Some developers and building owners opt to stop paying mortgages to get better loan terms

From the June issue: As the commercial market continues to struggle in New York, an increasing number of developers here are turning to so-called strategic defaults to force lenders and special servicers to enter into negotiations for loan restructurings.

The trend comes at a time when lenders are under increased pressure to keep their loans current. It also comes as developers are struggling to maintain the cash flow they promised their lenders during original loan negotiations.

And the number of strategic defaults — where the borrower may technically be capable of making the loan payment, but delays doing so as a way to improve his negotiating hand — is expected to rise even more in the near future.

“Sometimes [it] literally has to show up as a nonperforming loan to get any movement as a workout from a lender,” said Matthew Anderson, a principal at Foresight Analytics, a market research firm. “You can also understand from the lender’s standpoint that they don’t want to be handing out a loan modification without a valid reason, because that creates a loss on their books.”

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New details about the financing behind the massive condominium conversion at the Manhattan House are raising questions among critics and some public officials about the long-term viability of the Upper East Side project. Documents filed with the state attorney general’s office show that in 2009, HSH Nordbank, which holds a $750 million loan on the building at 200 East 66th Street, established a special fund to help the developer, O’Connor Capital Partners, meet its monthly expenses at the property. “My concern about Manhattan House is that one day the sponsor says that they have no money and that basic repairs and maintenance cannot be maintained,” said City Council member Dan Garodnick, who, along with state Assembly member Jonathan Bing, has held discussions with the developer over the financial condition of the building. Developer O’Connor Capital Partners has insisted the conversion is in good shape, Garodnick said. [more]

Apollo Management has struck a deal to buy Citigroup’s real estate investment arm, Citi Property Investors, effectively tripling the value of Apollo’s real estate assets, according to Bloomberg news. Its purchase of Citi Property will yield 65 real estate investments valued at $3.5 billion for the private equity investment firm. Ironically, it’s this real estate portfolio that Apollo real estate sector head Joseph Azrack helped assemble as Citigroup’s property investment director from 2004 to 2008. Matthew Anderson, a partner at research firm Foresight Analytics, said that Apollo may have brought Citigroup a certain comfort in the deal. “Having it go to Apollo is in a certain sense returning it to the previous management,” Anderson said. Citigroup’s move to sell comes on the heels of mounting pressure from federal officials, who have urged the company to shed some of its assets. The Treasury Department currently maintains a 27 percent ownership of the company.

As the fall of 2009 comes to a close, many of the commercial real estate lenders continue to limit their exposure to financing for real estate. The buzzword for 2009 is “extend and pretend,” whereby a bank extends the term of a loan to a later date. The legendary Samuel Zell, chairman of Equity Group Investments, the keynote speaker at the NYU Capital Markets conference Nov. 19, stated that “our government has become the bailout city. If a loan is kept current, banks will ‘pretend and extend.’” No one is surprised by the “pretend and extend concept,” especially if you had the opportunity to gain insight from the Federal Reserve’s October 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices and hear the comments made by Ben Bernanke, chairman of the Federal Reserve, in a speech at the Economic Club of New York Nov. 16. The Fed’s Opinion Survey addresses changes in the supply and demand of loans to businesses and households over the past three months. The results were based upon responses from 57 domestic banks and 23 U.S. branches and agencies of foreign banks. [more]

New Jersey’s commercial properties are falling more and more into debt as the escalating commercial real estate crisis takes its toll on the state, several leading research firms have said. After real estate investment in the state peaked in 2005 and 2006, the state now has $3.6 billion in distressed commercial assets, according to research firm Real Capital Analytics, with most of the boom-year mortgages slated to mature between 2010 and 2012. At least 15 New Jersey buildings entered foreclosure this year, and commercial giant Newmark Knight Frank said that number will continue to increase. California real estate research firm Foresight Analytics ranked New Jersey 13th in the nation for the value of commercial mortgage maturities between 2009 and 2012, with an estimated $7.4 billion expected. [NJ Biz]

While commercial real estate experts predict a rise in distressed securitized loans for New York City over the next year, new data shows the number of assets added to the tally last month actually fell. The quantity of loans transferred to special servicers dropped sharply last month, and those placed on servicer watchlists declined slightly, new data provided by financial tracking firm Trepp to The Real Deal shows. Only three New York City loans were transferred to a special servicer in September, down from 13 the month before, the figures indicate. At the same time, the volume of assets placed on a servicer’s watchlist fell slightly to 40 from 50 the month before. [more]