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Commercial Real Estate Will Collapse!

November 19, 2009

How’s that for a title? That’s the title of a Forbes article out today by Stuart Saft, a partner at law firm Dewey & LeBoeuf who makes the argument that court decisions could be the nail in the coffin. We’ve discussed some of the decisions here, including the Citigroup deal in New York.

In the last few weeks there have been a series of court decisions that will have repercussions in the credit markets for years to come making an already cautious lending community absolutely paranoid, and restricting credit even if available.

Mr. Saft lists a slew of steps which should be taken to help avoid a collapse. Amongst them:

The Federal Reserve should provide a credit facility to commercial real estate owners as a lender of last resort with the government obtaining an equity interest (but not control) over the real estate in order to avoid the real estate from being dumped on the market, thereby further depressing values, which will also provide lenders with a way to liquidate their loans.


Lenders should not be required to appraise real estate that they own, are part of special assets or the subject of workouts using a mark-to-market standard but, recognizing the current aberration in the market place, using a “fair value” approach that recognizes the need to sell in an orderly transaction. What helped to destroy the S&L industry in the late 1980s and bring on the last real estate recession was the need of solvent banks to mark the real estate assets to market.

but his last one is the only one that resonates with me…

Finally, the federal government needs to focus on policies that will produce jobs and an environment that will spur job creation.

Jobs is what it comes down to …. a light at the end of the tunnel. We don’t need to be out of the woods, we just need to see out of the woods. Job growth is that lens. The rest is window dressing.

[via Forbes]

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Categories: Commercial Real Estate Investing
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Joshua November 20, 2009

the credit facility idea is asking for nothing but trouble. it would be a wonderful thing for the industry. i dont think it should be done though. spur job creation immediately. were looking at over 3 years to absorb lost jobs. that needs to be cut down significantly and immediately.

the third item is interesting. but open to way too much interpretation. the recent 33 page guideline provides more than enough flexibility for lenders to get loans back to "performing" status. at that point banks should be setting aside their expense reserves for the deal and prepping to foreclose and sale should the workout not take. i had an interesting meeting with a small bank president tonight where we discussed these items in depth.

@JoeStampone1 November 20, 2009

I certainly agree with the last point, the success of the CRE industry hinges on two things: the ability for the U.S. to recover the nearly 7.2 million lost jobs and the ability to restore consumer confidence. That's all it comes down to. We're clearly in for a slow recovery.

Square Feet November 20, 2009

I agree the new FDIC guidelines give enough leeway to banks on assets which could arguably be classified as performing. The rest of the assets are simply toxic to growth and lending and need to be dealt with. A credit facility provided by the government would exacerbate the length of time it will take to arrive at a meaningful recovery because the debt will not be eliminated.

Sam November 20, 2009

This bank leeway needs to stop. We're quickly heading down a path toward Japan of the 90's, where banks hid their asset values for a decade. The result is zero to negative growth, since the economy freezes without price discovery.

Name November 25, 2009

If Bernanke wanted to bail out Main Street, why didn't he do so by wiping out equity, haircutting bondholders, and leaving reconstituted financial institutions in the place of the old ones. Apart from the direct financial justice, this would have returned moral hazard into investors' vocabulary and prevented the bubble that is the equity market now from forming. Ugh, such scum.

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