Don’t Fret Just Yet About Commercial Real Estate Debt Threat - Sachse Construction
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Don’t Fret Just Yet About Commercial Real Estate Debt Threat

Local experts believe banks and other lending institutions will work with landlords to avoid what could be a recipe for a wave of foreclosures on commercial real estate debt in light of the two-week mandated shutdowns of restaurants, bars and other businesses to combat the spread of coronavirus in Michigan, which has infected 65 people as of Tuesday.

With reduced or no revenue for those tenants, that could crimp rent payments and therefore threaten building owners’ debt service obligations.

But most agreed that for most lenders, short-term problems paying back loans won’t be worth the long-term hassle of property ownership.

“Now, it’s only for two weeks and no one’s going to lose their property unless they recently bought it and they’re way over leveraged,” said Steven Siegel, vice president of acquisitions for Lutz Real Estate Investments and Q10 | Lutz Financial Services, a commercial real estate finance firm based in Birmingham. “No lender really wants to own a property and all the lenders are in the same position.”

Ben Rosenzweig, a retail expert who is vice president of retail brokerage in the Detroit office of Colliers International Inc., echoed similar sentiments.

“Moreover, it’s doubtful that the banks want to take back thousands of properties through foreclosure, since they would all have higher vacancy rates and difficult to backfill in already.”

And it’s also in the landlord’s best interest to accommodate struggling tenants.

“From the owner’s financing standpoint, most mortgages require landlords to keep their occupancy and rental rates above a certain threshold. They will be hesitant to evict tenants who may have trouble paying rent during the short term, because they could put themselves in jeopardy with their bank,” Rosenzweig said.

Some are thinking of other ways to avoid the possible problem.

“It’s not theoretical. Restaurants will not be able to pay their rent at the end of the month,” said David Jaffe, an attorney with Birmingham-based law firm Jaffe Counsel PLC. “If their landlord is (large corporate landlord) Blackstone, that’s one thing. But if their landlord is a modest developer or even a decent sized developer, they can’t make their debt service payment.”

“The lender has the Fed for liquidity backup. If the banks or bondholders need help, we have a vehicle there that’s much more responsive than the political process to deal with that.”

There are thousands of restaurants and bars and other businesses affected by Gov. Gretchen Whitmer’s executive order Monday, including fitness centers, movie theaters, coffee shops and casinos and others. The state has taken unprecedented steps to combat the spread of COVID-19, although there remains a cloud of uncertainty over what precisely the effects of the coronavirus will be on commercial and residential real estate.

“Landlords may have to consider flexibility,” said Tjader Gerdom, owner of Novi-based brokerage firm Gerdom Realty & Investment. “It may impact cash flow, just hopefully for a small duration.”

Justin Winslow, president and CEO of the Michigan Restaurant & Lodging Association, said in a statement that the bar and restaurant industry employs 600,000. He told Bridge Magazine that there are 16,000 restaurants and another 2,000 hotels in Michigan’s $40 billion dining and lodging industry.

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