Lenders have issued a record number of foreclosure notices on risky commercial real estate loans this year, a clear indication that the sector is in serious trouble, according to a new analysis.
Lenders have issued at least 62 foreclosure notices on mezzanine and other high-risk loans through October, more than twice as many as all of last year and likely the highest total in a single year, according to the Wall Street Journal.
Mezzanine loans, similar to second mortgages, have higher interest rates and a quicker, easier path to foreclosure than other loans. This provides a quicker measure of commercial real estate distress than traditional commercial mortgage foreclosures, which typically take months or even years from the point of default to foreclosure, the WSJ reported.
Because mezzanine loans do not show up in real estate records, they are more difficult to track, and the WSJ was unable to determine the total dollar amount from the 62 foreclosure notices.
But the analysis, which counted commercial real estate loan foreclosure notices in print editions of dozens of national and regional newspapers over the past 15 years, shows a stark difference in the number of mezzanine foreclosure notices before and since the start of the pandemic. Three notices were issued in 2018. The number rose to 13 in 2019, 27 in 2020 and 41 in 2021, before falling back to 30 in 2022.
Mezzanine lenders like Blackstone, KKR and Starwood Capital collectively lent billions, largely starting in the decade after the global financial crisis as traditional lenders became more conservative.
Lenders were attracted to the loans because of their high interest rates, often above 10%, while interest rates on long-term government bonds were as low as 2%.
A flood of mezzanine loans has pushed up commercial real estate values ahead of 2022, the WSJ reported. With these values now declining and average interest rates rising from 10-12% to over 15%, it is more difficult to refinance properties, leading to higher delinquencies and foreclosures.
“A lot of borrowers have basically said, ‘I can no longer hold this asset.’ “I can’t keep investing money,” Terri Adler, managing partner of the Adler & Stachenfeld law firm, told the WSJ. “And the lenders said, ‘OK, we’ll take it back.'”
Mezzanine foreclosures this year include Korea’s Hana Financial Group taking control of the property at 20 Times Square, Marriott’s 452-room Times Square Edition. According to a lawsuit, Hana took control of the fee interest and told French bank Natixis, the building’s owner, that its 99-year ground lease would be terminated if it did not settle $39 million in mechanical liens within 30 days.
In late September, Hana took ownership of the leasehold after foreclosing on a mezzanine loan tied to the property, PincusCo reported.
Margaritaville Times Square experienced a similar fate last month. Sharif El-Gamal’s Soho Properties lost its stake in the 234-room hotel it had helped develop and ended up $371 million more in debt than the building’s estimated value, which was between $226 million and $350 million US dollars.
The original mortgage was for $167 million, according to WSJ, and additional debt included a $57 million mezzanine loan.