5/13/12: Healing Commercial Property Woes – The Trillion Dollar Challenge
There’s a lot of chatter in the news about the state of residential mortgage market – defaults, foreclosures, etc. Do you remember when it all started? Big Ben Bernanke tried to convince us that the damage would be limited to the sub-prime market. Oops.
As we know now, a funny thing happened on the way to recovery. Sub-prime leaked over to prime, values plummeted, and a wave of defaults – strategic and otherwise ensued. In short, a financial train wreck of epic proportions.
Of course, we’re giddy today, because all that disaster opened up all kinds of opportunities for astute and bold investors. Opportunistic investors are starting to snap up residential real in several markets and clearly investors are part of that market’s healing process.
But what about the long awaited “other shoe” of commercial loans? We wondered the same thing, so we trucked (actually flew, then drove) to sunny San Diego, California to catch up with a friend of ours who is neck deep in helping commercial borrowers re-work untenable loans before they implode.
We found it extremely interesting for two reasons. First, many of principles of crisis management, negotiation and business pragmatism that multi-million dollar borrowers face contain lots of lessons for us mere mortals. Second, we want to know what’s really happening in the commercial mortgage markets at the street level. Is there another sub-prime-like tremor signaling a bigger financial earthquake?
Behind the silver microphone of The Real Estate Guys™ radio show:
- Your doctor of dialog and host, Robert Helms
- Your woeful co-host, Russell Gray
- Commercial loan workout expert and entrepreneur, Phil Jemmet
So we show up at Breakwater Equity Partners’ brand new office in beautiful San Diego, California to have our sit down interview with return guest Phil Jemmet. Business must be good because the office is beautiful and there are a lot more people running around than our last visit.
Phil tells us that business is in fact booming, yet Breakwater is only scratching the surface of what’s out there.
We discover there is nearly $1.7 trillion in commercial loans coming due in the short term and Phil estimates that over $1 trillion (a ridiculous number) will NOT be able to be refinanced. Uh oh! What does that mean?
For the property owner / borrower / personal guarantor it means major brain damage and stress. In many cases, these people are facing absolute personal financial Armageddon. But there is one saving grace.
When you owe the bank $100,000, you have a problem. But when you owe $10 million, the bank has a problem. That is, it’s worth a lot of time and effort to work something out.
Here’s the deal: if the loan defaults, then the borrower is wiped out. That’s bad. But the bank doesn’t care about the borrower. However, if the loan defaults, the bank is going to have a severely distressed asset on their hands. Not only will they take a haircut (a scalping?) on the loan balance, but they’ll have the additional risk and expense of having to own and operate the property until they can dispose of it. That’s making a bad situation worse for the bank.
So, it behooves the bank to find the least damaging solution. Makes sense, right? Sure. Except that bankers can be really stupid sometimes. It’s called “denial”. So someone has to help them see reality. That’s what Phil and his team do.
We find the whole thing fascinating. What’s scary is that Breakwater has done about $2 billion of workouts, which sounds like a lot, but out of an over $1 trillion market, it’s only a 2% drop in the bucket.
It’s like the little girl who’s rushing to throw the dying starfish back into the water after the wave washed them all up on the beach. Then her father tells her, “Honey, give up. There’s too many. You can’t possibly make a difference.” To which she replies, as tosses another back into the water, “I can make a difference for this one.”
We feel sorry for commercial borrowers who are sitting on commercial loan time bombs, and don’t know that help is available. For us, we’re happy to glean wisdom from Phil’s experiences. And even if are problems aren’t of the tens of millions of dollars variety, we learn a lot from Phil about how to approach our problems.
So listen in to our conversation with Phil Jemmet from Breakwater Equity Partners and see what you can learn about what to do when faced with a really big financial problem.
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2/7/10: Renegade Strategies for a Changing Economy – When Your Workout Options Fail
Super Bowl Sunday! While most people were guzzling beer (we are SO jealous), gorging themselves on chips and salsa, and cheering on their favorite team, The Real Estate Guys dedicated broadcast crew faithfully showed up for yet another edition of real estate broadcast excellence.
And with all the hype about offensive, defensive and special team strategies, we thought it would be fun to do a show on renegade strategies for property owners when lender workout options aren’t working.
Taped up and dressed out in shoulder pads, helmets and eye-black for today’s broadcast are:
- Your Quarterback, Robert Helms
- Your Not So Tight End, Russell Gray
- The Head Coach and Godfather of Real Estate, Bob Helms
- Trick Play Coordinator and Special Guest, Trustee Verification Specialist, Tyler Cohee
After the coin toss and handshakes, we kick off with a discussion about the ethics of loan agreements. Of course, when you can’t make the payment, your options are limited. But what about when you can afford to make the payment and choose not to? Strategic defaults are growing in number and popularity. What are they? Do they make sense and if so, when?
When it’s late in the 4th quarter, you’re way behind and you can’t get your loan modified; the lender won’t forbear, your property is headed to auction; and you just need a little more (a lot more?) time – it’s time to call a trick play! Our special guest Tyler Cohee dials up just the thing when he calls in to explain how trustee verification works. VERY interesting!
Now in the Red Zone, the Guys call several renegade plays for reducing your loan balances, holding onto your properties and gaining more control over precisely when turn a doomed property over to the lender.
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11/29/09: Coming Up Short – The Realities of Selling Your Property for Less than You Owe
With so many properties with mortgages that exceed the current value, many owners are feeling trapped. When loan modification fails and you can’t afford to pay the mortgage, before you toss in the towel and allow the lender to foreclose, consider a short sale. No, this isn’t a garage sale of your used underwear to raise money for the mortgage. It’s the process of working with the lender to get them to release you from the loan when you bring in a new buyer who pays less than you owe.
In studio to brief you on short selling:
- Your host, Robert Helms
- Co-Host and Financial Strategist, Russell Gray
- The “Godfather of Real Estate”, Bob Helms
The Guys kick off the show with a discussion of what a short sale is and why a property owner would bother. Why not just throw the keys at the lender and walk? And what about the lender? Why would the lender accept a loan payoff for less than the full amount due? This show builds upon a March 22, 2009 show (available to Backstage Pass Members in the Archives) which covered the opportunities for investors in buying short sales.
Moving on from the motivations of the various parties, the Guys delve into the actual process of a short sale. Is this something you can or should do yourself, or does it make sense to get professionals involved? If so, which professionals are needed and what questions should you be asking? While short sales are nothing new, Bob pointed out that it’s been decades since they were a significant portion of the market. Who do you need on your team and how important is experience when seeking professional help?
The Guys also touched on the concept of “deficiency” and the possible tax consequences of a short sale for both homeowners and investors. The show concluded with a discussion of what to watch out for in today’s economic climate. Whether you are someone in need of getting out of a property that’s underwater, or if you’re an investor looking to pick up a bargain by providing a borrower and his lender an alternative to foreclosure, this show will give you some food for thought!
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