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Property Owners' Predicament
Investors Face Struggle to Refinance Loans for Local Commercial Real Estate

By Dana Hedgpeth and Dan Keating
Washington Post Staff Writers
Thursday, January 29, 2009

A third of the loans used to finance Washington area commercial buildings and then sold to Wall Street are coming due in the next five years, leaving investors scrambling to find new funding.

Many owners of office towers, hotels, shopping malls and apartment buildings relied on interest-only loans and planned to refinance them when they came due. That's become increasingly difficult to do in the almost completely frozen credit markets.

If owners can't refinance their loans, they could be forced to sell at a time when their properties are worth less. They could lose money and be forced to lay off workers.

About $21 billion of these loans must be refinanced by the end of 2013, according to data from Real Capital Analytics, a real estate research firm in New York that tracks 4,284 commercial loans.

"Getting money these days is like pulling an elephant through a key hole," Shelton Zuckerman, a longtime D.C. area developer, said about the credit markets in general. He said banks aren't willing to lend as much and are requiring owners to put up more cash and make personal guarantees.

While Real Capital's research doesn't show whether a loan has been refinanced or whether the property has changed hands, experts say such situations represent at most a fifth of the database and don't necessarily eliminate the owner's need for financing.

One of the biggest concerns is that some of these deals were underwritten on very rosy scenarios that assumed strong demand and rising rents for space. In a shaky economy that isn't happening, so lenders have become wary.

Take the Greenbriar Town Center in Fairfax. The mall, whose tenants include a Giant grocery store, Petco and Marshalls, has a $73 million loan that comes due in July 2010. The mall's owners typically wouldn't even start trying to find a new loan until six months before it matures, said Michael Mas, an executive with Regency Centers of Jacksonville, Fla., which owns the mall with partners. But with the uncertainty in the market, he is already talking to lenders about refinancing the mortgage and another $1.7 billion of loans that also come due in the next four years.

Two years ago, Mas said, he would have likely received 25 offers to refinance. Now he's lucky to find a handful of potential interested lenders.

Is he worried?

"That's a bit strong," he said, "but it is certainly at the top of everyone's mind."

Losing any sleep?

"Not yet," Mas said. "But we're actively trying to gauge where the market is." He said he doesn't know when the market will come back, "so we're erring on the side of caution. I want my product to be the first on lenders' minds."

The value of commercial real estate mortgages in the last decade has nearly tripled nationwide, growing from about $1.2 trillion to more than $3.4 trillion, according to the Real Estate Roundtable, an industry trade group.

The bulk of the growth has been driven by the rising popularity of commercial mortgage-backed securities, made up of loans that are packaged and sold to investors. Most such loans are for five to 10 years, so many that were originated between 2005 and 2007 -- the boom years of the real estate industry when interest rates were low, money was cheap and investors plentiful -- mature soon.

Real Capital Analytics has tracked 66,599 of these loans, totaling about $661 billion, that are coming due as early as this year on properties across the United States, using information from filings with the Securities and Exchange Commission. The loans have fixed interest rates, and the majority are interest-only. In many cases, lenders -- including Lehman Brothers, Wachovia and Bank of America -- made aggressive loans, requiring owners to put down less than 20 percent. The loans were packaged and then sold on Wall Street to insurance companies, pension funds and other institutional investors.

A Washington Post analysis looked at more than 4,280 loans in the Real Capital database, worth an estimated $61.2 billion, for offices, apartments, malls, warehouses and hotels in Virginia, Maryland and the District. The amount of repackaged commercial mortgages grew astronomically since 2000, going from $1.5 billion issued in 2001 to $16.3 billion in 2007. Then the markets collapsed.

In Virginia, nearly a third of such mortgages, worth $30 billion, come due in the next five years. In Maryland, nearly 40 percent of the $20 billion in commercial mortgages mature in that period. In the District, a third of $10.5 billion in loans comes due.

Several prominent office buildings have loans that were packaged into commercial mortgage-backed securities, including the two glass-clad, 31-story structures in Rosslyn known as the Twin Towers, which once housed USA Today and its parent company, Gannett. When Monday Properties of New York bought the towers two years ago, it took out a $567 million loan from Lehman Brothers on the properties and another nearby building. The owners, which have another $85.4 million in such loans on two other office buildings on Wilson Boulevard in Rosslyn, say they are not worried about refinancing because the loan doesn't come due until 2017.

In Largo, the Boulevard at the Capital Centre, a large shopping center with a Borders bookstore, movie theater, Sports Authority and Office Depot as major tenants, has a $72 million, five-year loan that comes due in October. The mall's owner, an Oak Brook, Ill., real estate investment trust called Inland Western, said it is "in discussions with lenders."

Hans Weger, chief financial officer of LaSalle Hotel Properties in Bethesda, said his company has about $100 million of these loans maturing in the next three years on hotels across the country, including $31 million due this September on the 246-room Hilton Old Town on King Street in Alexandria.

But with the market for commercial mortgage-backed securities practically frozen, he plans to use a $200 million line of credit to pay down the loans. "It's like paying for your house on your credit card," he said.

That's what some developers have nearly been forced to do.

Bill Asbill, who specializes in financing real estate deals at Holliday Fenoglio Fowler, said a bank recently required the owner of a suburban Maryland office building to put up a personal guarantee on a $7.2 million loan. That's usually a sign a lender is approaching a loan with trepidation, but Asbill said in this case it appeared that the bank was betting on a pretty solid deal. It was making a loan for only half of the building's value. The property is fully leased with government contractors, which are generally considered stable tenants.

"It shows how much the market has changed," Asbill said. "A year and a half ago you could have done that loan with no guarantee. Now virtually all the banks want some guarantee so if the tenants go, they want to make sure they get paid."

Delinquencies on large loans of this type are already rising. Fitch Ratings said recently that the delinquency rate on larger loans it watches grew to 0.9 percent, and it expects that to reach about 2 percent by year-end.

David Iannarone, managing director of CWCapital Asset Management of the District -- a company that's called a special servicer and comes in when a borrower is having trouble -- said his business has increased.

In spring 2007, when building prices were high and money was easy to get, CWCapital was dealing with less than $700 million in problem commercial loans. Now they are working on more than $3.5 billion worth of troubled properties nationally. In the Washington region, the company has two troubled loans -- worth $58 million -- it is working through, on an office building along the Interstate 270 corridor, and a retail and office project in Southeast .

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