The long recession from which we are emerging has caused numerous borrowers to default on the loans for their commercial projects including loans for residential developments, shopping centers, office buildings and industrial/warehouse/flex space. Many residential developers have seen their sales of completed units or lots stop or slow to a trickle over the past few years, while the interest on their loans continue to accrue. This may result in the debt on the projects being significantly greater than the value of the projects. Many developers of commercial projects have either been unable to lease space or have had to lease it at rates that are significantly lower than anticipated rental rates. Compounding the problems of commercial developers, many tenants have defaulted on their leases as their revenues have declined, leaving such space unoccupied or re-let at greatly reduced rental rates. Meanwhile interest has continued accruing on the developers’ loans.
Although these projects have been disappointments for the original developers and lenders financing the projects, financially troubled projects can present excellent investment opportunities for new investors/developers provided they have the capital to acquire the projects based on current market valuations and the project lender is willing to discount the existing loan balance to make the purchase and completion of the project feasible.