CHICAGO-The typical push-pull accusations and complaints aboutthe crisis in commercial real estate, compounded by a lack oflending, permeated a US House hearing on CRE problems and solutionshere Monday. The hearing, held at the Dirksen US Courthousedowntown, was overseen by the House’s Committee on FinancialServices, Subcommittee on Oversight and Investigations. The topicwas "A Chicago Perspective," and the purpose was stated succinctlyby Bruce Cohen, CEO of Wrightwood Capital, during the hearing, "Thecurrent credit system in America simply does not have the capacityto meet the legitimate demand for commercial real estate debt."

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Various local CRE industry experts, bank and governmentofficials spoke during the hearing. A couple of the industryleaders spoke on behalf of organizations. Joseph Cosenza, vicechairman and director of the Inland Real Estate Group Inc., andpresident of Inland Real Estate Acquisitions Inc., presented viewson behalf of National Association of Realtors and IllinoisAssociation of Realtors.

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Cozenza said a crisis is looming in the commercial real estatemarket due to a confluence of issues that include economicconditions, especially high unemployment; weakening commercialproperty fundamentals; declining commercial property sales volumeand price; slow commercial property lending; and increasingcommercial loan delinquencies. "These circumstances, paired with$1.4 trillion of anticipated commercial mortgages’ maturitiesthrough 2014, create a challenging commercial real estate financeenvironment," he said during the hearing.

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He said commercial properties today fall into one of threecategories: properties that are simply not sustainable; propertiesthat are performing, current, and can support their debt, but mayhave difficulty refinancing because their values are lower thantheir debt; and properties that are viable long-term but needimmediate help with loan modifications or refinancing assistance."In the first category are properties that are not viable andcannot be saved. But properties that fall within the other two areviable long-term and can be saved with a variety of tools. It iscritical that steps are taken now to prevent a total collapse ofcommercial markets and a corresponding downturn in our economy,"Cozenza said. These tools include incentives for increasinginvestment in properties; increasing the cap on credit unionbusiness lending; a mortgage insurance program for performingcommercial loans; additional Federal Reserve and banking agencyguidance especially relating to term extensions; an extension ofTALF; and improve lending access for small businesses, he said.

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In addressing the House members, Cohen said for most of thecommercial real estate market, the lack of credit has stalledtransaction volume, which has fallen by nearly 90% from its peak.Over the past two years, asset values are estimated to have fallenby approximately 35%-40%, on average, he said. Most of the privatemarket continues to suffer from a lack of capital and excessleverage. Job losses continue to hurt property fundamentals. As aresult, vacancies have been pushed to new highs and cash flowscontinue to weaken, leading to further erosion of commercialproperty values.

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"With very limited capacity to meet the ongoing demand forcredit, there is increasing concern about a potential wave ofdefaults--from maturing loans--that will further exacerbate thecurrent credit crisis. Needless to say, this has broad systemicconsequences and will reverse the progress that has been made inhealing the banking system and credit markets to date," Cohen said."As the demands for debt remain unmet, the stress to the financialservices system overall, individual financial institutions, andthose who have invested in real estate directly or indirectly willincrease."

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Peter Borzak, principal of Pine Tree Commercial Realty LLC,spoke on behalf of the International Council of Shopping Centers."The majority of ICSC’s owner/developer members are privatebusinessmen like me, many of whom are experiencing a difficult timetrying to find credit while facing maturing loans and the potentialof foreclosure," he said. "Like many CRE owners, we have been facedwith the dilemma of working out several maturing loans with veryfew if any viable credit options. During 2009, we were able to findresolutions to many of our bank loans, but in most cases, thoseresolutions included the investment of additional equity dollars toreduce the leverage level, or required us to finance the retirementof the loan entirely with equity funding."

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He said in one example, Pine Tree had an asset facing a maturitydefault that was 85% leased and 100% of the fully leasedloan-to-value ratio. The bank required $500,000 of additionalequity and tenant improvements to increase the lease level to 95%.For this additional investment, the company was granted athree-year extension with annual hurdles.

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"We were fortunate to be able to access the equity funding tofacilitate this loan resolution," Borzak said. "Many others in ourindustry have not been able to access those equity funds, and manyhave lost the equity that was held in their real estate portfoliosbecause of the decrease in asset values and increase in vacancythat resulted from the recession."

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He said ICSC is pushing forward with a temporary and targetedenhanced depreciation proposal that will provide 50% bonusdepreciation for new investment in existing distressed commercialreal estate. The new capital will be tied to paying down the debton the asset, with a portion allowed for job creation and capitalimprovements in the property. "ICSC believes that deleveraging CREdebt, largely held by regional and community banks, with freshcapital and new underwriting standards will help local economiesrecover faster and keep hometown banks in our communities," Borzaksaid.

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Providing a response to the complaints were government bankingofficials, including Anthony Lowe, Chicago Regional Director,Division of Supervision and Consumer Protection, Federal DepositInsurance Corp. He said Illinois, like many states in the Midwest,has been hard-hit by the recent recession. Nearly 7% of the state’sjobs have been lost since fourth quarter 2007.

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"Loan delinquencies for Chicago area institutions in fourthquarter 2009 were among some of the highest of all metropolitanareas in the nation, and these institutions reported record-highnet charge-off activity during the year," Lowe said during thehearing. "These conditions have caused a number of bank failures.From October 2008 through April 2010, 32 Illinois insureddepository institutions were placed in receivership."

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He said that the first quarter of 2010 has shown someimprovement in the industry. However, the return isn’t coming fastenough, and Lowe said concerns have been expressed by smallbusinesses, trade groups, and members of Congress that the banksupervisors may be contributing to the lack of credit availability,and that examiners are discouraging banks from extending smallbusiness and commercial real estate mortgage loans.

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"There have been assertions that examiners are instructing banksto curtail loan originations and renewals, and are criticizingsound performing loans where collateral values have declined. Wealso have heard criticisms that regulators are requiring widespreadre-appraisals on performing commercial real estate mortgage loans,which then precipitate write-downs or a curtailment of creditcommitments based on a downward revision to collateral values,"Lowe said. "I would like to emphasize that FDIC examiners do notdirect banks’ credit decisions. Our examiners do not instruct banksto curtail prudently managed lending activities, restrict lines ofcredit to strong borrowers, or deny a refinance request solelybecause of weakened collateral value. We do encourage banks to beknowledgeable of local market conditions and closely reviewcollateral valuations when a borrower’s financial condition hasmaterially deteriorated and a sale of the collateral may benecessary. We would not require a re-appraisal for a healthyperforming loan. We leave the business of lending to those who knowit best--the community bankers who provide credit to smallbusinesses and consumers on Main Street."

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Cathy Lemieux, SVP, Federal Reserve Bank of Chicago, alsoaddressed concerns that banks should be pushed to lend more. Shesaid that, in their defense, the number of bank failures continuesto rise, with some 140 banks having failed in 2009, and 67 more inthe first four months of 2010.

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"The Federal Reserve has directed examiners to be mindful of theeffects of excessive credit tightening in the broader economy, andwe have taken steps, including additional examiner training andindustry outreach, to underscore these intentions," Lemieux said."We are aware that bankers may become overly conservative in anattempt to ameliorate past weaknesses in lending practices, and weare working to emphasize that it is in all parties' best intereststo continue making loans to creditworthy borrowers." She said theTerm Asset-Backed Securities Loan Facility (TALF) and extensiveexaminer training are just a few of the programs that the federalgovernment is trying to encourage the economic recovery.

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