DETROIT, MI - Some commercial mortgage borrowers see opportunity in the wake of the subprime mortgage crisis, which could bring them higher returns on their real estate. They're buying back, at a discount, their mortgages from the original lenders, either financing the new loans themselves or refinancing with lenders still bullish on the Michigan economy. "What's happening right now is that mortgage holders are working to reduce exposure. They're in the process of selling off (commercial real estate) notes. It's in many cases being done at a discount and in some cases at par," said Robert Leonard, managing director of iCap Realty Advisors.
The upshot is that some borrowers are trying to buy back their mortgages at a discount. "It's an opportunity that private and institutional money are looking at - this opportunity to get above-market returns on real estate," Leonard said. Such was the case in one iCap deal in which a lender looked to the borrower to find alternative financing. "We participated in a deal that just closed a couple of weeks ago where there was a stabilized, cash flowing, multifamily asset in Michigan," iCap director Jill Jasinski said. "The lender was a life company that had too much property here in Michigan. They offered the note at a roughly 15 to 20 percent discount to these property owners.
"What was different about this deal was that rather than refinance the loan with another lender, they took the note to the bank and used the note, rather than the property, as collateral." Jasinski said. "The owner bought the note at a discount with the Michigan bank's money, and it continues to pay the full debt service to itself. Then there is the ability for the owner to reap the benefits on the cash flow side because it's basically paying itself."
Leonard has seen similar transactions and expects more. Right now, he has a large institutional lender in the market -with what he says are hundreds of millions of dollars in performing real estate assets in the Michigan market, which wants to refinance those notes to get them off its books and balance its portfolio, which is too heavily invested here. "And there is another property owner who just refinanced with a local bank in a similar situation, where the original lender wanted to get those properties out of its portfolio, but a local bank was willing to make that loan because that bank understands and appreciates the market and sees a performing asset as just that, a performing asset," Leonard explained.
It's not unique to Michigan and it's not unique to any particular kind of commercial real estate, added iCap director Scott Hannah. "Banks have regulators and the portfolios are consistently graded. Banks are right now under much more scrutiny as the lending markets have had their struggles," Hanna said. "In a lot of cases they want to unload a high concentration of commercial real estate, or maybe it's geographical and they have too much in Michigan, even though those properties are performing. They'll sometimes proactively ask the borrower to move the loan."
If it's a performing loan, there are still eager lenders who want to increase assets in commercial real estate. They'll take an 85 percent loan to value deal, which may look more attractive because it's performing or because the loan has been discounted, Hannah said. Though the move on the part of lenders to unload commercial real estate loans may look a little like distress relief, "It's not as much a geographical issue as it is a liquidity issue," Leonard said. "We have these large multibillion-dollar write-downs, so everyone's scrambling for liquidity,"
While that may be true, Thomas Schafer, president of Citizens Bank, Southeast Michigan, is hesitant to call th
Source: Mlive.com