The #1 Reason You Should Buy Troubled Assets NOW!

Let Me Unpack it for You...

Hello, friends of the Commercial Academy. I'm J Scott Scheel, the founder and chairman of not only the commercial academy, but the diamond inner circle and platinum mastermind mentorship groups, and I just had to share this with you. 

This is breaking news from December 20th, 2021. "The deadline nears for banks to reconcile with impaired commercial real estate loans." 

Basically, this is an article that I found, and I want to read it to you because I believe it is so important and there are certain elements that I want to highlight that are absolutely going to stand out and help you understand why I've been preaching patience, caution and conservatism, because the floodgates are about to open. 

The Financial Accounting Standards Board recently announced that a proposed accounting change ending the use of the troubled debt restructuring for companies that had adopted new credit loss standards, as explained by Ernst and Young, is about to change. 

But TDR's - those troubled debt restructuring, as they're called, are coming into a different context that may create massive difficulties for commercial real estate property owners that were hard hit by the pandemic. 

And in the coming New Year, they feel that it is going to be far from joyous for them to see. 

TDR's have been a way for lenders to modify loan terms because of a borrower's financial or legal difficulties, and an ability for them to account for the impaired value with the losses that have been sustained under the COVID 19 pandemic. 

Under the initial CARES Act, that requirement was temporarily postponed as part of the pandemic relief so that financial institutions didn't have to experience a shock to their balance sheet, which certainly would have affected their ability and willingness to lend. 

You see, when they take on or they have to recognize bad debt, lenders in particular are now restricted from making loans. 

They lose the ability to make loans as freely as they have in the past. And I have to tell you that loans have been flowing very freely during the pandemic in ways that simply didn't make sense. 

Although Congress has extended the relief, it does end January 1st of 2022. Now that's unless Congress does act again, which is certainly possible. But up until now, they have expressed no willingness and no urgency to do so. 

Institutions are still now required to generate TDR's for modified loans will now have to catch up, and that could cause a massive problem in the commercial real estate market overall, not just for those in trouble, but for those seeking new debt. 

In addition to that, it's going to cause property values to decline. So those that have been buying at the top of the market at compressed cap rates are now going to be exposed. So please be careful. 

"In talking to bankers and lawyers, there's been a whole lot of kicking the can down the road," said Scott Williams, a partner at the law firm of Romberg Kirk. He's a specialist in bankruptcy and restructuring, and he tells Globe Street, "They simply didn't have to report it. They could kick the can down the road, keep the credit rolling. Banks are now going to have to start reporting and being more active about their bad loans." 

Well, let me tell you, folks, when banks start to experience bad loans, that starts to really trickle down and it doesn't trickle down. In a lot of cases, it's an avalanche where lending starts to tighten up. They have to deal with their bad loans, and they're not focused on new loans. 

I've been telling you for a long time, it's very important for you to go out and get long term fixed rate, low interest debt. I can tell you that this is not going to be as available as it's been, and in certain categories where those cap rates have been incredibly compressed, you can almost be assured that that is about to change. 

Being more active includes accounting requirements for handling impaired loan values. 

This is on assets that are existing in portfolios, which will include writing down the impaired part and then making arrangements such as potentially calling loans due even if the borrower doesn't have the funds to do it. 

Demanding that additional capital payments come in to keep the loan to value percentages where the banks want them, or worse yet, selling loans to some other institution at a loss, which will usually mean pulling the guarantee of those who are the sponsors of that debt and making them make that capital call in cash before that loan is able to close. 

These are really big problems, and these are the things that were precipitated in the major financial meltdown and the real estate collapse of 2007-2008, which didn't shake itself out really until 2012 or 13. 

So many people forget that even though it's only about 15 years ago that this occurred, and I want you to know that this wave could be much larger than the last one, meaning that we're talking about global financial problems. 

As we know, Evergrande has just defaulted in China. So this is a global problem, and now the American balance sheet is coming home to roost. 

Some people say that this is, well, it just really isn't going to happen and it's not going to come. But I tell you that it absolutely will. And referring back to Scott Williams, that partner at the law firm, he said, "I think real estate is someplace that you're going to see a lot of turmoil. There are two things that have taken place. Number one, there's a lot of money sloshing around in the system. And if you've got a bad loan, maybe you can refinance with a different lender, but banks may not be willing to take that on at this stage of the game.". 

In my opinion, here's what's going to happen: A lot of these banks are going to be taking on these assets, and it's going to give us the opportunity to go in and negotiate and buy assets at deep discounts. 

Boy, I got to tell you, I'm not afraid of this turbulence at all. In fact, I've been waiting for it. I've been anticipating it. In fact, I've been anticipating it since it should have happened, but since we've had a 20 month moratorium since the beginning of the pandemic and it's about to come due, I want you to know that there's still about two quarters left before this really starts to take effect. 

This means that the reporting starts on January 1st, but there's also a 60 day grace period on that reporting, which will take us out to March 1st and then after March 1st, there's going to be about 60 days while the government assembles their information before they release it. 

But rest assured, banks are preparing for this wave right now. Finally, I want you to know that commercial real estate borrowers who have properties with impaired values should look at their options now. 

Do not wait, because come January, they may find lenders are in a sudden hurry to catch up on compliance, and you do not want to be squeezed in that vice. 

Get out there, be proactive, make sure that these things happen and batten down the hatches for those around you because asset values are sure to fall. 

But most importantly, I want you to tap your private money network because your private money network is about to come about in a way that is going to empower you to buy these excellent well-located, high quality, discounted assets at pennies on the dollar. 

Ladies and gentlemen, this is what we at the Commercial Academy have been waiting for. 

I want you to be excited. I don't want you to be afraid, but I also want you to be prepared. And until we see you again at an upcoming Academy, God bless you, God bless your assets, and may God bless the United States of America.