For struggling commercial property owners, loan modifications can be answered prayers, but without proper tax planning, all hell may break loose come April 15, 2010.

That’s because income from debt cancellation is taxable, something that is often overlooked as owners scramble to ward off financial ruin. Uninformed real estate owners could find themselves in financial peril when they file their IRS tax returns and owe hundreds of thousands of dollars in unexpected taxes they cannot afford to pay.

Consider the big picture: Commercial loan defaults are posting record-high rates — and momentum is moving toward worsening default rates in 2010. Real Estate Econometrics expects the default rate to rise to 5.2 percent by the end of 2010.

All this means heightened possibilities for commercial lenders working with overleveraged property owners to forgive a debt rather than waste more resources chasing insolvent borrowers. [more]

Regional banks plagued by souring commercial property loans are
unlikely to exit the federal government’s Troubled Asset Relief
Program, or TARP, before 2011, analysts say. Loans held by smaller, localized
financial institutions in the bailout program are far more
concentrated in commercial properties like malls, hotels, apartments
and home developments than those of larger banks like Citigroup and
Wells Fargo, Bloomberg reported. With 3.4 percent of such loans unpaid
in the third quarter, and with that rate potentially reaching 5.3
percent over the next two years, according to New York-based research
firm Real Estate Econometrics, regulators probably won’t be eager to
allow these smaller lenders to repay their bailout funds. “Somebody
that has a lot of CRE exposure is going to be held to a higher
standard” before they can exit the program, said Paul Miller, an
analyst with Arlington, Va.-based FBR Capital Markets and a former
bank examiner. “You’ve got to be careful they don’t allow these guys
to pay back TARP, and then a year goes by and have to give it back to
them.” [Bloomberg]

Pending home sales rose to 3.7 percent during the month of October, up 32 percent year-over-year, according to Real Estate Econometrics. That’s the highest annual increase ever recorded by the research firm, bringing its index to its highest level since March 2006. Lief Thomsen, founder and CEO of Mortgage Master, said that while the residential market appears to be steadily improving, the big question in the industry is what will happen in April when the homebuyer tax credit expires. Meanwhile, commercial mortgage defaults set records of their own. In that metric’s largest quarterly increase ever, commercial defaults doubled to 3.4 percent in the third quarter, CNBC’s Diana Olick reported. [more]

Commercial loans are defaulting at record-high rates, and many industry insiders believe the pace will only worsen, both in South Florida and nationwide. As revenues drop amid a severe recession, savvy commercial property owners in the region are working with banks — some more than others — to avoid default now before market conditions worsen.

According to a recent report from Real Estate Econometrics, the default rate of commercial real estate bank loans has reached its highest level in 15 years. And momentum is moving toward worsening default rates, which more than doubled nationally in the second quarter, up to 2.88 percent from 1.18 percent year-over-year, the report shows. And the company expects the default rate to rise to 4.1 percent by the end of the year, and to 5.2 percent by the end of 2010.

Rising vacancy rates, falling rents and increased operating expenses are contributing to the default surge. But the inability to refinance, sell or meet balloon payments also plays a part. Legal experts suggest commercial property owners looking to avoid default should get honest and aggressive about trying to find a middle ground.
[more]

Commercial property sales in the U.S. this year are likely to fall to
their lowest level in 18 years, according to research firm Real Capital
Analytics. About $16 billion worth of commercial transactions will
occur this year, the lowest volume since at least 1991, said Dan
Fasulo, managing director at Real Capital Analytics, and Sam Chandan,
chief economist of Real Estate Econometrics. The commercial mortgage
default rate more than doubled in the second quarter, hitting 2.88
percent, and could hit 4.1 percent, the highest level since 1993, by the
end of this year. [more]

As the unemployment rate continues to climb, particularly among those in the 20- to 24-year-old age bracket, the rental market has taken a big hit. Nationally, 70 percent of that demographic rents rather than owns their home. While rental activity is up 2.4 percent from last quarter, it is still down a dramatic 58 percent from a year ago and listing inventory is up 29 percent from one year ago, according to a report from real estate appraisal and consulting firm Miller Samuel. CNBC noted that it only costs $70 more per month to own than to rent an apartment. Apartment Real Estate Investment Trusts, meanwhile, have been faring better than single-family home rentals in larger markets such as New York, because they are able to offer lower prices and include amenities in large rental buildings, according to Sam Chandan, president and chief economist of Real Estate Econometrics.

Commercial loan defaults are increasing even as residential
foreclosures begin to slow. A recent report from Real Estate
Econometrics found that the default rate on commercial mortgages rose
to 2.25 percent in the first quarter of 2009, up from 1.62 percent in
the fourth quarter of 2008, the biggest quarterly jump since 2003. Sam
Chandan, president of Real Estate Econometrics, said he expects the
default rate to hit 4.1 percent by the end of this year and rise to a
peak of 5.3 percent in the fourth quarter of 2011. That could mean
foreclosure for nearly $200 billion of the close to $3.5 trillion in
commercial properties around the country. [more]

From the New York Web site: Baskin Robbins is known for having 31 flavors of ice cream. This month,
the “Flavor of the Month” is “Coconut Grove” while last
month the flavor was “Purely Parfait.” In the world of commercial real estate, the preferred investment class or “flavor” of the year — not month — is the opportunity to pursue a real estate mortgage note that is in default. Investment brokers were selling office buildings, multi-family apartment houses and land for residential development at record highs in 2006 and 2007. Today, with limited amount of debt available for financing any real estate transaction, investment sales are down. [more]

The default rate on
commercial mortgages held by U.S. banks may rise to the highest rate in 17
years in the fourth quarter as debt for refinancing remains scarce and
rents fall. The rate is expected to reach 4.1 percent by the end of the
year, according to property research firm Real Estate Econometrics. The
projection expects defaults on about $44.3 billion of commercial
mortgages, based on the $1.08 trillion of loans held by U.S. banks in
the first quarter. Commercial defaults are already at a 15-year high
after climbing to 2.3 percent in the first quarter.