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Foreclosure forbearance: with as much as $100 billion in multifamily housing mortgages facing refinancing during the next two years, owners and investors must position themselves wisely.

The volume of mortgage loans secured by multifamily housing assets that will be maturing in the next 24 months is leaving many owners and lenders feeling anxious.

The Mortgage Bankers Association recently reported that $171 billion of multifamily and commercial mortgages (one-tenth of the outstanding balance) that are held by non-bank lenders and investors will mature in 2009. The National Multi Housing Council reports that during the next two years, an estimated $80 billion to $100 billion in multifamily housing mortgages will mature and will need to be refinanced.

However, with the credit markets remaining essentially collapsed, even apartment owners who are meeting their financial obligations but whose mortgages mature in 2009 and 2010 will face difficulties. Depending on how their existing lenders respond, these apartment owners may be forced into foreclosure. Finally and most recently, The Wall Street Journal reported that approximately two-thirds of the securitized loans maturing by 2012 (approximately $154.5 billion in loans) will not qualify for refinancing because property values have significantly depreciated. The loan proceeds necessary to effectuate a refinancing will exceed the maximum loan-to-value ratios required under today's stringent underwriting standards.

Multifamily housing owners and investors should plan for the maturity of their mortgage loans, even in the absence of any foreseeable capital markets activity enabling them to refinance. To do so, here are things to consider:

* Start by analyzing whether to hold on to, bail out of or attempt to reorganize the community before loan maturity. If a workout approach makes sense, evaluate what is in it for both the borrower and the lender. In today's market, financial institutions are facing acute financial pressure, particularly where they hold a significant number of "toxic assets" on their books. Few lenders have any interest in taking properties back and worsening their balance sheets with real estate assets--lenders are in the business to lend dollars and not own real estate. This is especially true where the loans secured by these properties in question are otherwise performing.

As a consequence, many lenders have the incentive to work with borrowers to address their maturing loans without resorting to foreclosures. These lenders also often have the latitude to extend maturing loans and to use other tools at their disposal in developing creative approaches to assist borrowers facing these circumstances, such as the ability to modify interest rates and adjust amortization schedules. In light of these factors, borrowers should assess what is needed from their perspective to try to make their properties work. What type of modifications to the economic terms of the loan would allow the property to get back on track? What upside will flow to the lender to support a workout approach? What does the borrower need (such as retention of management fees from the property) to stay engaged in working through the property's issues and not just hand the keys back to the lender? In one recent loan workout transaction, the lender agreed to extend the maturity date of the loan for five years in exchange for an additional credit enhancement from the borrower in the form of a recourse guaranty of interest payments due on the loan.

* Another critical factor to consider is the financial condition of the lender. If the lender is facing financial difficulties, it may prove productive to approach the lender for a loan workout, even if the community's circumstances appear particularly bleak. Troubled lenders in some cases have agreed to extend the maturity date of a loan and otherwise modify the loan's economic terms (including leaving the loan as interest-only rather than amortizing) to avoid the loan going into default. Some lenders may agree to sell to their borrowers both performing and non-performing loans at significant discounts to help lenders raise the cash they might desperately need.

* Carefully review the loan documents before taking any action--in particular, any voluntary bankruptcy filing to reorganize the community's debts. Many of the loan documents signed in recent years contain "full" springing recourse provisions triggering material liability under a wide variety of circumstances. Typically, upon a voluntary bankruptcy filing, guarantors of the loan become personally liable for the repayment of the entire outstanding balance of the loan (including interest, fees and collection costs).

* Communicate early and often with the lender. In particular and if possible, initiate discussions with the lender before the community faces grave circumstances. Although it may feel more comfortable for owners to bury their heads in the sand, most lenders will be appreciative if the borrowers initiate discussions in forthcoming ways about the community's economic circumstances. Furthermore, this approach likely will preserve an owner's credibility with the lender--and the more credibility the owner has, the better.

* Be careful about exhausting resources by investing additional cash in a deal, such as to make debt service payments or to curtail the principal amount of the loan. Before depleting any resources, first develop a comprehensive and workable restructuring plan with the lender that allows the owner to put the community back on track and retain it in the long term. Where possible, borrowers should keep cash resources available and use them only strategically and as needed as bargaining chips to achieve satisfactory loan restructuring terms with their lenders.



These times are certainly among the most challenging and stressful many real estate professionals have experienced during their careers. Those who stay focused on the horizon and proactively manage loans that will be maturing in the near term have a better chance to emerge from the darkness with their multifamily housing portfolios relatively intact.

Pamela V. Rothenberg is Managing Member of the Washington, D. C., office of Womble Carlyle Sandridge & Rice. She is also a member of the firm's real estate development practice group where she leads the firm's multifamily real estate industry team. She can be reached at
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Author:Rothenberg, Pamela V.
Date:May 1, 2009
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