South Lake Tahoe, United States (IBwire.com - October 02, 2009) The IRS rule change issued on September 15, 2009 allows loan servicers and commercial property owners to agree on a workable modification before a default of the loan.  Prior to this change, owners of commercial property could only get a small change in the terms because a major change would jeopardize the REMIC's tax exempt status.

REMIC's are essentially trusts that were established to purchase loans from commercial mortgage bankers.  These trusts would then sell the income stream as an investment vehicle on Wall St to institutional and individual investors.

The market for CMBS investments broke down following the sub-prime crisis in 2008.  The Federal Reserve has made efforts to restore liquidity to that market with the TALF (term asset lending facility) program which funds loans to owners of recently issued CMBS.

From 2005 - 2007 about 70% of commercial loans were packaged into CMBS.  Many of these loans were made with loose underwriting standards to feed the demand for high yield investments.  These loans typically have a 3 to 7 year maturity.  With the commercial real estate price deflation that is occurring and the tightening of lending standards, property owners will have a hard time finding financing.

"We have seen an increase of 30% in lead production at commercialmodification.com since the IRS changed the rules two weeks ago" says Ted Schmidt, President of Leadsnet, Inc., a leading provider of commercial mortgage modification leads.

The South Lake Tahoe, CA company provides commercial mortgage leads for law firms, commercial mortgage consultants and CRE investors who are looking to provide services to commercial property owners.

Last week Leadsnet announced the addition of Genesis Financial and Real Estate Services as a consulting partner. "This partnership allows us to bring more value to the table on behalf of commercial real estate owners who want help in negotiations with mortgage servicers"

With the number of commercial loans coming due in the next few years combined with the fact that commercial real estate values have fallen often 30% or more, balloon loans that are maturing will fail. Properties with income sufficient to service the debt cannot even refinance if the value of the property is less than the indebtedness. This imbalance is estimated to be about $270 billion and growing.

Many commercial properties are experiencing increased vacancies along with decreasing rental rates. This disastrous combination makes the monthly debt service almost impossible for borrowers. “Sometimes there is a better alternative to foreclosure” quotes Roger Simard, president of Genesis Financial and Real Estate Services. “In our consultative and advisory role, we use our extensive network of experts in accounting, commercial real estate, bankruptcy law and mortgage lending to assist us."

Sometimes alternative solutions such as purchasing the note, to assist the owner in stabilizing their property or bringing in an equity partner is the best solution”, added Simard.

Recent consulting projects that have come through the Leadsnet web site include two 42 unit buildings valued at over $6 mil., that have been put into default by the servicer because of missed property tax payments.  Current occupancy is 95% and rent roll $62K per month. The owners are trying to reinstate with better terms or refinance.

An owner of a retail showroom and warehouse in Northern California who put a $1 million down payment a few years ago has lost nearly all his equity. He is now two months behind and making weekly payments on a loan that is close to the value of the property.

The owner of a 16 unit apartment complex in Mesa, AZ., who put $300K down 3 years ago has a loan reset in Jan 2010 when it adjusts upward. It is now only worth $400K and the loan amount is $688K. The owner of this loan faces a substantial loss if a modification is not completed before the reset date as financing is unavailable to pay off the resetting loan and the property would sell for substantially less if there were a forced liquidation. The cash flow on the property is insufficient to cover the debt load so modification is a best case scenario.

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