REITBull

Banks Kick Commercial Real Estate Loans Down the Road

The Irving Mall was built in 1971 and has no mortgage on it. Although it could probably use some love in the form of capex, it is definitely cash flow positive and in no danger of being considered distressed.


On Jul 28 03:02 PM Karen Consumer wrote:

> The experts who don't see a problem with the banks 'playing kick
> the can' with these commercial properties must never leave their
> offices. Irving Mall (Irving, Texas) is a Simon property. The people
> who venture to the mall know it's on its last legs, we can tell by
> the condition of the mall and the quality of the stores (that are
> left). The corner of Story and Irving Blvd; up and down Roy Orr/Valley
> View, the "For Lease/Build to Suit" signs up and down every major
> thoroughfare, these tell the truth to the rest of us.
>
> Artificially padding the books (which is how I see it when they refuse
> to take the loss) at the banks will help them this year, and maybe
> next, but they will eventually have to take the loss, and when they
> fall, they will drag us over the edge with them. God help us all.

Banks Kick Commercial Real Estate Loans Down the Road

I am not an accountant so I really can't be too confident in my response to this. My guess would be that foreclosed loans as a % of nonaccruals is at its lowest point in 3 years, because more banks are extending/modifying in the current enviornment. In the past 3 years, a bank would foreclose because they could salvage a reasonable amount through a foreclosure sale. It's not a change of heart, just adjusting to current business conditions.


On Jul 27 07:05 PM TraderMark wrote:

> Is it only performing loans? It sure doesnt sound like it. How are
> foreclosed loans as a % of nonaccruals at its lowest point in 3 years?
>
>
> Good hearted nature by banks all the sudden? Hmmm...

Banks Kick Commercial Real Estate Loans Down the Road

I think those are good points, CoinAphrase.

1. This certainly could happen. However, I think banks will be in a better position to handle foreclosures 3-5 years from now. Also, my belief is that the credit markets will improve from where they are now.

2. I would not assume that all currently performing loans continue to perform a year from now. But what is the alternative for the bank? Continue collecting interest payments until the borrower defaults via an extenstion, or foreclose now and take a huge hit to the balance sheet? If I were the bank I would choose the former. It just makes more sense.

3. I would not assume this is the bottom nor would I make any predictions about one. However, many reports put CRE value declines at 35-40% since 2007. I find it hard to believe that this rate of decline will continue, although further declines are likely in the short term. Also, I should point out that I am more focused on REITs than private CRE. REITs have an advantage by being able access the public markets which they have done successfully in recent months. They can also take free cash flow from one property and use it to pay down principal on another property that may be coming up for refinancing.




On Jul 27 05:55 PM CoinAphrase wrote:

> You make assumptions that would have been easy in past years, but
> that I can't automatically accept today. Consider,
> 1. What if payments on principle are more than offset by further
> declines in current market prices?
> 2. Would you assume that all currently performing loans continue
> to be performing a year from now?
> 3. Do you assume this is the bottom, and that they will therefore
> be able to dig themselves out from here on?
>

Banks Kick Commercial Real Estate Loans Down the Road

How are CRE loan extensions on performing loans a bad idea, if it includes accelerated amortorization on the part of the borrower (i.e. loan gets extended 3 years and additional payments are made to principal during this time)? Over a period of several years, this would lower the current LTV and make refinancing more likely down the road. It would only benefit owners who are cash flow positive, but most REITs currently fall into this category (As you can tell I am long certain REITs, so I am a little bias).