Commercial landlords have faced numerous challenges in recent months.
In addition to the drastic decline in rent rates at high-end shopping centers, landlords face clashes with tenants over unpaid rent payments, tenants vacating leased spaces, and available spaces sitting empty as fewer businesses move forward with new lease agreements.
Now experts are predicting imminent commercial property foreclosures that could have a major impact on commercial landlords – meaning landlords now have to deal with commercial lease disputes, too.
Anticipated Commercial Property Foreclosures
According to a recent Houston Chroniclearticle, commercial property foreclosures are expected to rise. These commercial foreclosures are largely linked to the massive hit taken by restaurants, bars, retailers, and hotels back in March (and there forward) when the pandemic resulted in government-mandated business closures.
These closures left many commercial property owners and landlords unable to make mortgage payments due to the reduction of business.
Commercial foreclosures happen after a borrower defaults on their mortgage. This occurs once the borrower – in this case the commercial property owner or landlord – falls behind in mortgage payments or fails to take actions required by loan documents (like maintaining insurance on the property).
Under a typical loan agreement, following a default by the borrower, the lender may accelerate the outstanding balance on the property loan. The lender must initially send a breach letter to the borrower outlining the reason for the default while also providing a timeframe within which the borrower may resolve the default and avoid acceleration.
Once this time period ends, however, if the borrower has not resolved the default, then the lender can begin foreclosure proceedings.
Borrowers with loans due in 2021 or prior have stopped making payments at a rate six times greater than those who have loans coming due at later dates.
This suggests that borrowers believe they will be unable to find financing to keep their buildings once their current loan expires; therefore, they are ultimately choosing to cut their losses by defaulting sooner rather than later.
Although data suggests smaller commercial property owners have been more directly impacted, as loans with balances under $1 million have a delinquency rate twice the overall portfolio, large commercial property owners are deciding to cut their losses more aggressively as well.
According to a Mortgage Bankers Association survey, lodging and retail industries have been the hardest hit, with roughly a quarter of loans backing lodging properties, like hotels, delinquent.
Additionally, delinquencies on mortgages for retail properties increased in August of this year, with 15% of loan balances delinquent for the month of August when compared to 14% for July.
Potential Challenges for Landlords and Commercial Property Owners
With this in mind, there are now many more challenges facing commercial property owners and landlords unable to make mortgage payments, as some mortgages are maturing during the current pandemic recession.
The inability to make timely mortgage payments goes hand-in-hand with what landlords have been experiencing for months now, with tenants unable or unwilling to pay rent. As tenants are finding commercial rent harder to pay with fewer people eating out or shopping at brick-and-mortar stores, many landlords have since seen their revenues collapse.
There are signs that borrowers with larger loans about to mature do not believe they can secure an extension or refinance.
For instance, loans of over $25 million comprise 36% of real estate debt maturing by the end of 2021. These loans also account for 57% of the delinquent balance. With no bank loans maturing after 2021 – or when the market is expected to begin recovering – this only adds to the delinquent balance.
Assisting Houston Area Commercial Landlords
The ongoing concerns surrounding landlords across the nation keep compounding.
As many commercial tenants and even large brand names continue to attempt to freeze, delay, or not pay rent at all, landlords continue to suffer, as many are now unable to make mortgage payments.
At Raizner Slania, we understand the frustrating complexities commercial landlords are facing in Houston, across Texas, and around the country. If a commercial tenant owes you unpaid or delayed rent, contact the attorneys at Raizner Law today to see how we can best assist you.