Warning: Commercial Property Foreclosures May Be On the Horizon

Many small business that own commercial property may face trouble in the coming years. The problem is that banks generally re-evaluate commercial mortgages every five to 10 years. In doing do, banks can choose to renew the loans or ask business owners to pay them off.

With that in mind, after getting burned by billions of dollars in defaulted real estate loans in 2008, 2009, and 2010, lenders are a lot less willing to renew loans that may not be good credit risks. And many businesses appear to be less creditworthy after the 2008 financial crisis, which caused years of lagging revenues as the U.S. economy has taken years to dig itself out of that financial crisis. As a result, many small businesses that own their commercial property may have difficulty finding a lender to renew their loans. Those that cannot find a lender likely will face the loss of their property through foreclosure.

Scope of the Problem

According to a commercial-mortgage research firm in New York, approximately $275 billion of nonresidential, commercial-property loans are expected to come due in 2013. That figure is higher than any prior year. Many of these loans were made shortly before the 2008 financial collapse, when property values were high and businesses could depend on steady revenue to pay their mortgages. Many of the mortgages that are expected to come due in 2013 are loans that came due during the heart of the financial crises and were given extensions by the lenders.

Many of these loans have large balloon payments coming due soon, with businesses that have not fully rebounded from the financial crisis unable to meet the payment. And with many banks facing regulatory scrutiny for carrying too many risky or bad loans on their books, banks likely will be more willing to foreclose on commercial properties rather than carry non-performing or underperforming loans.

One investment firm that specializes in troubled commercial real estate has predicted that approximately 20,000 small commercial properties are facing distress in the next 12 months. That firm predicts that there will be the same number of troubled properties each year thereafter through 2016. There could be a resulting wave of commercial foreclosures unless the economy as a whole continues on an upward trajectory of improvement.

Smaller Commercial Properties Likely to be Hardest Hit

Commercial real-estate analysts largely agree that the commercial real-estate market will not experience a full-scale collapse. One report found that 60% of $399 billion in troubled commercial real-estate assets since 2008 have been bought by third-party investors or refinanced. But for small properties in which banks and institutional investors are not particularly interested, refinancing may be difficult and foreclosure may be the end result. Of course, to the extent these loans were securities, the securities holding these loans (and the investors in the securities) also could suffer significant losses.

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