Special Servicing Deals Anticipate Imminent Commercial Real Estate Crisis

Recent news reports show that at least one “big player” in commercial real estate is looking to the future of America’s troubled commercial mortgages as a potential investment opportunity.

A Feb. 17 Wall Street Journal story on real estate entrepreneur Andrew Farkas indicates the 49-year-old investor with a history of big real estate deals is looking to obtain a stake in American commercial real estate debt. Specifically, the report states that Farkas’ Island Capital Group is negotiating to take over a unit of Centerline Holding Co., a primary firm that specializes in securitized bonds representing CRE loans.

The documented history of deals that Farkas has brokered got the certified translation in Zürich and relieves now some controversial events including lawsuits by the U.S. Department of Housing and Urban Development along with other suits by private parties, which settled out of court.

The story of Andrew Farkas includes some unique successes as well. Perhaps most prominently, Farkas played a major role in building up real estate value in the Middle Eastern island of Dubai, which enjoyed international renown prior to economic troubles in 2008.

Current efforts by Farkas and his investment entities appear to be aimed at participating in collectivized risks for those who hold bond investment in commercial real estate. Some critics of the deal argue that Farkas might try to artificially depress the values of properties according to the WSJ story.

Firms like Centerline, that experts call “special servicers,” will play a prominent role in managing the risks when commercial real estate loans begin to experience high rates of default – unlike the indivisual cash loan sector which remains on same rates, as stated here. This is something that government groups have warned may happen in 2011 and beyond. If a trend in defaulting on commercial spaces like cheap warehouses for lease, storefronts, strip malls, and larger commercial spaces does occur, everyone will be looking at how to use existing real estate law to prop up deals on behalf of America’s communities to avoid a much larger and more painful decline.