Just as the residential real estate collapse was one of the leading causes of the recession, a commercial real estate storm is taking aim on our recovery efforts. Due to the short-term nature of commercial real estate financing, $1.4 trillion in commercial loans will come due between 2010 and 2014. According to the Congressional Oversight Panel monitoring this situation, $270 billion needs to be refinanced in 2010 alone. Of this figure, nearly half of the buildings involved are under water, as commercial real estate values have fallen nearly 40 percent. Tight credit markets, increased vacancy, and declining property values will force many large commercial properties into default; others will change hands altogether.

With considerably higher equity requirements to purchase a building than in previous years, many commercial real estate investors are still on the sidelines. Historically, 80 to 90 percent of a building could be financed; today that number has dropped to 50 to 65 percent, requiring prospective owners to provide substantially more capital. The majority of completed transactions tend to be very high quality assets in major cities purchased by cash-flush real estate investment trusts and other institutional investors that aren’t as dependent on debt financing. For assets that don’t fit these criteria — including those already in default or where default is imminent — there are interested investors. However, there’s a significant pricing gap between the buyers and sellers.

The banking industry’s approach to these assets is to minimize any losses. Some of the options in a bank’s toolkit include loan sales, authorized short sales, foreclosures, or debt restructuring. Unless building owners can show a viable business plan as well as infuse capital into their buildings, banks will likely not provide further funding, as the risk appears too high and the other alternatives appear more viable. Oftentimes, the tenant improvements necessary to attract key clientele are at stake.

What does all this mean for users of space and the marketplace? Tenants who are able to make longer-term commitments and work together with lenders and landlords will fare best and avoid problems. Even if you have significant time left on your lease, renegotiating can be a win-win for all parties involved. Purchasing your building may even be a feasible strategy.

Finally, performing due diligence on the building’s financial situation, reviewing lease documents, and memorializing agreements are more important than ever to protect the rights of your organization, especially as lenders and landlords begin to change. The party sitting across the table in the future may not have the same operating strategy and will only have the in-force lease as a starting point to the relationship.

Plante Moran CRESA understands the dynamics involved and has successfully worked with all parties to properly structure transactions that are in line with the new commercial real estate landscape.