Mezzanine Foreclosure Sales Notices Reach Record High

They are more than six times during the Global Financial Crisis.

Much of the CRE loan analysis that has come out has been based on data from such sources as CMBS, proprietary sets, or compilations of government releases. Many of the results look at long-term financing.

A new Wall Street Journal analysis, though, wades into the troubling area of mezzanine financing. A normal part of CRE credit stacks, it’s been a way for developers, owners, and investors to get from one period of financing to another, maybe keeping a project afloat while a property leases up.

But what had been a normal part of the financial firmament has taken a turn for the worse.

“The Journal analysis found [uniform commercial code foreclosure-]sale notices for 62 mezzanine loans and other high-risk loans this year through October,” they wrote. “That is more than double the number for all of last year, and likely the highest total ever for a single year, as higher interest rates and rising vacancies punish the property sector.”

The 62 so far this year towers over every year since 2008, where the figure looks to be about 7 — 10 in 2010. Just over 40 in 2021, 30 in 2022. This is an astounding leap, although in another light it is still very small.

But the movement is still notable, especially given the importance of mezz financing when an owner hasn’t been able to refinance conventionally yet, given the jump of interest rates over the past, or a developer needs to keep a project on track while waiting for tenants to sign leases and start paying rent. This is a more immediate reflection of CRE distress than problems that can be made less obvious when banks and other lenders work with borrowers to keep from having to take properties back.

Because such lending doesn’t appear on property records, the Journal couldn’t obtain the size of the loans in question. And as the outlet notes, “Unlike mortgages, they don’t appear in property records, so real-estate data companies can’t track many of them. No one knows how much of this debt is out there.”

There can also be multiple layers of mezzanine debt, magnifying the size of the problem. “The Stuyvesant Town and Peter Cooper Village apartment complex in Manhattan, which was taken over by lenders following the crash, had 11 layers of mezzanine debt, according to the property’s bond prospectus,” the Journal wrote. “The 42-story hotel and retail tower 20 Times Square in Manhattan was once valued at $2.4 billion. It had four mezzanine loans, according to court records.”

So, there is no way to know whether there is a potential large wave of such foreclosures on the horizon and, if there is one, when it might break.

Article courtesy of Erik Sherman od GlobeSt.com

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