REQUIRED READING: In A Declining Market, Buydowns May Make Sense

commercial real estate developers, builders and investors alike are carefully pondering their next moves and proceeding more cautiously than ever, positive financial opportunities do continue to emerge in this fickle economy. Obviously, the number of profitable deals and transactions available has been suffering a sharp decline for some time now. Experts continue to agree that our industry will feel the impact of this crisis for a while. Fitch Ratings recently reported that commercial mortgage default rates are currently three times the historic default rates, and the agency predicts these rates are likely to continue to rise. "Commercial real estate is beginning to feel the same pinch as the housing market, with delinquency rates risingâ�¦and forecasts that they could reach the highest point in more than a decade by the end of 2009," notes a recent Wall Street Journal article. With that said, commercial real estate investors are now searching for new and unique ways to reduce investment-related spending. With earning opportunities limited, saving becomes an attractive means of stabilizing their bottom lines. One way to try to survive the financial storm is to reduce an existing commercial mortgage, which can be accomplished with the help of a third-party consultant, such as a private lender. Banks are often more than willing to negotiate to less than the existing balance on a current mortgage. In fact, many banks, which may have been caught unprepared by the recent turn of events, will accept a reduced amount in a single lump sum in order to assist with their own cash needs. For instance, an investor may have a $20 million commercial mortgage that is current and in good standing. In an effort to improve cashflow, the lender may consider a settlement to see its principal paid back immediately. Thus, a seasoned negotiator may be able to arrange a settlement for as much as 20% to 40% off the original mortgage amount. That discount can obviously result in significant savings to a borrower, even after any fees and/or expenses have been paid. For the mortgage borrower, these newly found funds can be invested into infrastructure and technology improvements, used to pay off other existing debt or used to hire new key personnel. A natural question is, why would a bank even consider such a buydown? There are several reasons. First, banks are usually in the banking business – not the real estate business. For the most part, they would much rather collect their loan payments than foreclose on property. Particularly during our present economic state, in which sales have slowed to extreme lows, foreclosure does not present an attractive option to the banks, whereas in different markets, the quick sale of foreclosed properties was quite a lucrative venture. With property values falling in many parts of the country, banks will often avoid the foreclosure process if a reasonable alternative can be found. In addition, the infrastructure of many banks – the systems and staffing in particular – is not well suited for extensive commercial mortgage foreclosure activity. Of equal concern to investors and banks are property values. As these numbers continue to fall in many parts of the country, a forced entry into the real estate seller's market paints an even less optimistic picture. If the original mortgage included a high loan-to-value (LTV) and the property value has dropped considerably, the bank may be content to get a reasonable amount of cash now rather than face the prospect of a lengthy – and potentially costly – selling process which, in the end, might not net them any more money than the buydown. [b][i]Cash influx[/i][/b] In any mortgage buydown, the first step of the procedure will be negotiation. Banks are obviously out to protect their best interests, so a professional advisor with focused expertise and extensive experience should represent your best interests. Financial professionals with existing long-term relationships with banks are an excellent source of information and expertise. By analyzing the numbers, terms and conditions of your existing mortgages, these parties will develop a better understanding of what level of negotiation might be possible. Furthermore, a professional advisor will instinctually have a fairly accurate idea of the value of the property in question. At the same time, an advisor may also recommend an initial private appraisal to avoid jumping too far in with too little information. Funding the purchase brings us to the next part of the process. Assuming a bank negotiates and does agree to a reduced amount, you will need the funds quickly to pay off your existing mortgage. A private lender may be called in for this step. In addition to their experience in working with banks to possibly lower your mortgage, private lenders may also be more likely to approve a loan application quickly. Banks and traditional lenders, on the other hand, tend toward a more drawn-out process – particularly during the current credit crisis. Private lenders typically make their own standards and create their own terms for evaluating and approving loan applications. From one single source, it may be possible to negotiate your existing mortgage down and secure the loan to pay it off. Even after any fees or costs involved, the end result could translate into savings of millions of dollars. Having a consultant negotiate a lower commercial mortgage balance can benefit a borrower in many ways. For starters, doing so can reduce regular monthly expenses, which is particularly helpful if sales are down and cashflow is a problem. Obtaining a lower commercial mortgage balance may also help to relieve the financial pressures on many mortgage investors right now. Even just a little bit more working capital each month can assist the budget and add to general financial stability. Reducing a mortgage can also help re-focus a company's efforts, energy and resources on current, time-sensitive opportunities. Or, having available funds might allow you to capitalize on low prices on long-term investments that otherwise might have been out of the question. The newly found financial stability of a reduced mortgage might even enable a company to avoid layoffs, downsizing or cutbacks on employee programs and benefits. That stability can be advantageous in outperforming other, weaker companies. Renegotiating a mortgage can also help make getting new conventional loans easier, while bringing the LTV in line with current, more stringent requirements. Any way you look at it, lowering your current mortgage can put an investor in a more positive financial position and enable it be financially prepared to handle unforeseen conditions that lie ahead. [i]Jeffrey Wolfer is president and co-CEO of Kennedy Funding, a Hackensack, N.J.-headquartered private lender. Wolfer can be contacted at (800) 342-8500 or jeffrey@kennedyfunding.


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