Reuters | October 6, 2010

Commercial real estate is where the action will be next year, restructuring and bankruptcy experts said at the Reuters Restructuring Summit summit on Wednesday.

"I call it a slow-motion train wreck," James Sprayregen, a restructuring partner at law firm Kirkland & Ellis, said in New York. "That's probably where I think you're going to see more action than anything over the next 24 months."  Nearly $1 trillion US of bank, insurance and commercial mortgage-backed securities, or CMBS, loans on U.S. commercial real estate are set to mature by the end of 2012, according to Deutsche Bank.

Many of those loans are for properties that are worth less than their mortgages because of declining values. Other borrowers may be unable to get new loans in amounts great enough to cover maturing loans because lenders will be unwilling to finance those amounts.  Commercial real estate has lagged other sectors in restructuring, but that is changing, said Luc Despins, chair of the global restructuring practice for law firm Paul Hastings.  "I'm seeing enough of a tip of the iceberg in commercial real estate that I think there will be a lot of activity," he said.

Problems will not be limited to the United States, said Steven Smith, global head of restructuring for UBS's investment banking department.  "Globally, there are others who are going to need to restructure," Smith said.

Smith and Sprayregen participated in the bankruptcy case of mall owner General Growth Properties Inc., which became the biggest U.S. real estate company to seek bankruptcy protection when it filed in April 2009. It is slated to emerge from bankruptcy next month.

Large workouts are looming, though they are not likely to be as large as General Growth's $27 billion bankruptcy, attorneys and advisers told Reuters.  "There are a number of multi-billion dollar entities that could potentially have restructuring issues," Smith said.

Banks and other lenders may continue to extend loans, and public real estate companies may tap the capital markets, but they will eventually have to pay up.  "This year and next year, (commercial real estate) is going to be a very busy sector," said Despins.

Not all of the troubles involving commercial real estate will result in bankruptcy filings. Many will involve restructuring of loans out of court, distressed sales or efforts to attract more equity to fill the gap between expiring mortgages and new, lower ones.  Many of the cases could be resolved out of court by using what has happened in court as a guide, Sprayregen said.  For example, in the case of General Growth, CMBS holders learned that their investments were not bankruptcy-proof as some had believed.  "It did show there was a bankruptcy forum to resolve CMBS problems if necessary," he said. "I think that has helped cause people to be willing to negotiate out of court."

Still, bankruptcy court could be the best forum to work out restructurings even if the parties agreed.  "If it's going to be in a foreclosure, there are state transfer taxes that cost a lot of money," he said. "If there's a way to do it through bankruptcy, there might be a way to save those taxes."

That is what is occurring with Stuyvesant Town/Peter Cooper Village, the massive Manhattan apartment complex that is in the process of foreclosure. It has a $100 million transfer tax attached to it. Sprayregen declined to comment about that specific case.