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In today’s ever changing commercial real estate climate the future is uncertain. Will the poor choices made by investors result in indebtedness to their commercial real estate investments? Will these same investments contribute to hundreds of billions of dollars in losses over the years to come? At this time no one is certain, but only time will tell the outcome for sure.

The difference between Residential and Commercial Loans

There are many distinct differences between residential and commercial loans. In the following paragraphs I am going to attempt to demonstrate the differences to you in a manner that is easy to understand so that you can fully comprehend the magnitude of this whole scenario.

Facts about Residential Loans

-Residential loans generally are self-amortizing which simply means that a loan’s particular payment schedule is designed to dissipate the debt by the time the mortgage ends.

Facts about Commercial Loans

-Commercial Loans differ from residential loans because they tend to operate under balloon provisions. A balloon provision simply means that the individual who received the loan must either pay the entire loan balance off by a pre-determined date or pursue refinancing.

How does this impact Commercial Loans?

Due to the fact that commercial loans generally last 5-10 years, many of them are about to expire which could dramatically affect the financial landscape of commercial loans.

By the time the sands of time expire in 2013, a wide array of retail plazas, small businesses, storage companies, and resorts will be at a crossroads.  According to leading financial analysts across the world, approximately 1.3 trillion dollars in commercial loans are set to expire and around 50 percent of them will be unable to qualify for any refinancing options to save their investment.

What can be done to keep this powder keg from detonating?

The good news is that both the Federal Reserve and the Treasury Department are working hand in hand with banks to create a plan to minimize the casualties.

However if the banks and the Federal Reserve and the Treasury Department do not come to an agreement, the banks will lose money, commercial real estate property value will plummet down the tubes, and bankruptcies will spread like wild fire.

The bad news is that at the time that this articles is written, vacancies are continuing to rise and even commercial real estate mortgage candidates with sparkling track records are running into roadblocks when it comes to refinancing their loan. This epidemic can potentially spread and cause a wide array of vacancies that will continue to increase by the time the year is over.

How did this happen anyway?

In the past few years the benchmarks for underwriting were extremely low and 9 out of 10 applicants were approved for loans. The whole thought process was that renting would continue to increase and cap rates would in turn continue to decline. Because of this, the LTV now has dramatically raised the bar on who can refinance and who cannot.

TALF may be a viable option

One option that the Federal Reserve and Treasury Department may look into is incorporating TALF (Term Asset-backed Securities Loan Facility) in order to create a reduction in the overall defaults so that they can minimize anything that the banks might lose. On top of all the TALF talk, various government incentives for banks are being discussed so that both parties can minimize losses and move forward with their heads above water.

How this affects us currently

At this time, commercial real estate losses are at an extreme low however an ever-rising number of lapses, vacancies as well as a decrease in customer purchases can mean an even more dismal economic state in the years to come.

Closing:
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