| Intuitively we all know this is a great buying | | | | - Weakness in the economy has thrown many into a |
| opportunity for investors that have the resources. | | | | DSCR default. |
| However, with the right resources, the opportunity | | | | - Many will reach the end of term and will require |
| can be even greater. You may think. Of course, this | | | | new loan financing or an extension of the loan that |
| is true. If you are purchasing with cash the values are | | | | they have. This event will trigger appraisals and |
| always greater. However, in this case the opportunity | | | | recognition of the LTV issue that already exists. |
| can be magnified further by the needs and | | | | - As the recovery gains steam and given the huge |
| vulnerabilities of the buyers and in like manner the | | | | volume of government debt, interest rates are likely |
| needs and vulnerabilities of bankers. | | | | to tick up for loans that are adjusting this will create |
| The place to begin is looking at the banks. There are | | | | default conditions and this will exacerbate the |
| several key points to recognize about banks: | | | | previously discussed refinancing issue. Where do |
| - Properties that are below a certain Debt Service | | | | investors gain value on their multifamily and |
| Coverage Ratio (DSCR - the ratio of income above | | | | commercial property investments from these |
| expenses divided by the total debt service) have to | | | | conditions? |
| be backed up by reserves. Performing loans do not. | | | | First owners, need to take steps to protect the |
| For banks that are already stressed financially this | | | | equity that they have as if forced to foreclosure the |
| step drives them closer to take over by the FDIC. | | | | crisis in the market will cause many projects to go to |
| - In like manner, when a property becomes non | | | | foreclosure and likely result in a complete loss of |
| performing against the loan covenants, the banks are | | | | equity. Second, banks are highly incented to accept |
| forced to appraise the asset which causes a reset in | | | | solutions that keep their reserves on the sidelines and |
| the value analysis. This can create a 2nd issue | | | | maintain the loans in a strong performing position. |
| because the required Loan to Value (LTV) isn't met. | | | | Therefore investors should seek to aggressively deal |
| Again, the bank must ante up reserves to resolve | | | | with banks on loans that are in default and with |
| the condition. | | | | owners who refinanced or purchased within the last |
| - Next, banks are highly incented if they can place a | | | | three years. |
| loan in a performing status for DSCR and protect | | | | With owners, offering them a sharply diluted position |
| their "investment" to work out a resolution since this | | | | is their best alternative to save in of their equity. For |
| removes the asset as a burden on reserves and | | | | bankers, taking over the position of the borrower |
| provides a path to profitability. Next, looking at | | | | with an equity structure that places the loans in a |
| borrowers there are several facts to consider: | | | | performing category should offer opportunity for |
| - Many over leveraged during the boom and if their | | | | very strong borrower note terms and excellent |
| loan value comes under scrutiny they cannot meet | | | | equity value. |
| LTV. | | | | |