Lenders increase efforts on bad loans

After months of relative inaction, a number of commercial real-estate lenders have increased their efforts to dispose of poorly performing mortgage loans, Phoenix-area real-estate analysts said.

The uptick in lender activity began a few weeks ago, said Beth Jo Zeitzer, president and designated broker of Phoenix commercial real-estate firm ROI Properties.

"I am definitely seeing a lot of lenders surge forward instead of just 'pretending and extending,' " she said.

Banks, commercial-property owners and loan analysts have known for months that a high percentage of commercial real-estate projects financed during the real-estate boom have lost too much value for those loans to be repaid.

In July 2009, those experts noted a sharp increase in commercial-foreclosure notices being issued and braced themselves for a tidal wave of foreclosures.

More than a year later, the wave has yet to arrive. But some analysts report they are seeing a few more ripples on the surface.

Promissory notes

Kurt Rosene, senior vice president of commercial real-estate firm The Alter Group, in Phoenix, said commercial real-estate lenders have more options than home-mortgage lenders when it comes to divestiture.

One type of activity both Rosene and Zeitzer said they have begun to see more of recently is the sale of commercial promissory notes to investors.

By purchasing the "notes," as they often are simply called, the investor in essence takes over as lender. All mortgage payments would then go to the investor, if any are being made.

"It's mostly happening with non-performing loans," Zeitzer said, referring to loans on which borrowers have not been making any payments.

Use of commercial promissory notes would appeal to lenders who believed their losses would be even greater if they were to foreclose on the property and then try to sell it themselves, analysts said.

Presumably, investors in commercial real-estate notes have performed some due diligence and are buying each note for an amount close to what they believe the property is currently worth, Zeitzer said.

In general, notes on Phoenix-area commercial properties have been going for about one-third of the loan's paper value.

Even with such a discounted price, Rosene said, buying notes is extremely risky.

"Appraisers probably use dartboards today - nobody really knows what the value is," he said.

Few foreclosures

Zeitzer said that actual commercial foreclosures remain rare and have occurred primarily with small, single-occupant office and retail properties.

In Arizona, foreclosures can occur in either of two ways. The lender can take the borrower to court via foreclosure, or it can bypass the court system and call for a trustee's sale, which is quicker and less expensive but requires the lender to waive certain legal rights.

Generally, most lenders would like to avoid both options and would prefer to help negotiate a sale to a third party.

Apartment properties are one type of commercial real estate that has seen a significant uptick in such sales.

Last week, an investment firm based in Washington state purchased Ocotillo Springs Apartments, a 272-unit community at 825 W. Queen Creek Road in Chandler, for $24.7 million.

Weidner bought the property from a private-equity firm in Boston in a deal brokered by the Phoenix office of CB Richard Ellis.

Weidner is one of a number of investment firms that entered the Phoenix market this year. The firm said it has purchased about 2,500 apartment units in Arizona since January.

Past-due loans

Rosene, whose firm tracks commercial mortgage-backed securities activity among other market indicators, said the recent poor performance of such loans doesn't inspire confidence in the short-term future of Arizona's commercial real-estate market.

Generally, the value of delinquent, securitized loans in the state is twice what it was a year ago, according to Pennsylvania-based credit ratings firm Realpoint LLC.

The total value of loans delinquent at least 30 days in Arizona was about $2.5 billion in June, which is nearly 15 percent of the total value of such loans issued in the state.

Securitized loans, those loans sold off as investments on the open market, are significant because they are easy to track and plentiful enough to offer a fairly accurate representation of the overall health of commercial real-estate loans.

Rosene said the lenders have been reluctant to sell or foreclose until now for the same reason many home sellers have been trying to wait out the current slump.

"Imagine if it was your house, and you paid $200,000 for it, and they're saying it's worth $50,000," he said.

by J. Craig Anderson The Arizona Republic Aug. 29, 2010 12:00 AM



Lenders increase efforts on bad loans