How commercial real estate is avoiding a foreclosure deluge

November 01, 2010 09:30AM

Ed Mermelstein

Why aren’t commercial foreclosures flooding the market in the same way that residential foreclosures are? Similarly loose lending standards were employed in both sectors of real estate lending, and just as now-soured home loans were often given out based on false income reports during the boom, commercial loans were based on inflated revenue projections. But while residential foreclosures continue to rise, commercial foreclosures are comparably few and far between. The reason, experts say, is what has become known as “extend and pretend,” a strategy employed by lenders to protect their balance sheets. According to New York commercial real estate attorney Ed Mermelstein, the logic behind “extend and pretend” derives from what he calls “balance sheet window dressing.” Mermelstein told AOL’s Daily Finance that “the way the value of the properties is determined plays a big part in the calculus [of whether or not to foreclose]. The residential market just has a lot more comparable sales. In the commercial real estate market there’s a lot less volume, so there’s a lot less ability to get a price point.” [Daily Finance]