1. 6/21/2010 More commercial properties in San Ant…
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San Antonio Business Journal - June 21, 2010
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Friday, June 18, 2010
More commercial properties in San Antonio
confronting negative equity
San Antonio Business Journal - by Tricia Lynn Silva
The total number of commercial properties in which the owner owes more on the mortgage than
the building is worth is on the rise.
And as that number goes up, so too do the odds that the property will ultimately fall prey to a
foreclosure sale.
Year-to-date in 2010, a total of 375 foreclosure postings were filed on Bexar County commercial
real estate, according to a recent report by Addison, Texas-based Foreclosure Listing Service
Inc. Of those postings, 25, or 6.7 percent, involved mortgages that were upside down — meaning
that the amount of the original loan exceeds the appraised value of the commercial asset owned.
By comparison, over the same period in 2009, a total of 334 foreclosure postings for commercial
buildings in Bexar county were filed — of which 15 postings, or 4.5 percent, involved upside-down
mortgages.
The Foreclosure Listing figures are based on foreclosure notices filed on commercial properties in
Bexar County District Court in advance of the monthly auctions held between January and June.
Although a property may enter the foreclosure pipeline via a posting, that does not automatically
mean the property will be repossessed by the lender and proceed to an auction — particularly if
the property owner and lender can work out a deal that forestalls the process.
Being upside down on a loan, however, is a no-win situation for both the owner of the commercial
asset and the lender who originated the loan, says George Roddy Sr., president of Foreclosure
Listing.
In fact, in cases where a commercial foreclosure posting involves an upside-down loan (or negative
equity), the probability of that asset ultimately being sold at auction is even greater, he adds.
“There are simply fewer options since both the property owner and the lender are in a no-win
situation,” Roddy says. “Generally, the property owner cannot sell the building for what they owe
on the mortgage.
“And, most often, the lender cannot sell the building after repossessing it for the amount they have
invested in the mortgage and other costs that the lender has incurred.”
Number wonders
Officials in the commercial real estate industry say they are not surprised that more owners are
finding themselves in the unfortunate position of owing more on their properties than those assets
are worth.
Bryan Leonard, senior vice president and managing director of the local office of Minneapolis-
based investment firm NorthMarq Capital, says more and more of the assets that he sees going
back to lenders involve upside-down loans.
Leonard and others are surprised that only 6.7 percent of the troubled commercial loans in Bexar
County are upside down.
“That number seems slightly understated,” Leonard says.
“If you’re saying that 6.7 percent of these loans have no equity, what’s going on with the other 93
percent?” asks Chip Fedalen, executive vice president and group head of the Wells Fargo Real
Estate Banking Group in Irvine, Calif. “(The 6.7 percent figure) seems very low to me.”
Local real estate broker Marshall V. Davidson Jr. counters, however, that this 6.7 percent has to
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2. 6/21/2010 More commercial properties in San Ant…
be considered in a larger context. A given property posted for foreclosure may not be in a negative
equity situation, but the owner may have other assets that are in that predicament.
“When an asset comes up for foreclosure, it’s because the owner can’t handle the debt service,”
says Davidson, who is the president and CEO of Davidson Gill LLC — a full-service commercial real
estate brokerage, management and counseling firm. The San Antonio firm’s niche is distressed real
estate — including helping active buyers find such assets for purchase.
A property, says Davidson, may be “absolutely sound, and cash flowing,” and may have a
mortgage that is not under water. However, the owner’s larger portfolio may be upside down —
making it difficult for that borrower to fulfill the debt service on even the trophy properties.
Fallout to continue
Whether the 6.7 percent figure pertaining to properties already in the foreclosure pipeline is
reflective of the equity condition of the city’s overall troubled commercial property portfolio
remains unclear; however, local industry experts agree that the overall number of commercial
foreclosure postings is likely to go up in Bexar County. And so too will the number of upside-down
mortgages.
Between 2010 and 2012, more than $50 billion worth of loans dating back to the years 2005
through 2007 — the heyday of the last real estate cycle — will reach maturity, notes NorthMarq
Vice President Robert Jordan.
As those notes come due, even those lenders willing to work with cash-strapped owners may be
stretched to the limit and forced to make some tough decisions regarding sour loans, industry
insiders say.
“Is there some level at which it doesn’t make sense (to work out the loan)? I suppose there is,”
Fedalen says. “But it is asset-specific, borrower-specific and bank-specific.”
“The prospects for the trend to continue are pretty good,” adds Leonard, who says at some point
maybe 10 percent to 15 percent of the commercial foreclosure postings will involve upside-down
loans.
“Will it go up to 20, 30 percent, probably not,” he says.
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