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Black hole opening up for commercial US real estate loans

That figure could grow to $55 billion of commercial mortgage-backed security debt due in 2012, triggering delinquencies, defaults and forced sales, according to research by JPMorgan Chase & Co.

Sales of commercial properties in the US have fallen 72% this year according to the latest figures from Real Capital Analytics Inc., a property research firm.

But it is the 'hidden' loans problem that is set to cause a lot of stress. Landlords who acquired properties using CMBS debt in 2006 and 2007, when prices were soaring, will have to choose between selling their properties and replacing their loans with higher-cost debt, according to real estate firm Grubb & Ellis.

Loans made to be sold into the CMBS market were the predominant form of financing for commercial real estate buyers between 2004 and 2007, when US commercial property prices rose almost 60% on the Moody's/REAL Commercial Property Price Index. But that index has fallen 13% since peaking in November 2007.

The drop in values might be even more as the volume of transactions isn't enough to 'adequately and empirically measure what's going on in the marketplace,' said Glen Esnard of Grubbs.

'A lot of that debt is not refinanceable at its current level or current rate. It's kind of like a black hole. You can't see it but because of the gravitational affect of everything around it, you know something's out there, and it's very big,' he added.

The companies who oversee payments on the loans are making it more difficult for troubled borrowers to sell the properties securing their debt, according to Bill Collins, director of capital markets at Cassidy & Pinkard Colliers, a Washington-based commercial property brokerage.

'The special servicers are not making it easy to assume these debts. They're taking the opportunity to take another bite of the apple,' he said.

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