Are We About to See Dumb Loans Again?

TAMPA, FL—Ron Cohn believes in the Tampa Bay area's commercial real estate comeback. In fact, he's witnessing the market come back in a big way.

Cohn, managing partner of the Arnstein & Lehr law firm's Tampa office, specializes in working out delinquent commercial real estate and asset-based loans for a variety of commercial lenders, including banks and secondary market investors. That work is starting to settle back to pre-recession levels, reflecting the improvement in the market.

At the same time, Arnstein's transaction work is booming—a sign of the increased pace of commercial real estate activity in west-central Florida. But while the market is better, Cohn tells GlobeSt.com, it's important for commercial lenders to do their homework and avoid deals that could cause headaches later. GlobeSt.com caught up with Cohn to discuss the market and offer some tips for those making deals or working out bad loans.

GlobeSt.com: What are you seeing in terms of the health of the Tampa Bay area's commercial real estate market?

Cohn: While there will always be delinquent commercial loans, the volume we're seeing in the Tampa Bay area has clearly started to drop. Lenders are able to sell more loans, while borrowers have more access to money needed to work commercial loans out from their end. Basically, it's easier for borrowers to refinance or to work out of a commercial mortgage if that's what's needed.

Hotels are still a bit of a troubling area, particularly in Central Florida, where there was so much overbuilding. And we are still seeing some other types of properties in trouble, such as day care centers and some retail. But overall, the market appears much healthier.

GlobeSt.com: More commercial real estate loans made during the boom are scheduled to come due over the next several years. What will the impact be on the market?

Cohn: I think the maturities coming up on these loans will become less of an issue, since more borrowers can refinance, but it's still a problem. Loans were made based on what we now know to have been grossly inflated values. Values have since come down to far more realistic levels, and it's unlikely they will get back to previous levels.

So commercial lenders have a decision to make. Are they willing to accept less to satisfy these matured loans, based on a realistic view? It's a good sign that we are seeing more flexibility from lenders. Often, the lender will consider writing off some part of the deficiency, while working out a payment plan for the other portion.

As an example, let's say that a loan of $1 million has come due, but the property is only worth $700,000. In this case, the lender may elect to accept a short sale for $600,000 and absorb the difference.

GlobeSt.com: With the market getting better, and more competition for deals, how does that impact decision-making by lenders?

Cohn: My concern is that as lenders start to compete again, corners can get cut, and bad loans could start being made again. This is my third time through such a cycle, though this last one was by far the worst I have seen.

To avoid such a drastic downturn from happening again, it's important that commercial lenders do their due diligence carefully and thoroughly, and try to avoid excessive risk. That type of risk can result from making a loan simply to keep the bank across the street from getting the business.  

We always are focused on protecting the lender. But we do occasionally see where loan officers seem more interested in simply closing a deal than in prudent balancing of the risks inherent in a given deal.