Commercial loan defaults skyrocket

by | Aug 9, 2010 | How to Guides, Uncategorized

Many sources are reporting this so I wanted to talk about what’s happening in the commercial loan world. In a word the news is bad for owners and sellers. In the last year the default rate has more than doubled with many predicting it will triple by the end of the year!

There are many factors taken into account when a bank makes a loan but these factors are all moving in the wrong direction.
Asset Value: What the building is worth has declined
Vacancy: Up accross the board
Down Payment: More money is required by banks
Debt Coverage Ratio [DCR]: The ratio of income to debt cost has increased which means loan payments must be much less the buildings income
Rents: Down accross the board

These factors affect the ability of owners to buy and refinance; with many projects losing money and/or underwater I expect this trend will get worse before it gets better.

If you’re an owner then I recommend aggresively pricing, carrying a contract if possible, or holding for the next 5-7 years.
If you’re a cash buyer look at bank owned properties or short sales.
If you’re a buyer that needs debt then look at owner carried contracts or SBA loans if you’re an established business looking for a building to use.

Details on the default rates of various property types

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