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San Diego
Thursday, May 30, 2024

Coastal Counties Keep Commercial Property Loan Distress at Bay

Experts in the receivership arena say San Diego County continues to hold up relatively well compared with other regions when it comes to commercial property loan distress, though they will be monitoring what happens in the next five years as loans come due.

Gordon Gerson, a partner in the San Diego-based Gerson Law Firm APC, notes that California’s coastal counties, including San Diego, are generally seeing fewer commercial loan delinquencies than inland counties. That’s in part because employment gains in coastal areas have recently been outpacing those of communities to the east.

While no region is unscathed, job growth generally helps raise demand for building space, which in turn helps keep building owners out of financial trouble.

“We are in a market climate where we no longer talk about Northern California and Southern California,” Gerson said. “Now it’s Western California and Eastern California.”

The research firm Trepp LLC reports that 7.9 percent of loans on large San Diego County commercial properties were at least 30 days delinquent at the midpoint of 2011. That was below the national rate of 9.3 percent.

Decline in Delinquency Balances

The total balance on delinquent local commercial loans went down year over year, from $737 million at the midpoint of 2010 to $723 million this year.

Trepp primarily tracks loans that are bundled into what are known as commercial mortgage-backed securities, also known as CMBS. The loans are made in the purchase of office, industrial, retail, multifamily and hospitality properties.

According to Trepp data current as of Nov. 1, there were 40 local commercial property loans at least 90 days delinquent, with all but one involving loan amounts below $50 million.

The largest involved a $121.2 million loan on Pacific Center, a Mission Valley office complex previously owned by Maguire Properties Inc. of Los Angeles. Trepp noted that the lender took a loss of under 10 percent, about $11.7 million, after the property was placed into receivership and recently sold.

“While investors won’t remember the story as a happy one, the outcome could have been far worse,” Trepp said in a Nov. 18 report regarding Pacific Center.

The two-building Pacific Center was purchased in late October by Los Angeles-based CommonWealth Partners LLC and Five Star Parking for $115.9 million, according to CoStar Group.

On Guard as Loans Come Due

Gerson said the lending and legal communities will be watching for what happens locally and nationally in the next five years, when a large number of commercial loans will be coming due. Property owners could face difficulties because the value of the property has gone down, and they might not be able to meet lender requirements to put up more of their own cash upfront.

At a recent forum in La Jolla, presented by the San Diego chapter of the California Receivers Forum, experts noted that because commercial foreclosures have been relatively rare locally, delinquent owners sometimes resist efforts by court-appointed receivers to sell properties.

Even if seriously delinquent, owners often contend that they can address their situations without selling, if they are just given more time by lenders and the courts, or they object to prices being offered when properties are about to be sold.

“Our biggest challenge is setting the (owners’) expectations appropriately regarding the lending community,” said Fernando Landa, general counsel for San Diego-based Trigild, among the nation’s largest receivership companies.

Panelists said court budget cuts in jurisdictions including Los Angeles County have created case backlogs, which in turn can cause delays in handling pressing financial matters involving a delinquent property loan, although the problem is less pronounced in San Diego County courts.

“If you need to get a judgment in a very tight time frame, it can be very challenging,” said Stacy Rubin, an associate in the San Diego law firm Mulvaney, Kahan & Barry.


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