The Riches Back To Rags Story Of Today\’s Retail Property Owner. \”The Unpleasant Options\”\” Part 2.

The Riches back to rags story of today\’s
retail property owner
“The Unpleasant Options” Part 2.

{3 minutes to read} 

• Sam Liebman
• December 11, 2021

Part 1 of this article described in detail the dire financial trouble facing retail property owners because of the pandemic and other related factors. Many retail property owners have lost part or all of their capital investment but need to continue investing additional funds for operating shortfalls and debt service knowing these funds will never be recouped.

 

How long can they keep throwing good money after bad? Why would a property owner want to hold onto the property as their obligations keep piling up while property values continue to sink? 

Retail property owners desperately want to stop the bleeding but are left with only a few unpleasant options. In my opinion these unpleasant options will translate into an avalanche of lender foreclosures that will present tremendous opportunities for new purchasers to acquire these properties at bargain basement prices. The best time to buy real estate is when nobody wants it and currently nobody wants retail properties.

How Do To Stop the Bleeding

1. Sell the property at a substantial loss, stop the bleeding and move on with life. A good option especially if the net sale proceeds can repay the mortgage and closing costs irrespective of whether funds will be available for the owners.
2. Continue funding shortfalls while trying to lease the vacancies at reduced rents but also needing to fund for brokerage fees, TI, free rent periods, etc. A cost benefit analysis will be needed to determine the properties potential verses the revised decrease in net cash flow, property value and additional capital needed.
3. Refinance the mortgage even it means an additional capital investment and providing a personal guarantee. Why keep throwing good money after bad and increase your personal liability?
4. Try and make a deal with the lender for a lower interest rate, amortization period and/or a forgiveness of a large portion of the debt. Your credit rating will be affected but financially it could lead to a favorable restructuring. A successful forgiveness of the debt will depend on each lenders financial situation, policies, etc.
5. Try and convert the property to a different use such as for residential housing. This is a viable option but will be dependent upon the permitted zoning regulations for the property.
6. File for bankruptcy protection. Filing bankruptcy is expensive. Bankruptcy protection is viable if an owner needs time to make a plan to reorganize their finances. However, many owners are in positions where no viable reorganization is possible and use bankruptcy as a tactic to pressure the lender to renegotiate and forgive a large portion of the debt. Sometimes this tactic is successful and sometimes it’s not.
7. Give the property back to the bank; accept the loss of their entire investment, as well as any loans made but stopping the bleeding. If the mortgage is non-recourse the only rational choice is to give the property back to the bank and move on. If a personal guarantee is involved then this option becomes more complicated. The bank can go after the owners personal assets for any monetary deficiencies.

 

Most mortgages on retail properties require a full or partial personal guarantee. Additionally, many retail property owners own more than one property. Can you imagine if these owners had 5 or more other properties in the same situation with personal guarantees? Not only would the owners credit rating be ruined but a foreclosure my force the owners to file personal bankruptcy as well.

Please read Part 3 – Will Opportunity be Knocking on your Door?

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Sam Liebman is founder and CEO of WealthWay Equity Group LLC, a New  York-based private equity and real estate development company. He has owned substantial interests in over 70 properties during the past 30 years, ranging from multifamily communities, office buildings and shopping centers, to the ground up construction of a luxury 21-story condominium development in Manhattan. He is also CEO of Rolling Cash Realty, Inc., a real estate management company, as well as a partner in Tepper & Co., a certified public accounting firm. His new book is Harvard Can’t Teach What You Learn from the Streets: The Street Success Guide to Building Wealth through Multi-Family Real Estate (Made for Success Publishing, Jan. 11, 2022). Learn more at samliebman.com.