GUEST VIEWPOINT: Commercial Real Estate Property Owners; Buy, Sell or Hold After COVID

The past year has been a very turbulent time for commercial property owners. Many lenders are suspending activity or taking very conservative views on ongoing business leaving some investors in a panic, not knowing what their best path will be forward.

While some financial institutions have curtailed loans, revised their parameters, or removed certain lending programs from their offerings, this should be temporary. However, even after this crisis is over, the concern of valuation and risk margin will linger, hindering a full recovery in the industry at least in the short term. Lenders will undoubtably pull back on the aggressive lending practices they were demonstrating before this crisis hit.

At M1 Capital Corp, we have been receiving calls for several months from people who are understandably worried about the current financial climate. Their questions center around the availability of funding, the value of the properties they hold, and what they should do if tenants don’t pay their rent. Often, they aren’t sure if they should contact their lenders directly and how to approach them, which can be especially critical when dealing with SPEC construction loans and debt workouts.

Commercial property owners should consider having an advocate who can structure or arrange financing for their properties on their behalf: someone who represents them—not the lenders—and who understands the processes and terms required to negotiate with a commercial lender, which is significantly different than a standard residential real estate transaction. This advice also applies to larger investors who have “over-leveraged” their portfolios, landlords burdened with vacancies and businesses of any size who need to refinance their loans. A good advocate can counsel clients on the most important factors to elaborate on when applying for a loan, as well as what information it is best not to mention.

Ways to Take Action

For anyone thinking about acquiring a commercial property asset in this environment, we recommend the following:

• Reviewing the credit quality of the subject property’s tenants with your real estate broker.

• Identifying if the tenants have requested a loan via the CARES Act/American Rescue Plan

• Ensuring that retail tenants on commercial and mixed-use properties have solid financials and a “make sense” business model, especially in this economic environment

• Securing any prior property reports including appraisals, environmental and engineering inspections that may be available.

• Having upfront preliminary discussions with a lending professional to understand exactly how financing parameters have been impacted by the current market including “turn around” time in obtaining a loan.

Those who decide to purchase a commercial property should obtain the best legal representation with in-depth experience in commercial real estate transactions and ensure they are available from contract negotiations thru closing.

If you own an investment property and it has become destabilized and you are concerned about the debt, consider the following questions:

• Who is reviewing the leases and expenses to make sure they are still operable in this environment?

• What terms or “covenants “of my CRE loan may be affected by the property’s destabilization?

• Can I ask for a forbearance from my lender?

• Can I apply for a mortgage modification?

• If neither a forbearance nor a modification is available, is a refinance an option?

Commercial real estate can be a great investment opportunity; however, it is not the same as owning a few single-family or a small multifamily investment property. The operations, management and financing of this asset class is more involved than those of a smaller residential portfolio and any prospective investor needs to become educated in the nuances of its ownership.