When the Landlord Can’t Pay the Mortgage

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In the face of the biggest financial crisis and deepest recession since the Great Depression, retail landlords are increasingly falling behind on mortgage payments or defaulting entirely. Owners are facing great difficulties refinancing debt. One major source of financing—commercial mortgage-backed securities—is no longer available. And the lenders that are still in the market have dramatically tightened underwriting standards.

This is happening at a time when other pressures are mounting. Vacancy rates are rising and retail sales are suffering. Faced with all these pressures, more and more properties will end up distressed. Commercial mortgage defaults are at a 17-year high and still rising. The current volume of distressed retail assets on the market at the end of April reached 1,276 properties valued at $30.6 billion, according to Real Capital Analytics—accounting for 38 percent of the total value of distressed assets.

So what happens when the landlord can’t pay the mortgage? Tenants might be left in the dark. Retailers may not know if their landlord is working out a solution or if the bank will be the new, permanent owner. If the latter is the case, new questions emerge. Is the bank equipped to conduct day-to-day management of a shopping center? If not, who might the lender turn to for help in dealing with these issues? And while this is all playing out, who is communicating with the tenants about what’s going to happen next?

Tara Scanlon, Partner, Holland & Knight, and Paul Kinney, Executive Director, the National Retail Tenants’ Association, discuss the issues.

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Tara A. Scanlon is a Partner in the Washington D.C. office of Holland & Knight LLP where she is Co−Chair of the firm's National Retail Development and Leasing Team in the Real Estate Section. Ms. Scanlon concentrates her practice on commercial real estate transactions which include development matters, sales, and acquisitions, as well as retail and office leasing. She has extensive experience in retail real estate transactions representing both institutional and entrepreneurial owners of regional malls, shopping centers and high end street retail projects in connection with various leasing, finance, operational and transactional matters. Other areas of experience include commercial finance involving construction, and permanent real estate loans, asset−based lending, and equity investments, as well as the restructure of debt and security instruments.

Paul Kinney is currently the Executive Director of the National Retail Tenants Association, responsible for the day-to-day management of the association and Co-Chair of the Curriculum Committee. He is co-founder of the NRTA and has served as President. Prior to his role of Executive Director he was employed by Friendly Ice Cream Corporation as Director of Real Estate Services with more than twenty years experience in real estate lease administration. He was responsible for the effective management of Friendly’s real estate portfolio and for providing real estate support services for the corporation. In addition, he was responsible for all lease payments, real estate and personal property tax payments, lease renewals, lease audits and landlord/company dispute resolution. He holds a B.S. degree in Business Administration from Western New England College in Springfield, MA.

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