One plan calls for Treasury to ask Congress to create a public-private fund that would provide money to small banks out of the $700-billion TARP fund. The small banks would use the funds to make loans to small businesses.

Another approach reportedly under consideration would have Congress create a $30 billion fund, consisting of $10 billion in private investments and $20 billion in TARP money. Private investors would take the first losses if the money wasn't repaid. The Treasury Department did not return a call to GlobeSt.com in time for publication.

How, or if, such a fund would impact the commercial real estate industry is unclear – certainly the funds would be lent out across many different sectors, not just the commercial real estate industry. Still, though, given that community and local banks have filled to a certain degree the gap in real estate finance created by the CMBS market, it would seem that such a move would be at least of indirect benefit.

Opinions on these proposals' impact range across the board. On one end there is, said Dory Wiley, president and CEO of Dallas-based Commerce Street Capital LLC, who believes that TARP would be very good for community banks. "It will help save some banks and will help by providing capital for lending in others," he tells GlobeSt.com.

Aaron Kurlansky, VP of the Miami-based First Meridian Mortgage also agrees it will help the industry--mainly because local and community savings banks have become a major if not main source of capital for real estate transaction. "The larger commercial banks are very selective on lending and most deals are closed with local banks who know the client and the asset and look to establish and maintain a depository relationship," he tells GlobeSt.com.

In the worse case scenario, an infusion of TARP capital could allow the banks to live to fight another day. "It will allow them to maintain sufficient capital reserves and thus solvent as they work through their problem loans," Edward J. Indvik, vice chairman of Lee & Associates in Torrance, CA., tells GlobeSt.com.

There are almost as many skeptics as supporters to the plan. Salvatore Zerilli, a principal at The Mercadien Group of Hamilton, NJ, tells GlobeSt.com that a new TARP fund will have little effect on commercial real estate lending for two reasons. The first will be convincing the community banks to apply for the funding, he tells GlobeSt.com.

"Many community banks did not take advantage of TARP last year because of the high dividend payments and restrictions on how they could run their bank. If relief from these restrictions is not part of the new TARP program many small community banks will not partake."

The second reason for Zerilli's doubts is that while community banks have continued to be active in commercial real estate lending, the challenge has been that federal and state regulators typically want to see a bank's commercial real estate portfolio not exceed 300% of their total capital. "Banks that exceed this level in commercial real estate loans were not considered for the first round of TARP and endure more scrutiny during their safety and soundness examinations. Community banks which are closing in on 300% need to grow their commercial real estate lending portfolio with caution." Therefore, he concludes, the new TARP fund would have little impact on commercial real estate lending.

In the middle is Herrick, Feinstein attorney Howard Peskoe, who tells GlobeSt.com that while expanding TARP for community banks won't be a bad thing for commercial real estate lending, "I'm not terribly optimistic about its likely effectiveness.

"These smaller banks had more access to capital than the larger banks did and yet still cut back on commercial real estate loans as well as loans to small businesses," he tells GlobeSt.com.

"Their belief was that many of the loans they denied were simply too risky, and this proposal will change neither their perception nor the criteria they use to underwrite loans."

Another piece to consider, he says, is how to encourage or compel the banks to make loans – a problem in the first iteration of TARP.

Instant Insights /

Community Banks May Be Next in Line for TARP Funds

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