Real Estate Forum - November 2008

News Wrap

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While speculation of a company sale has abounded, Taylor says it’s highly unlikely that any wise investor would snap up the ailing REIT. “There is just too much debt associated with it, and potential buyers can’t raise enough equity to pay it down,” he says.—Danielle Douglas

Experts Ponder Impact
Of TARP Realignment

A few months ago, to hear advocates of the Emergency Economic Stabilization Act tell it, the financial system was in impending danger of complete meltdown unless the US government stepped in to strip away toxic debt from lenders’ balance sheets, among other measures. Recently, Treasury Secretary Henry Paulson all but declared that this kind of thinking had been a mistake. Purchasing illiquid mortgage-related assets, he said, “is not the most effective way” to use Troubled Asset Relief Program funds.

To be sure, there were many critics of TARP within the commercial real estate industry; the critiques focused on the mechanics of how the assets would be valued and purchased as well as concerns that the private capital waiting on the sidelines to pick up distressed paper and assets would be priced out of the market by taxpayer funds.

Still, to have the program snatched away suddenly is a blow, both in the expectations that funding would improve as a result of the buy-back program, as well as a vague confidence that the Treasury really knew what it was doing.

“This is now the fourth prime objective stated since the first Paulson proposal,” says Brian Olasov, managing director at McKenna Long & Aldridge LLP in Atlanta. “First, Paulson called for purchasing troubled assets. Then there was a call to stabilize regulated financial institutions through direct capitalization. The third, particularly espoused by the FDIC, focused on mitigating foreclosures. While there’s nothing inherently wrong with any of these initiatives, it looks a bit like cabinet-level ADD.”

If the government is not moving to clear toxic debt off of banks’ balance sheets, the question is, how will this policy about-face impact commercial real estate lending, which has all but dried up?

The consensus, not surprisingly, is that it will result in an even further tightening of lending to real estate projects. “There will be little incentive for

banks to increase real estate exposure through new loans until balance sheets are cleansed,” relates James I. Clark, managing principle of EnTrust Realty Advisors, a Lombard, IL-based affiliate of the Alter Group.

There are some bright spots to the situation, however. As a general holistic approach—as heretical as this view may be to the industry—there is a grudging sense that using TARP to bolster consumer spending is a better plan. “With TARP, the government was interfering directly in the market by helping to set the price,” says William Gamble, author of “Freedom: America’s Competitive Advantage in the Global Market.” He says, “There were also too many conflicts of interest, economic incentives without sufficient legal disincentives. The Treasury was asking the people who created these things to value them.”

Rather than trying to put a floor under the bad mortgages, Paulson is doing something much better, he continues: trying to speed up the workout process. “Faster resolution of the mortgage issues provides information about lending risk to the market, which, over time, will increase the amount of credit and help commercial real estate.”

At least one constituency in the commercial real estate sector—opportunistic funds and investors—is likely to benefit from the shift, notes Adam Weissburg, partner with Cox Castle & Nicholson in Los Angeles.

In its original incarnation, the EESA was to have created an instant marketplace for distressed assets, he explains. One concern about that plan was that banks would not be motivated to sell if the Treasury was a buyer. “The thought was that investors would need to offer more than bottom-dollar to encourage sellers to redirect their efforts to the private markets,” he says. It is now clear that the Treasury believes it is more important to stabilize the banks themselves through capital infusion. “This new direction means that those opportunistic investors now have less competition,” Weissburg relates.

Forcing buyers and sellers to finally come to terms on the value of distressed assets and paper may well be the proverbial silver lining of this whole debacle, says Barbara Trachtenberg, a partner in DLA Piper’s real estate practice in Boston and president-elect of New England Women in Real Estate.

“Now we know that the government is not going to provide the needed stability for commercial real estate,” she says. “Perhaps that certainty will encourage

those holding illiquid assets to sell them now, at whatever price the market will bear, and get them off the books in 2008. Maybe it will encourage lenders holding maturing loans to work with borrowers or recognize the losses. We know that there is plenty of equity waiting in the wings for things to start moving again. This could be the catalyst to get the industry going.”—Erika Morphy, GlobeSt.com

What Obama Presidency
Could Mean for Industry

In the wake of this month’s historic election of Barack Obama as the nation’s 44th President, commercial property interests are eager to see how the incoming Administration will address the needs of the industry.

“When you look at all we have on our hands, the number one issue is getting the credit markets unfrozen, since capital is the lifeblood of our industry,” says Thomas J. Bisacquino, president of the Washington,

DC-based NAIOP. “It’s

very important that the Administration takes a proactive stance, moving money back into the marketplace, freeing up banks and lending

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put forth focused on tax relief for the middle class and job creation through investing in clean energy and infrastructure. A definitive plan for restoring liquidity was not outlined. However, he did vote for the Emergency Economic Stabilization Act of 2008.

While the Real Estate Roundtable supports the rescue plan, the Washington, DC-based organization is urging the incoming Administration to encourage banks to extend the terms on maturing commercial debt. The suggestion was one of many in the lobbying group’s letter to President-elect Obama, sent days after the election. Other chief concerns included the institution of a mark-to-maturity accounting model and the deferment of the Financial Accounting Standards Board’s consolidation rules.