining:

In 2009 these properties will come back on the market at a steep discount and you even get a valid “second opinion” on your read of the numbers. Today you can bet the only way a lender will write you a Mortgage it is because they are 100% certain it will make money on Actual Numbers. When the Recession ends, the properties you are able to close now will perform very well indeed.

You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.