Post-Bailout Financing Challenges
Last spring, I tried to arrange financing for the $15 million acquisition of Pebble Place Business Park. Located in Henderson, Nev., a prestigious suburb of Las Vegas, the 51,878-sf property, which was completed in 2007, is comprised of two multitenant office buildings situated around a beautifully landscaped central courtyard.
This was a solid gold transaction. It was built on significant liquidity; joint and several liabilities offered by all partners; long track records of successful real estate development and investment; a recourse loan; and a $1 million cash deposit and the seller’s personal guarantee of 95 percent occupancy for nearly two years. In addition, the buyer was willing to put up l0 percent of the loan amount in an offsetting securitized deposit for the term of the loan. Finally, the seller was funding cash at closing for tenant improvements and leasing commissions for remaining vacancy, guaranteeing the same for any new vacancies of currently leased space during the guaranty period.
Working with an experienced mortgage broker, as well as directly with lenders, we approached every major bank in Las Vegas, including several national lenders. We also contacted lenders in cities in which two of the three partners had done business for many decades as private wealth clients. Over a three-month period, 33 banks were approached.
Virtually all lenders were recipients of Troubled Asset Relief Program funds. On television, on radio, and in newspapers, every bank advertised that they had “money to lend” in Las Vegas.
We discovered that this was false advertising: There was no loan market. In fact, each bank used a similar strategy to indicate that the loan did not meet its criteria. Some requested appraisal updates after the borrower already had provided them. The request supposedly was based on the scarcity of recent comps. When I contacted title companies between September 2008 and April 2009, there were no new commercial transactions to use as comps for new commercial real estate loans -- because no banks were lending. Thus, the loan was denied. Other lenders required 50 percent to 60 percent (or more) equity and offsetting collateralized deposits held by the lender. This requirement effectively defeats virtually all new lending. A few banks quoted terms of one to three years -- maximum. Others told us that the loan had not been approved by the loan committee, when, in fact, the loan committee never reviewed the application.
One senior loan officer at a well-known local bank told me that if our loan was not going to qualify, he was going to call 35 other applicants and tell them they were wasting their time. The bank was advertising money to lend, but clearly this was not happening. This scenario is happening all over the country.
We were finally successful in getting our loan commitment from the thirty-fourth bank we approached just three weeks prior to our 1031 exchange deadline. This Midwest bank with just one Las Vegas branch was unaffected by the residential housing meltdown and the collateralized securities crisis of 2007 and 2008. The bank expedited the processing of the loan in less than three weeks and the transaction finally closed.
It’s important to note that I was introduced to the president of the bank of the lender by one of the bank’s clients at a charity event. During our conversation, the president of the bank indicated that money was available through their private wealth management division. The bank originally had looked at the loan and rejected it because of residency requirements. But for a totally unrelated social introduction and connection, this 1031 exchange would not have taken place.
The loan market remains frozen today. Hundreds of billions of dollars of commercial mortgages are coming due in 2010 and 2011. The government must address the issue of commercial mortgage market liquidity or the impact of commercial loan defaults on the economy will be devastating. The recent FDIC and Treasury regulatory guidelines changes may help; but guidelines are just that, leaving the day-to-day decisions to the very same lenders who refused to provide liquidity in the commercial marketplace. To create liquidity, some form of government-backed mortgage insurance is necessary in the short term. The cost of the program could largely be paid for by borrowers desperate for funding. The CCIM organization can lend support and expertise at a legislative level to resolve this issue.
I have seen no changes in the lending market since this transaction closed. Efforts by the government will not work unless banks are required to begin lending again. The banks are not doing this willingly. The credit market for commercial transactions remains essentially frozen.