CLIENT ALERT: BEWARE -- LANDLORDS FACE A $1.5 TRILLION COMMERCIAL REAL ESTATE MATURITY WALL

by Tripp Scott's Charles M. Tatelbaum and Corey D. Cohen

As recently reported by the American Bankruptcy Institute, the preeminent nonpartisan think tank on bankruptcy and insolvency issues, landlords for offices, apartment complexes and other commercial real estate (including retail stand-alone and shopping centers) have $1.5 trillion of debt due by the end of next year. About a quarter of that borrowing could be hard to refinance, according to Jones Lang LaSalle Inc., as reported by Bloomberg News. The value of buildings has broadly decreased  after higher interest rates increased  funding costs for property owners. These lower valuations will make it make it significantly harder for landlords to borrow as much, forcing many property owners to raise equity capital to secure new debt or extend their existing facilities. Alternatively, if such new capital or new debt is unavailable, or the existing loan cannot be extended, a tsunami of foreclosures and possible bankruptcy proceedings may follow.

Apartment buildings, which make up about 40% of the looming maturities, are at the center of the refinancing wave, according to the broker. Many U.S. owners of  multifamily assets  bought their properties using three-year floating rate loans during the easy money era. Interest rate increases since then have consumed  much of their rental income, making it challenging  to secure additional equity. Rising insurance costs and falling values have added to the pain, leaving about $95 billion of U.S. properties in distress or at risk of becoming so, according to data compiled by MSCI Real Assets.

This can have a cascading or domino effect on many others besides the mortgage lenders. For landlords that obtained secondary or bridge loans,  the declining value of the real estate places those loans,  many of which have been syndicated, in  total jeopardy. Tenants, while having lease rights protected even in the event of a bankruptcy or foreclosure, may find reduced services being provided by the cash-strapped landlord, a lender forced to take over the property, or a distressed value purchaser seeking to maximize profits.

Furthermore, creditors of the landlord that provide goods and services to the landlord can be in jeopardy, as their outstanding receivables may become uncollectible, and long-term supply and service contracts might be rejected.

It is important for all businesses and individuals currently dealing directly and indirectly with potentially distressed landlords in need of refinancing to take appropriate legal precautions now, in advance of the looming problems, in order to protect their rights and remedies. The Tripp Scott creditors’ rights and bankruptcy practice group is poised and ready to assist clients and friends should the need arise.