April 18, 2024

KT Business

The Business Servicess On for You

See How Commercial Real Estate Deals Are Being Cut As Debts Mount

5 min read

Faced with moribund office demand and cratering property prices, the New York investor RXR Realty was ready to surrender the commercial tower it owns at 61 Broadway in Lower Manhattan.

But in an increasingly common twist, the 33-story building’s lender, a group of financial institutions led by Aareal Bank, has been unwilling to seize control of the asset and unable to sell the debt to an investor who might.

Instead a deal is now being negotiated to trim the size of the property’s $240 million mortgage and potentially extend the loan at below-market interest rates in an attempt to revive the property’s fortunes.

“We went to the lender and said it doesn’t work under the current capitalization,” Michael Maturo, RXR’s president, said. “If you’d like to work with us, we’d like the building. But we need relief on the loan.”

Maturo said that reworking the property’s debt could allow RXR the leeway to cut rental rates and attract tenants amid the difficult market conditions. It is also considering a conversion of the building to residential space.

In exchange, RXR and its investment partners in the property would potentially pour millions of dollars into the turnaround if the mortgage is “reduced to a level that, based on our business plan, supports putting in new money,” Maturo said.

The negotiations show that as hundreds of billions of dollars of commercial real estate debts come due or have already tumbled into default, deals are being arranged behind the scenes to try to stave off financial catastrophe.

Borrowers and lenders hope that, by sharing some financial pain now, they can buy time to allow market conditions for troubled property assets to rebound and ultimately lessen their losses or even recover their investments.

Jack Terzi, for instance, said his New York-based real estate investment company, JTRE Holdings, recently arranged for the mortgage tied to a retail building it owns at 240 East 54th Street in Manhattan to be reduced to $42 million from $58 million. The property had fallen into default during the pandemic. As part of the restructuring, the debt was extended through 2027 at an interest rate of roughly 4% – below the 7% or more that Terzi estimated he would likely have had to pay if it had reset to market rates. Terzi handed $8 million to the lender to cover half the debt’s writedown.

Pouring in more cash was a risk after nearly losing the property and all of his equity, but Terzi is convinced it will pay off in the long run.

“At one point, this was a $70 million building,” Terzi said, noting that if the property had been seized and sold today it might have fetched half of that. “I believe, in the long term, New York City will be back and values will reach new heights.”

More borrowers and lenders have sought to buy time

There is mounting evidence that such negotiations are taking place more widely.

The Mortgage Bankers Association estimates that $929 billion of debt is set to mature this year. But $270 billion of that total was debt that had been due in prior years and pushed into 2024.

“Many loans that were set to mature in 2023 have been extended or otherwise modified and will now mature in 2024, 2026, 2028 or in other coming years,” Jamie Woodwell, the head of commercial real estate research at the MBA said in a February research report.

Of the roughly $9.7 billion of commercial mortgage backed securities tied to office assets that fell into default last year, roughly 20%, about $1.9 billion, was subsequently pulled out of distress and extended, according to data from Trepp – and that number may grow.

The deals show how some special servicers, the financial parties that negotiate on behalf of CMBS bondholders, have also chosen to negotiate with borrowers instead of seizing properties or forcing sales.

“Why would I want to accept a really high loss severity today to flush an asset?” Stephen Buschbom, a research director at Trepp said, speaking of the perspective of servicers. “If I have a borrower that stands ready and willing to contribute capital and we can help this thing kind of leap forward into the future.”

There have been concerns that trillions of dollars of upcoming commercial property debt maturities could inflict heavy losses that could weigh on investors and lenders across the property market and even cause systemic issues in the banking sector. The MBA says that roughly $2.3 trillion of commercial property loans are set to come due by the end of 2027, roughly half the $4.7 trillion of total outstanding debt in the sector.

The continued practice of pushing off maturities could ultimately spread that mountain of expiring mortgages out over a longer period of time and reduce the damage, experts say.

Federal regulators, including the Treasury Department, encouraged workouts in a policy statement last year that stated: “examiners will not criticize a financial institution for engaging in loan workout arrangements,” so long as they were done prudently.

“There is going to be some distress,” Alan Todd, the head of CMBS strategy at Bank of America said. “But I think the level, the amount of distress and the losses that one might infer, is wildly overstated.”

Reticent lenders may drive a hard bargain 

The effort to extend the due dates for property debts anticipates that, over time, interest rates will fall and property prices will rise.

“Nobody thinks we’re in a 7.5% to 9% rate zone for a long term, otherwise the whole assessment would change,” said David Blumberg, a managing director at 601W Companies.


Aon Center

The Aon Center in Chicago.

Raymond Boyd/Getty Images



601W reached a deal last year to extend its more than $500 million securitized mortgage at Aon Center, an 83-story office tower it owns in Chicago, for three years. Blumberg said the firm committed $40 million of cash to lease the property and anticipates a recovery of the office and financing markets in the coming years that will allow it to eventually refinance with fresh debt.

Some borrowers, however, may not share that optimism, and some lenders may be wary to put off tough decisions in a deteriorating market. Although the Federal Reserve is expected to make three rate cuts in 2024, its policy moves are notoriously difficult to forecast and interest rates could ultimately remain higher than investors and lenders hope, resulting in property distress for years to come.

Robert Ivanhoe, an attorney at Greenberg Traurig who oversees its real estate practice, said that he is currently representing a hedge fund in its purchase of a package of 10 commercial property loans from a bank at a roughly 20% discount. The deal is part of a growing number of sales by some lenders to cut down their exposure to commercial real estate.

Last year, Ivanhoe worked on a deal to hold off default on $1.3 billion of CMBS debt for Workspace Property Trust, an owner of suburban office assets. Although a two-year extension was eventually arranged, Ivanhoe said the process was fraught.

“These negotiations are very challenging, believe me,” Ivanhoe said. “It was hammer and tongs among the various parties in the capital structure and a total game of chicken right up to the maturity date.”

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