By Bill Shippen
Apartment Realty Advisors, Atlanta
shippen@arausa.com

Bargaining
It is two years into the loan term; with the Interest-Only Period now over, the community’s cash flow is negative $25,000 a month and is worsening. The concessions given earlier have now turned into delinquency and the income continues to fall. If only the lender could cut John a break on his loan. Maybe drop his rate, go back to IO or the “holy grail” of loan modifications- the UPB reduction. If they would only do this, the deal would be solvent and he would be back on his feet with a fighting chance.

Depression
It is already 30 months into the deal. The investors refused a third capital call. The lender has been unresponsive to John’s overtures for a loan modification. The property has been capital-starved for months now and much of the $10,000/unit renovations have worn off due to the low quality of tenants. Turns are almost impossible to do with any semblance of professionalism. He has resorted “As Is” leasing, knowing that this is the beginning of the end and reluctant to keep fighting to keep the property above water.

Acceptance
36 Months in. Occupancy is down to 70%. The good tenants have moved out because of the poor tenant profile on the property. John realizes that all of his equity is out of the deal with very little chance of ever recovering it even if the lender reduces his UPB by 30%. Cap rates have increased 60% since his purchase and his NOI is down 15% from purchase. Even with the reduced UPB to get out even, he will have to increase his NOI by over 40%. It is not likely given everything else that is going on in the economy. A neighboring property was just sold as REO for half of his basis anyway. Maybe having one foreclosure on his record won’t be too bad. Besides, he has those other six deals in Michigan to worry about.

Moral of the story? Not sure there is one for John Value-Add but lenders should catch these borrowers earlier rather than later. Unfortunately for many lenders, the borrower stays in the Denial stage too long and by the time he reaches out to the lender, the deal is already long gone.