The Chicago commercial real estate market is number one in the country–but not in any category to be proud of. Rather, Chicago is the number one metropolitan region in the county for defaulted commercial real estate loans. According to an article at chicagobusiness.com, Chicago’s four percent delinquency rate on commercial loans is twice the national average. This is despite the fact the default rate is dropping at its fastest rate since 2008.
Why All the Defaults?
One cause of these defaults stems from the number of smaller banks that funded the loans. Smaller banks are less likely to modify loans, maintain fewer options to sell bad debt, and lack the infrastructure to deal with so many defaulted loans at once. Chicago’s one percent job growth rate, which lags behind many other major cities, may also contribute to the problem. Fewer jobs means businesses are not growing, and those businesses are finding it difficult to keep up with their mortgages.
Much of the debt shed by banks are sold off to debt buyers. Debt buyers are companies that purchase millions of dollars in delinquent loans for pennies on the dollar, and then seek to recover what they can from borrowers. But smaller businesses are less willing to take those losses by selling loan portfolios to debt buyers.
The increased default rate does not necessarily mean that every defaulted loan is foreclosed and collected upon. It just means the loan is non-performing according to the bank. The good news is, the total number of outstanding loans increased from this time last year, meaning banks are lending again, and lending fuels economic growth.
Everyone is Affected by Bad Commercial Loans
We tend to think of commercial debt as that belonging to large corporations. But small businesses, entrepreneurs, and start-ups all rely on commercial loans to survive. When commercial loans default, many of those companies are hit the hardest.
Commercial loans tend to be larger than residential loans. There are no government programs that require lenders to modify loans or provide principal reductions. Programs to help struggling borrowers are largely based on the individual bank. Some are willing to work out solutions with borrowers, but others offer little to no meaningful relief, opting instead to foreclose and seek monetary damages.
Most commercial loans require personal guaranties. That means that if the bank is owed money after default and foreclosure, it can go after a company’s individual officers for repayment if the business lacks the means or assets to pay the loan back. Many entrepreneurs find their personal income, savings, and belongings in jeopardy when a commercial loan is foreclosed upon.
Because of Chicago’s hot rental market, it is possible that small business can find some relief by subletting space or renting out larger property to tenants. They can then use the increased rents to help them repay defaulted loans.
Do you have a commercial loan in default? Are you thinking about taking out a commercial loan? Commercial loans are complex transactions that require experienced real estate attorneys. Contact The Slater Firm LTD, a real estate law firm familiar with the closing process, to discuss your situation and help determine which path is right for you.