Well, after we have all been witnessing the biggest residential market valuation collapse in memory, what next? Brace yourself; the green-visored experts are predicting that commercial real estate is next.

How could they prognosticate this one accurately when no one seemed to know the housing calamity was going to hit so rapidly and with such force? Believe it or not, this is not a bunch of economists sitting in a darkened room reading their tea leaves. They can look at the outstanding commercial loans; their types, interest rates, duration, and the layers of mortgages loaded on the millions of commercial properties throughout the country. From all of this information, they can predict the timing, and the volume of loans which are coming due. And it isn’t pretty.

Fueled by the sliding economy, commercial owners have been enduring fleeing, or almost as bad, slow-paying, tenants, retailers closing shops, and a credit market which has given new meaning to the word “constipated”.  This seized-up financial lending market continues forcing many businesses into default with their day-to-day obligations. Plus, once their mortgage notes become due, many during the latter part of 2009, their properties likely will go into receivership, or to the sheriff’s block.

So, what can commercial owners do to minimize their losses? Unless they can swing a refinance, or anti-up the additional cash, they likely will be facing selling their prized commercial properties at a substantial lose – IF they can sell them at all.

At Best Corporate Real Estate, I am working to match distressed owners with investors. We work to  negotiate a short sale with the present lenders. Simultaneous with the short sale negotiations, I aid negotiations between the owner/seller and the investor/buyer to draft a lease for the seller to remain on in the property as a tenant. Commonly known as a “Sale-Leaseback”, this process has been done for many years, and with very good results. The twist here is coupling the sale-leaseback with the short sale.

You might be thinking “If the owner couldn’t afford the property while owning it, how will they be able to pay enough in rent (plus other typical expenses) to attract an investor to the table?”.  There is actually a very good reason why, in these wild days, it can often work. Simply, and coldly put, the lender takes the “haircut” for the loss in market value. What this does is to reduce the overall cost of owning the property, back to a much more realistic value and cost.

Lenders aren’t advertising this, but they are often taking 50 cents on the dollar for distressed loans. And, I am now hearing of some going as low as 25 cents on the dollar.  A property which once had, for example an $800,000 mortgage burden, suddenly has one closer to $400,000, or less. Another interesting and helpful factor occurring in this point in time is the record low interest rates. Therefore, these new mortgages will enjoy a very favorable interest expense, again, helping in the over-all cost of running the seller’s operations.

So, what should you do if you find yourself becoming squeezed for cash? Give me a call to discuss options. The sooner, the better. Exploring the options, and actually pulling a deal together does take time. Let me know as soon as possible if you feel you are heading in this direction.

If you are a commercial real estate investor, or a disgruntled stock and bond investor, investing in distressed business owners may be an excellent alternative for you.

For an excellent article on this topic, see McClatchy Newspapers’ “Next Economic Crisis Looms: Commercial Real Estate Defaults” – April 30, 2009.