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The Reality of Office “Give-Backs”


This is the fifth in a series of articles that examine the truth behind the negative headlines concerning the offie sector. The previous articles include “Unraveling the Office ‘Doom Loop’” and “Digging into Office Debt Maturities.”


Adam Finkel

The foreclosure process of a property isn’t a lot of fun for either lenders or borrowers. With this procedure, the lender takes control of a property if a borrower cannot meet its repayment obligations. With help from the court, the lender then takes control of the asset and will either continue operating it or attempt to sell it to recoup its losses.

During the Great Financial Crisis, banks found themselves unwilling owners of residential and commercial real estate. Borrowers who could not pay their mortgages handed the keys to the lenders or walked away. And close to a decade and a half later, reports indicate that office owners unable to pay their debt are again handing over their buildings to lenders.

This is being done through deeds in lieu of foreclosure. Data from CoStar noted that office buildings made up 43% of all deed-in-lieu of foreclosures during Q2 2023. This compares to a 20% average for all of 2022.

Hayim MIzrachi

There’s little doubt that office building owners are struggling. But experts tell Connect CRE that borrowers and lenders are focused more on workarounds than just giving up and giving back. “For the most part, lenders have been working with borrowers to provide more time or flexibility since it’s challenging for lenders to divest those assets in today’s environment,” explained Tower Capital’s Adam Finkel. Added Hayim Mizrachi with the MDL Group: “There’s so much more that is actually happening than rushing to the assumption that it’s going to be the Great Financial Crisis again, and all properties are going back to the banks.”

Not in My Wheelhouse

Eli Randel

Lenders are more willing to work with office borrowers today (versus circa 2009) because those in the business of issuing loans understand that they’re not property managers or building operators. “Many lenders may recognize that the operator is better suited to maximize collateral value and may seek to extend loans,” commented Eli Randel with CREXi.

Randel explained that the deed-in-lieu, or a voluntary handoff, has been one workaround between borrowers and lenders (versus lenders going through the costly and timely foreclosure process). The other two methods are discounted payoffs (the lenders accept less than what is owed) or a loan modification. “Lenders tend not to be entrepreneurial operators, and disposition may result in big losses and write-downs, whereas an extension could preserve value even at the expense of timing,” Randel added.

Extend and . . . Partner

Adam Showalter

The concept of “extend and pretend” was common during and in the immediate aftermath of the Great Recession. Through extend and pretend, lenders and servicers kick the can down the road to defer costs or risks to a future time. Under this scenario, lenders give borrowers extra time to pay their loans while delaying any write-downs.

But Stream Realty’s Adam Showalter explained that the term is misleading in the current office owner environment. “Traditional pretend-and-extend represents a denial of value degradation and extending current loan terms,” he said. “The better depiction is ‘accept and partner.’” Under such a scenario, lenders understand and “accept” the deep value reduction in their office properties. But instead of taking the titles, the lenders are “restricting loan agreements, with borrowers to weather the storm, or ‘partner,’” Showalter said. He added that examples of accept and partner include reducing coupon rates, implementing short-term reduced or abated debt servicing or restricting A and B notes.

Fewer Foreclosures

Tony Russo

Unlike what happened in the late 2000s, lenders are in no hurry to go the foreclosure route and the time, effort and cost required. “We’re a long way from mass foreclosures in our market,” Mizrachi observed. Though office property values have decreased, the buildings still have some equity. “Owners can choose to add equity to refinance,” Mizrachi commented, adding that refinancing with higher interest or accepting lower distributions could also work.

Furthermore, owners don’t have to do it all alone. “I see a tremendous shift going forward in creative financing,” observed Tony Russo with Lee & Associates. Examples include joint ventures and new partnerships. “This can bring in new money to the property,” Russo added.



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