North Bay historically insulated; banks urge spirit of 'partnership'

SAN RAFAEL – The foreclosure on one of the North Bay’s largest commercial properties earlier this month brought home a national debate over whether commercial mortgages will be the next wave of problems for the economy.

The North Bay in general, and Marin particularly, has been a relatively safe area for commercial mortgages because of regulatory constraints on construction, according to Michael Sullivan, who oversees Wells Fargo Bank’s North Bay commercial lending group.

But the June 10 foreclosure on the 455,000-square-foot Marin Commons two-building office complex in north San Rafael over $62.3 million in debt could be representative of other large North Bay commercial mortgages in trouble, according to local lenders and real estate experts.

The rate for the securitized commercial loan portion of the market more than 60 days delinquent in Marin, Napa, Sonoma and Solano counties was 1.64 percent of 314 notes totaling $1.76 billion last month, according to New York-based commercial mortgage tracker Trepp.

Rising commercial vacancy and property owners’ ability to continue to make mortgage payments are of major concern for lenders who say they are working with borrowers to prevent default.

“We’re not considering notices of default on many commercial properties,” said Louise Mason, senior vice president who oversees construction and commercial real estate mortgages for Santa Rosa-based Exchange Bank. “There has got to be a partnership with the owner to develop a workable solution.”

The bank and others contacted are requiring new borrowers to put forward more collateral, bring more cash to lower loan-to-value ratios from two-thirds or higher to sometimes about one-half – especially for retail properties – and sometimes asking for more guarantors on a loan.

The current economic recession started extending vacancies to retail properties in the latter half of last year and industrial buildings more recently. And some of the softness in the for-sale housing market is starting to spill over into multifamily rental properties as owners of single-family rentals desperate to save their mortgages compete for cash-strapped tenants.

Congress has been holding hearings on potential aid for large owners of commercial real estate. Deutsche Bank Securities earlier this year predicted roughly two-thirds of loans that were packaged into commercial mortgage-backed securities, or CMBS, will have a larger balance at maturity in the next decade than the property is worth, with about $100 billion needed to keep the borrowers out of default.

A CMBS rating agency, Pennsylvania-based Realpoint, in May forecast delinquency rates for such loans would rise from 2.1 percent to 4 percent to 5 percent by year end.

As part of its commercial loan portfolio review, Exchange Bank has been “stress testing” loans, or applying vacancy, expense and other scenarios to see how they could affect debt service.

For example, the bank now evaluates multifamily property loans with an expense ratio 10 percent to 15 percent higher than the previously typical 30 percent needed for upkeep and prepping for new tenants. At the same time, the bank is projecting vacancies of 15 percent rather than the 5 percent rate common for North Bay markets in the past several years.

The North Bay commercial markets have been through periods of high vacancies before, such as after the bursting of the technology bubble earlier this decade.

The difference today is lack of other collateral to back up loans.

“There is no margin for error if the owner loses a tenant or cap rates rise,” Mr. Sullivan said.