October 24, 2023
By: Adam F. Zweifler
My practice focuses on commercial real estate finance and working with lenders financing commercial real estate projects throughout the United States. A highlight of my professional calendar is the annual meeting of the American College of Mortgage Attorneys (ACMA), where real estate finance professionals gather for discussions, formal and informal, regarding the state of the industry and recent developments. Following is a list of my key takeaways from this year’s meeting which was held at the end of September:
The State of Lending Today
As usual, the ACMA meeting was attended by mortgage finance attorneys from across the country, all who have seen different impacts from recent changes in the marketplace. However, some themes did emerge.
- Lenders and borrowers are stuck in a holding pattern – originations and enforcement actions are both limited at the moment. The factors that appear to have the most effect on deal volume are elevated interest rates, tightened credit standards at institutions and a continuing gap between bid and ask that is reducing the number of purchases and sales.
- Lenders are starting to see more distressed properties in their portfolios, particularly from maturing loans that don’t qualify for refinancing in the current market. However, there has not been a big wave of enforcement actions. Many lenders would still prefer to give borrowers time to find a solution other than enforcement.
- In recognition of the elevated number of borrower requests for modifications and accommodations, one formal discussion at the conference covered the efforts underway to draft a uniform law on mortgage modifications. While still in its early stages, once adopted by states, the uniform law should provide lenders with simplified rules and greater clarity as to what modifications they can make in an instrument that does not need to be recorded.
- Some participants at the conference expressed an expectation that continued elevated rates will lead to an increase in defaults next year, as 2024 and 2025 are anticipated to be big years for loan maturities.
Loan Enforcement and Alternatives
Given that the number of distressed properties appears to be growing, it’s not surprising that there was discussion of loan enforcement and alternatives to traditional structures and remedies.
- In states where the Uniform Commercial Real Estate Receivers Act (UCRERA) has been adopted (such as Connecticut and 11 other states), lenders may be able to speed up the enforcement process by utilizing the new authority for sale by a receiver. A receiver’s sale can save time and money in realizing on the collateral, or at least converting a troubled asset to cash that is available to satisfy the loan. One advantage of this mechanism is that the sale will be free of junior liens, whereas another common alternative to foreclosure, a deed in lieu, does not address junior liens. You can read more about this in the firm’s news alert on the UCRERA.
- Dual collateral loans, sometimes referred to as an accommodation pledge, where the lender takes a mortgage of the real estate and a Uniform Commercial Code (UCC) interest in the ownership interests in the borrower, have been getting more interest due to the potential for an accelerated enforcement timeline. Dual collateral loans allow the lender the option of enforcing by way of a UCC foreclosure, which is likely to be quicker than a real estate foreclosure in states that do not have non-judicial foreclosure. Some disadvantages are increased closing costs and the fact that, upon foreclosure, the lender becomes the owner of the entity that owns the property. Therefore, if the property owner has other creditors, or if there are junior liens, a UCC foreclosure will not eliminate the claims the same way a real estate foreclosure would.
Increased Interest in Alternative Sources of Funds
Given the challenges of obtaining institutional financing right now, there was some discussion of alternate sources of capital. Two that were discussed were the sale-lease back and EB-5 Financing.
- Sale-leasebacks can be a viable option for an owner-occupied property that generates cash from an operating business. Besides being available from some private lenders, the sale-lease back may allow the borrower to realize more proceeds at closing. However, the pricing may be higher. In addition, in the case of a default, the borrower will generally have fewer legal protections as a tenant than they do as a mortgagor.
- EB-5 loans take advantage of a federal program (EB-5 refers to the “Employment Based Fifth Preference Visa”) that grants a preference in the green card (U.S. residency) process for foreign nationals who invest at least $1,050,000 in a U.S. company where the company uses the investment to create at least ten permanent jobs. In some instances, foreign nationals are pooling their investments to create sizable loan facilities. As the primary interest of the investors is obtaining a green card or U.S residency, rather than a return on investment, the lenders may accept a lower return than other market participants, however, the costs of setting up the loan vehicle and working through the qualification process can be high. As a result, the overall cost of funds can end up being in line with funds from other sources. In addition, EB-5 loans are not suitable for all property types because of the requirement that the investment create permanent jobs. Many EB-5 loans end up financing hotel properties. In some instances, it is possible that the employees of tenants can count towards meeting the job requirement as well.
Overall, participants seem to sense that we are at a turning point in the market, and it will be interesting to see the coming year unfold.
If you have any questions or would like more information about any of the topics covered at the ACMA meeting, please contact me at azweifler@murthalaw.com or 860.240.6097.
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