Dealing with distressed assets was a highlight of Tuesday’s “Following the Fallout” panel discussion during the 2010 Iowa Commercial Real Estate Association Expo.

Chuck Hendricks, a vice president and senior asset manager with Overland, Kan.-based Midland Loan Services Inc., said his company’s portfolio of troubled loans grew to $12.1 billion at the end of 2009, from $950 million at the end of 2007.

Midland, which is a subsidiary of The PNC Financial Services Group Inc., is a third-party provider of loan servicing, asset management and technology services for the commercial real estate finance industry.

In addition to handling a greater number of distressed loans, including those that are 60 or more days past due or those that have matured with the borrower being unable to pay off or refinance the balance due, Midland is also seeing more complex debt structures.

“There are some assets in our portfolio that have five to seven layers of mezzanine debt, on top of the primary debt, associated with them,” Hendricks said, adding that most of the loans his department handles originated in 2005, 2006 and 2007.

Pointing to a failure to maintain older buildings and overleveraged debt on newer assets as primarily culprits, Hendricks said about 26 percent of the distressed loans Midland manages are on multifamily properties.

“What we are seeing is a gap between physical occupancy and economic occupancy of the assets,” he said. “So there are a lot of concessions going on out there trying to keep those properties rented up.”

Seventeen percent of Midland’s special loan servicing portfolio consists of office properties.

“Big problems are starting to surface” in the central business districts and suburban areas of most major U.S. markets, Hendricks said, citing Manhattan, Chicago and Atlanta as examples.

Delinquencies, or loans that are 30 or more days past due, are also on the rise.

As of Sept. 27, the overall delinquency rate on the distressed loans that Midland handles was approaching double digits. “Eighteen months ago, before these loans started to transfer in, our delinquency rate was less than 5 percent, Hendricks said.

Hendricks, whose office was recently tapped by the Federal Deposit Insurance Corp. (FDIC) to handle nonperforming loans emerging out of failed receiverships, said the collapse of community banks is a primary threat the commercial real estate market’s recovery.

“In the past week, we’ve had 600 loans transfer into our office, representing 16 receiverships out of Florida, Georgia and Texas,” he said, noting that number is expected to grow to more than 2,000 by the end of the year.

“The FDIC tells us that there are over 700 banks on the troubled bank list,” he said. “Most of their problems deal with commercial real estate.”