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Commercial Loan Restructuring – Recession Proof Planning For The Commercial Real Estate Market

Commercial real estate is valued differently from the way residential real estate is appraised. Commercial real estate value is determined by the amount of income it produces. With the economic slowdown businesses have failed and people have begun making more economically savvy business choices such as living with relatives to save on rent.There are many factors creating lower occupancy rates, resulting in a decrease in property valuation. Many property owners are finding it difficult to maintain their current overhead while trying to operate competitively in today’s market. Often personal savings is used to keep up the property with no solution in sight. This dismal situation of underperforming commercial real estate is all too common. Personal credit is often damaged and savings are wiped out with nowhere to turn.These situations are typical in some areas of the county, and they put the banks in a predicament since they are holding a note for defaulting properties. The banks’ investments into these at risk properties are counter productive since they force the banks to hold cash reserves for the mortgage amount when they could be invested in other areas that produce a return on their investment.A commercial loan restructure (CLR) offers the advantage of transforming an underperforming or non-performing property into an income producer with a healthy ROI. If a commercial property is not generating enough revenue to afford its mortgage and operating expenses a lender may be enter into negotiations for a temporary or permanent interest rate reduction. Reducing the interest rates can help apportion cost and reduce high vacancy rates. On a commercial real estate loan a reduction of just 1% can save thousands of dollars each month and result in higher cash flow for the property.The objective of a commercial loan restructure is to create stability in properties that are at risk of defaulting on their mortgage notes. A restructure can be more than just a rate reduction. Negotiations can extend note terms and maturity date. By doing so property owners can benefit by postponing balloon payments. In today’s market there is a credit crunch with lenders, underwater mortgages, and borrowers with less than perfect credit. This has created an environment that is not conducive to a refinance.If owners cannot afford a balloon payment or refinance they face the possibility of foreclosure. With declining values, and the reduction of revenue from commercial properties, even borrowers with good credit are finding it difficult to get their loan applications approved. There are over a trillion dollars worth of commercial properties that have mortgage notes becoming due over the next few years. Many of the commercial properties will not be eligible for refinance. Commercial Loan Restructuring is a win-win opportunity for both the borrower and lender since it creates financial stability with the property.The FDIC is encouraging lenders to work to restructure loans to avoid the pitfalls of a failing real estate market. However, most lenders do not have the experience to properly restructure a note that is in the best interest of the borrower. Small and mid-sized banks lack the experience and know how to adequately handle the restructuring process in a timely manner. Nor can these smaller banks afford to withstand a borrower defaulting on a loan. Real estate professionals that specialize in commercial loan restructuring have insight into the market that can help avoid foreclosure and rescue property owners from a failing business. Don’t wait until your note is called in. Take a proactive approach and speak with a CLR specialist before its too late.