According to several analyses of commercial real estate there is a group of properties valued in total around $2 Trillion whose loans are maturing in the next 2 to 3 years. Many of these properties are “distressed”.
While this looming debt may pose a threat to the recovering economy, it also represents opportunities for much of the commercial real estate industry—brokers, lenders, equity investors, and due diligence professionals will be busy as bees working through the many distressed properties. The lenders/owners will have several options to resolve the issue. Three possible approaches for lenders and owners are to:
- foreclose on the loans and sell the collateral
- sell the loans at what the market will accept or
- sell the asset at a loss.
These options involve a transfer of property rights. Whether or not an asset or debt sale is considered, the physical and environmental status of the property should be part of the transaction evaluation.
Physical Condition Assessments
Because the property is “underwater” it is likely that reduced income will mean physical maintenance has been neglected. This can be a leaking roof, poorly maintained mechnical and electrical systems and building interiors, exteriors and site conditions. In order to understand these issues the owner/lender should hire a qualified engineering firm to produce a Property Condition Report. This report will discuss the findings of a site inspection. It will also estimate the deferred maintenance/immediate repairs that are required because of imminent damage to the property as well a projection of annual costs to maintain the physical condition of the property. The current status of building codes compliance will be researched and included in the Property Condition Report.
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