REPOSTED FROM MOVETOBEND.COM> You have to love that phrase. Unfortunately, when it comes to the commercial real estate market, it might be more descriptive that we’d like to hear. We’ve been predicting a rocky road for commercial buildings for quite some time.

“Huge commercial real estate lender may file bankruptcy, heightens meltdown fears”

As more businesses struggle in this economy, it certainly affects their ability to pay what is often their largest expense, rent.  We know several local landlords that have had to forgive rent, lower rent, and still lose tenants. And, when you’re dealing with commercial buildings, their value is all based on the rents they generate.

That loss in value is never good, but it is certainly worse for those that borrowed the money for their building. It affects “the ratio”, or the amount of debt on your property in relation to what it is worth. In the past, this wasn’t as big a problem. You could know that your property was worth less than you owed on it, but that fact was not something the bank wanted to think too much about. Today, with the FDIC making frequent visits to banks, auditing their files and checking their loans, bankers are much more keen to watch these ratios.

So how do you get your “ratio” back in compliance? Simple…the bank calls you up and asks you to write them a check in order to make up the lost value. Ouch! And in the recent real estate market, depending on when you bought or built your building, that check could be a whopper.

So now, your building is costing you more than it’s making you every month, its value is decreasing and picking up speed, and to top it off, the bank wants a huge check.  Some borrowers are saying to heck with this, stopping their payments, and now their banks gets to hire expensive attorneys to go through the foreclosure process so that they can take possession of an almost vacant building which they essentially paid well over market prices for.

You can’t run through that scenario too many times and still call yourself a business. Don’t believe me? Ask Capmark.