By Cheryle Powell and Lui Garcia, SperryCGA, Rocky Mountain Associates
For Release October 16, 2023: In the realm of commercial real estate, the term "distressed asset" has taken center stage in recent months. The shadow of financial trouble looms over properties and real estate investments in distress as owners and investors grapple with their inability to meet financial obligations. These obligations may include mortgage payments, maintenance costs, and other debt-related expenses.
In the ongoing war within the commercial real estate sector, office and retail properties are the primary battlegrounds, and various factors contribute to the distress levels within each asset category. The severity of functional obsolescence varies based on the market and potential uses, making it crucial to explore various strategies, from changing property management to repurposing.
When addressing distressed assets, selling the property is only one solution. One of the key considerations is whether the proceeds from the sale would be sufficient to cover the outstanding loan balance. This is where seeking an experienced partner and exploring alternative options become imperative.
Potential alternatives for distressed asset borrowers include negotiating with lenders for loan relief, such as forbearance, principal reduction, or restructuring. Our partner 1st Service Solutions  helps borrowers approach lenders with a well-thought-out plan. They work to demonstrate that all available remedies have been exhausted and that current market conditions make it unlikely to reach the desired property value.
Shlomo Chopp, managing partner at Terra Strategies, spoke with Connect CRE  and emphasized that lenders should not be seen as adversaries but rather as partners in navigating market challenges. Building effective communication and finding common ground are essential in these situations.
With an array of options available, effective communication is just as critical as the choices themselves. Borrowers and lenders often face a significant disconnect, with borrowers initially focusing on loan terms such as interest rates and proceeds when obtaining a loan. However, when problems arise, the focus shifts to the remaining terms of the loan document, which can be a complex challenge. Structured finance offers the advantage of higher proceeds at closing but comes with its own set of complexities, creating a "pick your poison" scenario for borrowers.
Addressing distressed assets requires bridging the gap between borrowers and lenders, emphasizing that simply handing back the keys to lenders is not a straightforward solution. Liability issues, including personal recourse
and tax implications, may arise from loan foreclosures. For special servicers, preserving the property's value through modifications or extensions may be the most favorable outcome for all parties involved.
Despite these challenges, the overall real estate market remains healthy, with strong occupancy and rent growth. Banks are taking proactive steps to address potential issues before they escalate, reaching out to borrowers and strategizing for the future. As interest rates rise, borrowers must adapt to tighter financial conditions.
SperryCGA has launched a national Commercial Property Resolution (C.P.R.) team of consultants known for maximizing the value and return of capital from commercial assets. The C.P.R. team offers immediate underwriting solutions to real estate clients and financial institutions nationwide and collaborates with strategic consultants to design customized marketing plans for asset disposition or loan workouts. Alternative solutions to speak to your SperryCGA C.P.R. consultant about:
Keep Loan Current/Pay Off
Sell the property.
Future Discounted Pay Off (DPO)
Discounted Pay Off (DPO)
Hand back the property.
In conclusion, selling distressed properties is just one option, and depending on the specific circumstances, alternative solutions should be explored.