The amount of commercial real estate debt in distress is huge:
- delinquent unpaid balances on CMBS loans exceeding $62 billion (October 2010), and heading toward $70-$80 billion by year end ’10 (per Realpoint)
- delinquency ratio of 8.04% (September, 2010) (per Realpoint)
- Fitch predicts special servicing volume of @ $110 billion of CMBS loans by the end of 2010
- @ 3,000 banks and savings institutions have more than 300% of their risk based capital in commercial real estate loans (per JLL)
Late in the good economy, "green buildings" became a new distinctive for the newest construction.
This is the "technology-smart" building – designed, built and operated to be environmentally friendly for all of us, and resource efficient and healthier for the occupants. And the rent is a little higher. A good thing. Unless the tenant moves out or goes bankrupt.
Combining the large number of distressed investments with the green building concept:
- What does a "green building" mean for real estate lenders dealing with distressed debt? How much extra trouble is a green building?
A green building is an operational and legal disaster in the making for a foreclosing lender.
I brought this concern and my questions to Bill Weinberg, a friend and partner at my law firm. As you’ll read in his answers to my questions, it depends on the nature of the collateral, where it is located, and what the lender intends to do with it. But since Bill is the expert . . . .
Keith: "first, Bill, thanks for that tip about adding this topic to my ‘watch list’ on distressed debt, and for alerting me on changes in local building codes that come into play on a construction loan – I actually blogged on it . . . over a year ago."
Bill Weinberg: "yeah, but you forgot to mention me in that blog . . . should I say ‘thanks?’"
Keith: "well the bet at the firm was that I wouldn’t still be blogging. . . so here’s your opportunity to see your name a bunch of times out there in the vastness of the internet . . . "
Bill Weinberg: "you need my help . . . remember, your distressed debt decision tree list after ACMA did NOT even mention this topic"
Keith: "guilty . . . bad oversight . . . this is a topic begging for trouble. . . Question #1: What is the first question, or step that needs to be taken?"
Bill Weinberg: "let me make this simple for you . . . and I know that you like bullet points –
- What is the nature of the collateral?
- Is it raw land, an occupied building, or something else like a half-finished building?
- If the collateral is raw land, it is fairly safe to say that there is no green building issue.
- First of all, there is no building.
- Secondly, the lender will probably be long gone before anyone lifts a shovel to start work on a building.
- BUT: you still need to get that environmental study BEFORE you take possession or take title
- If the collateral is improved . . .
- and an occupied building, the lender may have to maintain it appropriately
- or is a half-fished building, the lender may have to build it appropriately
- either way, you’ll still need to get that environmental study BEFORE you take possession or take title
Keith: " love how you talk in bullets . . . let’s just assume that you’ve taken possession or obtained title . . . . foreclosure or a deed in lieu . . . . Question #2: what’s next on the list?
Bill Weinberg: "you’re the dog that just caught the car – so:
- Do you know how to operate and maintain the green building features?
- A green building may contain some high-tech features with which the typical maintenance or janitorial crew may not be familiar.
- Do you know how to operate the solar panels or the rain water re-use system?
- How about the geothermal heating and cooling system?
- Does the janitorial staff know how to clean a waterless urinal?
- Do you have the warranties for the specialized fixtures and equipment?
- Don’t lose the value of the innovative features by neglecting to seek expert assistance.
If you have any comments, questions or war stories, please comment below.
More from Bill Weinberg shortly . . . .