News & Press

Excerpted from the original published by Real Estate Capital USA

As banks look to resolve potential problems with their balance sheets, there is a greater conversation about what will happen with all the debt that is coming due over the near term as well as the potential tax implications of workouts or restructurings for commercial real estate owners, said Rob Gilman, a partner at New York-based advisory Anchin.

“Modifications are different than foreclosures,” Gilman said. “You can modify the payment terms, or you could do a modification in which the size of the loan is adjusted. Banks are willing to do that but any situation in which there is forgiveness around the amount of debt counts as a cancelation of debt and this could mean a 35-40 percent tax hit, depending on how much has been forgiven.”

He continued: “I think every bank is willing to have this conversation, but no one wants to poke the bear, especially if their debt is not due for eight or even 12 months. Many investors are holding off on talking to banks because of an expectation that rates will decrease. I don’t think rates will decrease enough to make much of a difference, but these conversations need to be had.”

In addition to the tax implications of debt modifications and foreclosures, commercial real estate owners need to be aware of cost segregation studies and taking advantage of bonus depreciation. Tax planning, Gilman added, is a 12 month activity.

One question the market continues to grapple with is the size and timing of rate cuts. While some optimistic market participants are anticipating the potential for a 150-basis point decline in interest rates over the next 18 months, the consensus is that any rate drops will be less aggressive. “We are not getting back to the time of 4 percent mortgage rates,” Gilman said. “The problem is not necessarily the rates but the valuations and what banks are willing to accept.”

The market has seen banks like New York Community Bank increasing their reserves in anticipation of a rise in distress, with Gilman noting this could have an impact on the number of lenders active on the commercial side. In addition to private credit providers funding gap capital, there could be more opportunistic buyers.

“I’m not sure how many lenders will be out there for the commercial side. This is where we will start to see vulture funds with loan-to-own strategies. That may be where we are going,” Gilman said.

Rob Gilman is a partner and the leader of Anchin’s Real Estate Group. He has over 35 years of experience serving real estate owners, developers and operators in commercial and residential spaces.