Good news for commercial real estate owners

Commercial real estate owners got some encouraging news during the past few weeks. Several economic reports showed promising signs, and the FDIC made clear how it is looking at commercial real estate loans sitting on the books of banks.

For the first time in two years, tangibly good news came out of the Bureau of Economic Analysis on GDP growth. The government agency reported 3.5 percent annualized growth in gross domestic product, which is the highest since the third quarter of 2007. Many economists are declaring the recession over.

In addition, the Purchasing Managers Index of business activity showed that the manufacturing sector grew in October, with increases in new orders, production and, for the first time in 14 months, employment.

And now, the Federal Deposit Insurance Corp. has issued a 33-page policy statement aimed at easing concerns over souring commercial real estate loans sitting on banks' books.

Critics contend that banks, which hold more than half the $3.4 trillion of outstanding commercial real estate loans, have been extending loans just to keep from having to write them down. The policy statement provides detailed guidance for bank examiners and a rough road map for troubled borrowers.

The statement doesn't mean banks and borrowers are off the hook for bad loans, but it helps define the proper practices for dealing with loan modifications and extensions.

Perhaps the best news is for borrowers and banks struggling with a matured loan in which the borrower is strong and the collateral has sustained a loss in value or tenants, but there's good and sufficient cash flow to cover debt service.

In that specific case, the FDIC allows the bank to continue to carry the debt without a negative classification, even though the loan-to-value could be more than 100 percent.

Beyond the specifics above, the policy statement gives guidance to banks as they work through restructuring troubled loans. Two central themes for banks are:

• fully understand the collateral securing their loan; and

• fully understand the borrower's financial position.

That means appraisers will continue to be busy for many quarters, and bankers will spend most of their time doing asset management versus granting new loans.

After banks, conduits originated the next largest portion of commercial real estate debt, and it now sits like an orphan in the hands of third-party servicers.

Almost a quarter of outstanding commercial real estate loans were originated by conduits (banks, insurance companies, credit companies), bundled up and sold as commercial mortgage backed securities.

Because the CMBS market is defunct and the loans are managed by third-party servicers, the fate of these loans continues to be a source of huge problems for the real estate industry.

According to published reports, approximately 4.81 percent of conduit loans (CMBS) are now 30 days or more delinquent, including 8.6 percent of hotel loans and 7.7 percent of multifamily loans in the CMBS/conduit universe.

The Richmond Metropolitan Statistical Area has more than $105 million of CMBS loans that are 30 days or more delinquent, according to industry data.

Included in that bunch is the Sheraton West at the Glenside Drive interchange with Interstate 64. The 372-room hotel's occupancy and room rates have fallen dramatically because of competition from the new Westin across the street as well as continued regional economic pressure.

Another large loan in the batch is Chesterfield Marketplace, a 197,941-square-foot retail center along Midlothian Turnpike. It is anchored by PetSmart, Staples and TJ Maxx and is adjacent to a Home Depot and Toys R Us.

While the challenges continue for commercial real estate, cheap money is available for the best loans that are out there.

According to the John B Levy & Co. National Mortgage Survey, rates for fiveand 10-year fixed-rate mortgages range from 5.75 percent to 7 percent for low-leverage loans secured by real estate with good tenants and operated by solid borrowers.