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.

Listen now: