ORLANDO—How long will the commercial real estate recovery last? How should real estate lenders manage the downside risk in the current environment? Where do we go from here?

I had a lot of questions for Ed Whitson, a partner in the Tampa office of the Arnstein & Lehr law firm. He offered some sound answers in part two of this exclusive interview. You can still read part one of this article: CRE Recovery May Be Shorter Than Past Cycles.

GlobeSt.com: How should real estate lenders manage downside risk in this environment?

Whitson: There needs to be thought in how a lender structures financing of deals.  We advise lenders to always try to get personal guarantees, including any spouses. 

And beyond that, banks need to analyze how an entire business operates and capture the entire entity when they look at whether the borrower is solid. In the past, some borrowers have presented their business in certain silos so they can look more profitable.

GlobeSt.com: What other advice do you offer lenders?

Whitson: For a lender, there's usually tension between the credit side, which analyzes underwriting, and operations, which is trying to generate money from loans, other assets and fee-based relationships. Banks have to balance how much money they need to put out there for loans with the need to mitigate loss in the event of a default.

The idea is that if you fall, don't fall too far—or, at least, not as far as your competitors. A key thing to remember is this: Just because the deal seems like a fire drill, that doesn't mean you need to rush. Sometimes the best deal is the one you don't make.

For lenders, another way to think about mitigating risk is to consider getting involved in a participation, where multiple banks will work together on a loan. In our role, we help structure participation agreements that are clear, reduce any confusion and avoid most intercreditor issues. Banks don't want to be in a participation with difficult lender partners, so this is important. Poorly structured transactions or vague intercreditor and other agreements can create issues if a credit goes sideways.

GlobeSt.com: So how long do you think this recovery will last?

Whitson: The last upswing was around 15 years long, with a few bumps. I think this current upswing will be at least a year or two shorter than that, with more spikes. Lenders should be cautious that they don't make any hurried transactions that will have an accentuated downside in a deeper downturn.