Commercial real estate – without banks

Enough already with the gloom-and-doom predictions for commercial real estate. Yes, prices and volume of transactions are down, but those wading into the swampy market are finding firmer ground. Many professionals who experienced the commercial real estate wave of 2003-7 feel like those left on a beach after a tsunami. Disoriented and stunned, we don't know where to begin.

In order to find direction, I consulted local brokers, lenders, title underwriters and recording data for Clark County.

First, it appears that banks are not interested in construction, development or property acquisition lending, despite the protests of my banker friends to the contrary. The fallen valuations underlying most real estate loans already on the books for local lenders are so painful, their priority is to deal with what they have, not increase exposure.

Instead some life insurance companies are lending, however owners must invest more of their own money to buy. When refinancing, "cash-in" as opposed to "cash-out" is the new norm. It was common to get loan-to-value ratios of 75 or 80 percent, but the refinancing life-lenders today will lend only to 60 or 65 percent of appraised value. So if you can borrow a smaller portion of a smaller appraised value, cash from the owner or from a non-secured party is required. According to Blake Hering Jr., a partner at NBS Financial Services, the life-lenders are lending on finished and lease-stable property that produces income at a higher "sustainable" capitalization rate.

There is a nagging question of what will happen with all the commercial mortgage-backed securities or "conduit" loans that financed 25 to 30 percent of the commercial market coming due. The answer may be – as it was with Y2K predictions in the 1990s – nothing. Congressional action has reduced tax traps, so those conduit borrowers who can show a viable plan, an ability to keep paying the expiring loan and a willingness to hand over excess rents to the lender get extensions. These lenders would rather accept some payments and wait, than foreclose. Many publicly traded Real Estate Investment Trust (REIT) funds are up this year and the "short funds" that ballooned in anticipation of a further collapse of commercial real estate are down, indicating that Wall Street is ready to absorb the refinance problem and that the predicted wave of distressed selling of commercial property may never arrive.

Finally, what is going to happen with all the "vulture" funds and cash war chests that have been gathered to buy in the predicted panic? They will see vacant or unfinished distressed projects for sale by lenders. But as long as government-backed interest rates are low and stable lenders are willing to extend terms, they may not have much to buy. Even vacant land values, which have been highly unstable, could stabilize led by large homebuilders' buying bulk land and competing with increasing bids. According to a March 3 report in BusinessWeek, the five largest publicly-traded homebuilders accumulated more than $12 billion in cash by issuing bonds and receiving federal tax refunds and were again buying bulk land.

After the smoke of tax credits and government money clears, look for surviving buyers, sellers and conservative lenders to balance the market. As with the Y2K non-event, we'll wonder what all the fuss was about.

Dustin Klinger is a business and real estate lawyer in the Vancouver office of Miller Nash LLP. He can be reached at 360.699.4771 or

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