Macroeconomic Impact. The Fed estimates that the size of the U.S. commercial property market is $6.5 trillion, or approximately one-third the size of the housing market. Commercial property loans outstanding are an estimated $3.3 trillion, also roughly one-third of the $10 trillion in residential mortgages outstanding. Of the commercial real estate loans outstanding, over half are held by commercial banks, with these loans constituting a very important part of the regional banks' balance sheets. Approximately 25% of commercial property loans are securitized, with most of the remainder being held by life insurance and savings companies.

1. All borrower’s information and completed forms typically required for a normal commercial understanding, including a description of the property, monthly income and expense on the subject for current year and annual summaries for the prior two years; a current rent roll (current within 30 days); photos of subject, (four sides plus up and down street scene), a copy of borrower’s (and where applicable, borrowing entity) complete last two years federal and state income tax returns.

2. Summary of the operating issues contributing to the inability of the property to service its current debt or qualify for a refinance of extension of current credit, or summary of anticipated changes in occupancy or other operating results that will adversely affect the debt serviceability of the property.

3. Current loan balance and payment status, copy of payment notices, copy of lender’s correspondence, and a review of pertinent phone conversations to date between borrower and their lender, if any.

4.  Copy of existing mortgage loan agreement.

5.  If a multifamily property, a written assessment by the leasing agent or resident manager, of the marketability of the units, given their condition, amenity value and size in relation to competing properties in the market area of the subject.

6.  A market analysis of the subject, in terms of its competitive stance and attractiveness as a rentable property. Also, the current and 12-month forecast for space in the subject, based on current market conditions in the market area of the subject.

7.  A list of all deferred maintenance items and estimated cost to correct.

8.  A schedule of any necessary or advisable capital improvements.

9.  Copy of an appraisal within the last 12 months, or a current appraisal conducted by an MAI who is on the subject lender's approved appraiser list.

INVESTORS

How Your Loan Can Be An Important Asset

According to CNNMoney.com, July 22, 2009, JP Morgan Chase values its non-performing commercial loans at $2.26 billion—quadrupled from $510 million during the same year-over-year period in 2008.

The current climate for loan modifications has proven one fact: institutional lenders are willing to modify the terms of their loans—including reductions in principal balance—to keep a loan in a current paying status. On their books, this is referred to as a ‘performing loan’, and is an asset. Conversely, a loan in default is a liability. Liabilities equal risk. Obviously banks don’t like risks and will do whatever is commercially possible to avoid them.

The truth is lender risk avoidance can work in your favor. And, given the climate of acceptance for loan modifications, there has never been a better time to negotiate a commercial loan modification, or workout—weather you currently need one or not.

If declining occupancies and rents have substantially reduced or eliminated the ability of your property to service debt, NOW is the time to commence loan modification negotiations. Every 30 days that passes increases your cumulative negative cash flow. The sooner your loan is modified, the sooner the bleeding stops.

How is a defaulting—or prospectively defaulting loan an asset?

Defaulting loans present multifaceted problems for institutional lenders. They represent a very undesirable level of risk—with very real current economic consequences. The truth is, in the present economic environment, with an uncertain future, investors with institutional loans are in a position of leverage over the lenders—for the first time since perhaps the Great Depression.

Even if your property is currently servicing its debt, but there is the real potential that the foreseeable stability of its income is in doubt, NOW is the time to commence loan modification negotiations. Taking a ‘wait-and-see’ approach is not prudent. It may be possible to negotiate a reduction in payments on performing commercial loans in advance of the potential for adverse financial performance. This mitigates the issue of having to negotiate a loan modification under financial duress.