As published in the Business Ledger – March 4, 2010
Anyone who owns commercial real estate knows that there are cycles in commercial real estate. There are times when the commercial real estate market is “hot” and times when the real estate market is oversaturated and is considered “soft.” As the economy has been in a deeper than normal recession, the commercial real estate market is also experiencing deeper issues than normal in a soft market. In fact, a congressional watchdog panel raised new warnings about the condition of the commercial real estate market.
In its monthly report, the Congressional Oversight Panel for Troubled Asset Relief program predicted that the failure of these loans could further endanger the banking system and preclude a true economic recovery. The report noted that about $1.4 trillion in commercial real estate loans will come due at the end of their terms and about half of those are considered “under water”, where the fair market value of the property is less than the mortgage debt outstanding. The report further stated that the potential losses from these loans could amount to $300 billion, which would severely impact small to mid size banks, who have a high concentration of commercial real estate in their portfolios. The concern is that if these banks do not have adequate reserves to cover these losses, that there could be more bank failures, which will adversely impact any real recovery in the economy.
There were several potential solutions that were listed in the report, including doing a “stress test” of individual banks whose portfolios contain a concentration in commercial real estate loans. Due to the sheer volume in number of these small to midsize banks, it may not be feasible to review these banks’ records at such a detailed level. Another suggestion is that the federal government could inject additional capital into the small banks, buying their toxic assets or guaranteeing loans. Based upon the fact that the federal government is considered by many taxpayers as spending too much of the taxpayers’ money already, this may not be a feasible approach. There are also concerns if the federal government “reuses” paid back TARP funds as to whether that is constitutional to do so without additional legislation.
A more practical approach might be to allow the banks to extend the due date for the underwater loans, rather than to force a bank to recognize losses at this time. This would allow the economy to recover and over time, the commercial market place would recover, allowing the fair market values to recover as well. It would also allow the owners of the property to find additional tenants for the property or sell the property and pay off more of the outstanding balances of loans for the property. This may allow the banks to recover 80% or more of their loans outstanding, as against taking a loss for the entire loan, reselling the property, and being able to recover maybe twenty cents on the dollar. In addition, if the bank forecloses and cannot sell the property, as there are few buyers out in the marketplace at this time, the bank will have to pay the maintenance and upkeep for the property, the insurance cost and the real estate taxes, as well as a management fee. These costs, along with the legal expense, may force the bank to take a lower offer than that they would have normally accepted in a decent market.
Hopefully, the federal government will enact the necessary regulations that will allow the banks to extend the due dates of the loans on terms that will allow the borrowers to pay, which may include the accrual of a small interest amount, e.g. 1-2%, until three to five years have passed which would allow the cycle to Anyone who owns commercial real estate knows that there are cycles in commercial real estate. There are times when the commercial real estate market is “hot” and times when the real estate market is oversaturated and is considered “soft.” As the economy has been in a deeper than normal recession, the commercial real estate market is also experiencing deeper issues than normal in a soft market. In fact, a congressional watchdog panel raised new warnings about the condition of the commercial real estate market. In its monthly report, the Congressional Oversight Panel for Troubled Asset Relief program predicted that the failure of these loans could further endanger the banking system and preclude a true economic recovery. The report noted that about $1.4 trillion in commercial real estate loans will come due at the end of their terms and about half of those are considered “under water”, where the fair market value of the property is less than the mortgage debt outstanding. The report further stated that the potential losses from these loans could amount to $300 billion, which would severely impact small to mid size banks, who have a high concentration of commercial real estate in their portfolios. The concern is that if these banks do not have adequate reserves to cover these losses, that there could be more bank failures, which will adversely impact any real recovery in the economy. Denice A. Gierach, owner and founder, The Gierach Law Firm pass. After all, most of the commercial real estate loans were good loans hit by a really bad economy. In other words, the borrowers did not cause the loans to go bad—it was the economy. Enacting regulations of this nature would make the best of a bad situation for both the borrower and the banker, as well as for the overall economy. Absent these type of regulations that would allow a “lend-extend” type of loan adjustment, the federal government may cause the other shoe to drop, which will cause additional bank failures and additional economic problems.
