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BOSTON GLOBE - Commercial properties fall to foreclosure

April 23, 2009

Crisis can sow blight, cut into local tax bases

The foreclosure crisis is now claiming commercial properties across Massachusetts, prompting a surge of fire sales as the owners of office towers, hotels, and stores cannot meet or refinance sizable loan payments.

In the first four months of the year, some auctioneers report they have already handled double the number of distressed properties they did in all of 2008. Among the recent casualties are Glen Ellen Country Club in Millis, a prominent Art Deco building in Boston's Park Square, and a yacht club and inn with views of the city skyline.

"All of a sudden we're seeing substantial properties coming up for auction. The scope of it is growing pretty quickly," said Justin Manning, president of JJ Manning Auctioneers in Yarmouth Port

Property owners are in trouble because of fast-approaching due dates on large loans they obtained to buy properties during the height of the market. Now some owners cannot make the payments because the economic slowdown has prompted their tenants to downsize or shut altogether, reducing rental income. Others cannot refinance into more affordable payments because property values have declined or lenders won't extend credit.

The turmoil is affecting workplaces and town centers: municipalities will get lower tax collections from idled or devalued properties, while boarded-up storefronts and vacant strip malls can discourage customers from patronizing neighboring businesses and sow the seeds of blight in the community.

"This kind of problem results in a decrease in property values, and that can start to feed on itself," said Andrew Glincher, a real estate attorney and managing partner at Nixon Peabody in Boston. Glincher said clients, mostly lenders, have notified him of 10 defaults by borrowers in the last two weeks.

Already some properties have sold at sharp discounts. The Hancock Tower in Boston was auctioned off last month for $660.6 million, about half its last sale price of $1.3 billion in late 2006. Another nearby office building, at 441 Stuart St., is scheduled to be auctioned next Tuesday. It was last bought for $37.5 million in 2004, and its owners failed to convert a portion of the building to condominiums.

Ron Rakow, Boston's commissioner of assessing, said the city has yet to see a significant uptick in foreclosures but noted the marketing is weakening. "If it becomes widespread and starts to impact investors, then it will begin to weigh on the [property] valuation process," he said.

The foreclosure trend is expected to accelerate as more loans come due. Between now and 2012, building owners nationwide are facing more than $1.5 trillion in debt payments and are predicted to default on as much as 5 percent, the highest level since the early 1990s, according to the real estate research firm Reis Inc.

The problem is particularly acute for owners who financed their purchases with loans that were subsequently packaged into securities and sold to investors. The market for these so-called securitized loans collapsed in the wake of heavy losses at investment banks and the subsequent credit crisis in the financial industry.

Real estate specialists said borrowers will not be to refinance those loans, leaving building owners with debt they cannot repay. In Boston, $385 million of securitized debt will come due this year, and another $1.9 billion in 2010, according to Reis.

"Foreclosure auctions will spike dramatically," said George Fantini, chairman of the mortgage banking firm Fantini & Gorga. "There really is no question that the pipeline of troubled deals is growing at a very rapid pace."

In Millis, town officials are grappling with foreclosure on Glen Ellen, an 18-hole golf course that was slated to host a 341-unit condominium development for 55-and-older residents. It would have been the town's largest residential complex, significantly boosting tax collections and adding nearly 10 percent to Millis' current housing stock. Now, the property is scheduled to be auctioned off Thursday, its future dependent on the winner of the auction.

"Any time a property is foreclosed upon, it's a damper on the town and the neighborhood, so it's unfortunate," said Planning Board Chairwoman Catherine MacInnes.

Among other scheduled auctions are the Nantasket Beach Inn in Hull, a condominium and garage building in Charlestown, and several industrial buildings in Central Massachusetts. Manning said he's already handled 11 forced sales of large commercial properties this year, up from six in all of 2008.

"We have a lot coming up in the pipeline, and it's mostly the larger commercial projects," he said.

Later today the Boston Yacht Haven will be auctioned off, and its neighbors who live in condos at Commercial Wharf are anxiously awaiting the outcome. Its current owner, Yovette Mumford, was sentenced to prison on forgery charges last year and didn't keep up with debt payments. She was the lead investor in a group that purchased the waterfront property for $11.7 million in 2005.

"Now we don't know what's going to happen out there next," said Cole Landers, a resident of the condominiums at Commercial Wharf, where neighbors successfully blocked prior proposals for a large hotel and restaurant on the site. "We don't want someone else who's just going to come in with their own agenda."

Casey Ross can be reached at cross@globe.com.