Once upon a time there was a land where anyone could make serious money in real estate. Commercial real estate prices were steadily rising. In many parts of this land the value of commercial real estate rose significantly between the time you contracted for the purchase and the time you actually closed. You actually had “equity” or price appreciation almost before you owned the property. This land was populated by men and women walking the streets with pots of money, just looking for someone to take the money. Lenders were willing to make loans at 90% to 95% of cost, with years of interest only payments and debt coverage ratios as low as 1.05:1. There were even mezzanine lenders willing to make loans at 125% of cost, with debt coverage ratios as low as .90:1 at the start of the loan. Were these really the good old days of 2005 and 2006?
We have all heard the adage that “what goes up, must come down”. The recession in commercial real estate that started in late 2007 and continues through today is a painful example of asset bubbles and the correlation of asset prices with cheap and easy credit. Since the Lehman Brothers bankruptcy, the conservatorship of Fannie Mae and Freddie Mac and the melt down of AIG, Merrill Lynch, Countrywide Mortgage and Washington Mutual, among other institutions, commercial real estate credit has almost disappeared. As a result of the loss of jobs in the financial and housing sectors, and the ripple affect though the whole economy, demand for commercial real estate has plummeted. We have seen effective rents drop as much as 40% in some markets, to levels not seen since 1999. Vacancy rates in commercial real estate in many markets exceed 20%. The impact on commercial real estate prices has looked like a death spiral. Values have dropped 40% or more in many markets.
Now, many people in this land walk around stunned, like zombies, and trying to negotiate with “zombie banks”. The men and women with pots of money are unemployed or working at the car wash. The lenders who couldn’t shovel money out the door fast enough have now closed the cash window and bolted the doors. They have pulled your credit lines and want to be paid in full on every loan at the earliest possible date. By the way, don’t ask for an extension unless you can write a big fat check to bring down the principal balance to meet the lender’s new underwriting guidelines (which, by the way, are now contrived to take no risk and assume real estate prices may never rise again).
The once high flying real estate moguls have come to understand a new term: “negative equity”. Not only has the value of their property dropped below the purchase price, in many cases the value has dropped well below the loan amount. Their equity investment is wiped out, and they are facing foreclosure or writing a big check, with no confidence that their property value will get back to 2007 levels in this generation.
As these forlorn souls sit practically alone in their office towers that were once filled with employees doing deals and constantly visited by lenders and equity providers with pots of money, they wonder: “What am I to do now?” For them, it was once so easy. Money flowed and deals were getting done. That meant lavish offices, heavy metal in the driveway, memberships at the most expensive clubs and golf 4 days a week to raise ever more money. Alas, those days are behind us for now.
While everyone else is trying not to drown in re ink, there is one company that is aggressively acquiring commercial real estate. Abacus Financial may be the solution for the “negative equity” nightmare.
Abacus Financial (Los Angeles, CA) is the national expert in workouts of distressed commercial real estate borrowers and operating companies. Abacus is a national investment firm dominant in the specialized discipline of Value-Added Acquisitions.
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