At the Commercial Investing Center, we keep an eye on the possibilities inherent in commercial real estate though, outside of mobile home parks and self storage properties, we’re not too excited about the industry’s current state. Not so long ago, commercial investments were flying high on golden wings but present circumstances have brought the goose crashing to the ground. During the free and easy credit time of the 2000’s, traditional lenders commonly offered a 65% loan to value ratio, which means that if you owned a $100 million property, you could get a $65 million loan on it.
But then private equity firms and hedge funds wanted in on the action and began offering an 80% loan to value ration. Many commercial real estate owners decided to take advantage of this new development, especially in light of the extra $15 million that would find its way into their pockets. The problem was that the loans needed to be refinanced in five years, a requirement that didn’t seem onerous in the least in those heady days.
Fast forward to 2008 and the economic Armageddon that makes it seem like we’re not even on the same planet any more. Many of the hedge funds and private equity firms no longer exist but the loans still need to be refinanced. Problem number one is that many properties have lost value, some as much as 20% or more, which means your property that your property formerly valued at $100 million might only be worth $80 million today. Add to that the fact that you’re going to have to go with a traditional lender (because the others are dust in the wind), who will likely only offer the standard 65% loan to property value ratio, and you’ve got some cash flow troubles – maybe even a pending bankruptcy.
This is not to say that the fundamentals of commercial real estate are bad. Everything else – good tenants, cash flow, great building – might be in place but the present economic circumstances could ruin you financially and that’s why we’re still leery about recommending a return to buying commercial real estate just yet.
But stay tuned. Lending circumstances can and will eventually change.
The Commercial Investing Center Team
Flickr / Mykl Roventine