Challenges await retail, industrial, office property owners

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Investors, banks in throes of loan workouts

The toughest workouts aren’t limited to the gym.

In today’s constrained financial world, they’re part of everyday life for commercial real estate investors and lenders — with plenty of heavy lifting, agility exercise and super-human challenges awaiting retail, industrial, office and land property owners.

Take El Paso County, for example, where at least $200 million of vacant land and new or existing investor-owned buildings have hit the foreclosure rolls during 2009.

In contrast, for all 2008, only four foreclosed properties, commercial and residential, valued at $3 million or more were sold at auction. A year later, that number will probably reach 24 — six times last year’s total, said El Paso County Public Trustee Tom Mowle. And most of those properties fall into the commercial real estate category.

Local investors tested

Distressed commercial real estate covers a broad swath of El Paso County, but some ownership groups and their partners have been harder hit than others.

The Morley Cos. control at least $80 million of commercially zoned property west of North Powers Boulevard between Barnes Road and North Carefree Circle.

Asked about his half a dozen or more pending notices of election and demand, the first step in a three-part foreclosure process, President Jim Morley said he is in workout discussions with his lenders and that a renegotiated deal is in the works.

At the same time, other lenders have approached him to take over their REOs, or real estate owned properties.

“It’s almost humorous. I’ve had the opportunity to take over three projects at two banks from two other developers,” he said. “At one bank I’m a villain and at the next, I wear a white hat.”

Morley said the climate is like that during the Resolution Trust Corp. days of the late 1980s and early 1990s, when properties were shuttled from one developer to another. “Everyone — (Steve) Schuck, Martin List, (John) Olive — they all ended up with each others’ properties.”

For now, Morley is hunkering down, relying on himself and his only remaining employee to handle the paperwork and phone time involved in working out new payback arrangements on existing real estate obligations.

“We’re trying to position ourselves for the next move,” he said, adding that he might not be able to save all 36 commercial properties. Most are already in one phase of foreclosure or another.

The notice of election and demand signals a 120-day period during which a property owner can “cure” the foreclosure by paying the default balance (plus interest and fees), refinance, restructure or otherwise modify loan provisions with a lien holder prior to a sale.

In some cases, a lender will renegotiate terms or interest rates with an owner/developer, and the property will be withdrawn from foreclosure. But when the parties cannot work out satisfactory arrangements, the property is sold at auction.

Of course, Morley Cos., while one of the largest holders of commercial property in foreclosure, is not the only investor fighting to remain intact.

Others have been trying to work with lenders and investors on extended loan terms or interest rates.

Sunshine Development President Jannie Richardson is developing Colorado Crossing, a 1.6 million-square-foot mixed-use development at Interquest Parkway and Federal Drive. None of the property has entered foreclosure, although the project has faced a number of financial hurdles, including much-publicized contractor work stoppages and mechanic’s liens.

Such stories are not unexpected, Mowle said, especially given national economic trends. But the Pikes Peak region, until recently, had seen very few notices of election and demand issued to commercial owners.

At this year’s December auction, for example, Mowle estimated that about $25 million of commercial property will go out for bid — likely fetching only 40 percent to 50 percent of its value during 2006-07, the height of the economic boom.

The properties will probably end up selling for about $10 million, he said.

In some cases, commercial lenders — like residential mortgage companies — will agree to work with an owner and the property will be withdrawn. Others will find a way to “cure” what’s owed — but that only happens about 2 percent to 3 percent of the time.

Of all properties that do go to auction, only about 15 percent are purchased by new buyers. Most revert to the lender.

Challenges to come

Small developers and commercial real estate owners who have escaped an NED so far might still be fighting the growing foreclosure trend, Mowle said.

Reasons vary. Some owners got attractive short-term financing, and the time has come to secure permanent loans.

In the current environment, with increased tenant vacancies, declining rent rolls and lower appraised valuations, however, the same investors simply can’t afford to refinance or even to sell at a loss, Mowle said.

“For them, unfortunately, the result is often foreclosure,” he said. “Last year at this time, we had … fewer than a dozen or so commercial properties (in foreclosure). In 2009, the first three pages of our highest-valuation properties are all commercial.”

As he scrolled through an online list of properties, Mowle pointed out that the first three pages, in descending order, are valued from $29 million to about $3 million.

And those values might be slipping by as much as 20 percent to 30 percent, or more, as the recession takes it toll.

“This is significant,” he said, “Maybe six months or a year ago, if we had 25 pages of properties in foreclosure, most were residential — and values were almost all $1 million and under.”