Lenders Require Revamped Appraisals for Old Loans

Commercial real estate has become a forced tiptoe walk. Borrowers whose loans have expired and are facing the problem of not being able to refinance at higher rates are talking to lenders. More often than not, the result is a extend-and-pretend agreement.

Loans are modified or extended so lenders don’t have to write off the asset, which would represent a loss and possibly be a sign that other loans they hold may also be worth much less than what’s stated on the paperwork. Lenders do not lose their property and also do not have to suddenly find large amounts of capital to refinance. Banks with assets between $100 and $700 billion highest average for loan modificationsAccording to Moody’s.

There’s a dark side to stretching and fakingsays the Federal Reserve Bank of New York. A new analysis from them suggests that attempts to cover up problems and expect a positive rate change are not working. Instead, it leads to increased financial pressure on banks.

Patience may be nearing its end. Altus Group says debt funds and other CRE lenders are starting to lend focus on reviewing and updating valuations.

The values of outstanding loans depend on the values of the properties that support them. Every loan begins with a property valuation. As long as the valuation remains good (equal to or higher than the original amount), there is no underlying risk to the potential for a loan to be held more valuable than the property.

But prices and valuations have been falling rapidly for several years. It is unrealistic to assume that a CRE property is necessarily worth what it will be in 2021 or 2022. Some properties have increased in value, some have increased in value. But all? No way.

The office is an example of this. Valuations have been falling steadily outside the 10% to 15% of the stock that is Class A or Trophy.

As Altus writes, the approach to “gaining insight into how debtors’ properties are performing” assumes that debtors are meticulous in their analysis and forthright in their answers.

Lenders are working with expansion and imitation strategies that suddenly start considering revaluations to better understand their current situation and risks already knowing that there may be problems.

“This has been impacting portfolios for some time and there is still room to go depending on the type and asset class of particular loans,” Andrew Pabon, director of valuation consultancy Altus Group, said in a prepared remarks.

Lenders are taking new approaches to better understand and manage risk. Altus pointed out: Note from Trepp on a $242 million 521 Fifth Avenue loan that was sent into special service in June due to maturity default. The 39-story, approximately 500,000-square-foot Class A office tower has an upper tenant with approximately 5.2% of the space and its lease expires in 2035. The property is 77% occupied and the solvency ratio is 0.79x. The lender works on a two-track approach with foreclosure proceedings while discussing the extension with the borrower.

Lenders, particularly in office but probably in other types of property as well, may be about to get a lot tougher because they’re getting to a point where they need to start dealing with the risks hanging over them.

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