Despite a recent spike in commercial real estate loans that are late on payments in Connecticut, lenders appear eager to move bad loans off the books by selling them at a discount, rather than going to foreclosure.
After hovering between $210 million and $230 million in the previous three quarters, in the first quarter of 2012 troubled commercial real estate loans shot up to $416 million in Connecticut, as tracked by DistressedPro.com, which helps investors in “distressed debt” find banks looking to unload loans off their books.
With many fearing a new wave of residential mortgage foreclosures, experts say a similar scenario is unlikely to unfold locally on the commercial real estate front, due to a brisk market of banks selling off discounted loans to investors willing to work out those loans.
If old hat to companies like Greenwich-based Starwood Capital Group, which announced last week that it had used a “distressed opportunity” fund to purchase a 21-story Manhattan building, smaller investors increasingly are opportunistically seeking out banks to gauge their interest, including smaller, stable community banks that have held loans in hopes that borrowers”™ fortunes might rebound.
Rather than turning to foreclosure, banks are seeking deals to sell loans at anywhere from 50 cents to 75 cents on the dollar, according to Edward Jordan, founder of Northeast Private Client Group, which has offices in Bridgeport, White Plains, N.Y. and Hartford.
Helping things along are platforms making it easier for buyers and sellers of “nonperforming notes” to find each other ”“ particularly Auction.com, whose primary investor is Greenwich-based Stone Point Capital L.L.C.; and The Debt Exchange Inc., a Boston-based company better known as DebtX.
In 2011 alone, Auction.com said it helped sell nearly 1,200 notes totaling more than $4.6 billion, at a “recovery” rate of 52 percent on average. In addition to notes, the company also auctions properties itself.
In mid-June, Auction.com was auctioning off a note secured by the 110,000 square foot Clearwater House office building at 2187 Atlantic St. in Stamford, with the starting bid at $5.5 million.
Northeast Private Client Group itself recently brokered six transactions involving nonperforming notes, including a $1 million note and mortgage secured by a multifamily portfolio on Hallett St. in Bridgeport.
“It became apparent that this time around, rather than foreclosing on borrowers ”¦ that lenders are leaning toward the easier way out, selling the nonperforming asset ”¦ and allow (that) investor to restructure the debt or go after the deed as a way to get the underlying asset,” Jordan said. “Now you have a pretty active market out there in terms of lenders selling nonperforming mortgages to the investment community.
“It”™s not for everyone ”“ there”™s risk involved,” he added. “Sometimes you don”™t know what you are walking into. It”™s got to be someone pretty comfortable walking in and working through the issues on that property.”
Still, at a Commercial Real Estate Finance Council convention in Washington, D.C. this month, a Royal Bank of Scotland analyst predicted another rise in commercial default rates with borrowers still unable to fill buildings at lease rates sufficient to make their payments. RBS tracks data from “special servicers” who specialize in negotiations between delinquent landlords and lenders.
“The re-default rate is going to be significantly higher than many market participants think,” said RBS”™ Richard Hill, as quoted by Bloomberg. “For some of these loans that were modified in the past three years, the rubber is finally meeting the road.”
