Industry Leaders Push for Lending Flow Return

CHICAGO-The typical push-pull accusations and complaints about the crisis in commercial real estate, compounded by a lack of lending, permeated a US House hearing on CRE problems and solutions here Monday. The hearing, held at the Dirksen US Courthouse downtown, was overseen by the House’s Committee on Financial Services, Subcommittee on Oversight and Investigations. The topic was "A Chicago Perspective," and the purpose was stated succinctly by Bruce Cohen, CEO of Wrightwood Capital, during the hearing, "The current credit system in America simply does not have the capacity to meet the legitimate demand for commercial real estate debt."

Various local CRE industry experts, bank and government officials spoke during the hearing. A couple of the industry leaders spoke on behalf of organizations. Joseph Cosenza, vice chairman and director of the Inland Real Estate Group Inc., and president of Inland Real Estate Acquisitions Inc., presented views on behalf of National Association of Realtors and Illinois Association of Realtors.

Cozenza said a crisis is looming in the commercial real estate market due to a confluence of issues that include economic conditions, especially high unemployment; weakening commercial property fundamentals; declining commercial property sales volume and price; slow commercial property lending; and increasing commercial loan delinquencies. "These circumstances, paired with $1.4 trillion of anticipated commercial mortgages’ maturities through 2014, create a challenging commercial real estate finance environment," he said during the hearing.

He said commercial properties today fall into one of three categories: properties that are simply not sustainable; properties that are performing, current, and can support their debt, but may have difficulty refinancing because their values are lower than their debt; and properties that are viable long-term but need immediate help with loan modifications or refinancing assistance. "In the first category are properties that are not viable and cannot be saved. But properties that fall within the other two are viable long-term and can be saved with a variety of tools. It is critical that steps are taken now to prevent a total collapse of commercial markets and a corresponding downturn in our economy," Cozenza said. These tools include incentives for increasing investment in properties; increasing the cap on credit union business lending; a mortgage insurance program for performing commercial loans; additional Federal Reserve and banking agency guidance especially relating to term extensions; an extension of TALF; and improve lending access for small businesses, he said.

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

"With very limited capacity to meet the ongoing demand for credit, there is increasing concern about a potential wave of defaults--from maturing loans--that will further exacerbate the current credit crisis. Needless to say, this has broad systemic consequences and will reverse the progress that has been made in healing the banking system and credit markets to date," Cohen said. "As the demands for debt remain unmet, the stress to the financial services system overall, individual financial institutions, and those who have invested in real estate directly or indirectly will increase."

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 private businessmen like me, many of whom are experiencing a difficult time trying to find credit while facing maturing loans and the potential of foreclosure," he said. "Like many CRE owners, we have been faced with the dilemma of working out several maturing loans with very few if any viable credit options. During 2009, we were able to find resolutions to many of our bank loans, but in most cases, those resolutions included the investment of additional equity dollars to reduce the leverage level, or required us to finance the retirement of the loan entirely with equity funding."

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

"We were fortunate to be able to access the equity funding to facilitate this loan resolution," Borzak said. "Many others in our industry have not been able to access those equity funds, and many have lost the equity that was held in their real estate portfolios because of the decrease in asset values and increase in vacancy that resulted from the recession."

He said ICSC is pushing forward with a temporary and targeted enhanced depreciation proposal that will provide 50% bonus depreciation for new investment in existing distressed commercial real estate. The new capital will be tied to paying down the debt on the asset, with a portion allowed for job creation and capital improvements in the property. "ICSC believes that deleveraging CRE debt, largely held by regional and community banks, with fresh capital and new underwriting standards will help local economies recover faster and keep hometown banks in our communities," Borzak said.

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

"Loan delinquencies for Chicago area institutions in fourth quarter 2009 were among some of the highest of all metropolitan areas in the nation, and these institutions reported record-high net charge-off activity during the year," Lowe said during the hearing. "These conditions have caused a number of bank failures. From October 2008 through April 2010, 32 Illinois insured depository institutions were placed in receivership."

He said that the first quarter of 2010 has shown some improvement in the industry. However, the return isn’t coming fast enough, and Lowe said concerns have been expressed by small businesses, trade groups, and members of Congress that the bank supervisors may be contributing to the lack of credit availability, and that examiners are discouraging banks from extending small business and commercial real estate mortgage loans.

"There have been assertions that examiners are instructing banks to curtail loan originations and renewals, and are criticizing sound performing loans where collateral values have declined. We also have heard criticisms that regulators are requiring widespread re-appraisals on performing commercial real estate mortgage loans, which then precipitate write-downs or a curtailment of credit commitments based on a downward revision to collateral values," Lowe said. "I would like to emphasize that FDIC examiners do not direct banks’ credit decisions. Our examiners do not instruct banks to curtail prudently managed lending activities, restrict lines of credit to strong borrowers, or deny a refinance request solely because of weakened collateral value. We do encourage banks to be knowledgeable of local market conditions and closely review collateral valuations when a borrower’s financial condition has materially deteriorated and a sale of the collateral may be necessary. We would not require a re-appraisal for a healthy performing loan. We leave the business of lending to those who know it best--the community bankers who provide credit to small businesses and consumers on Main Street."

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

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