The FDIC is hiring auditors to look into bank reserves to cover these write-downs. There have been multiple bank failures so far this year, including the second largest bank in U.S. history, Indy Mac. Banks that are in a good position will also cut back on lending as they hit certain volume goals, geographic targets, sponsor limits and product-type restrictions.
The Exit Strategy
Many lenders are concerned about their exit strategy, so an owner should exhibit a future net operating income (NOI) that will allow for pay off of the current loan with a new lender. However, this is more complex than it seems since the future of cap rates, rental rates, occupancies, etc., in this market is so uncertain. For example, many lenders may not give an owner credit for rental increases, and then use a 1 percent or greater cap rate for their exit sizing.
Even though a loan may qualify today, the loan proceeds may be reduced because the owner may not be able to qualify for the same loan in three years when he needs to refinance due to conservative underwriting of future financial and market assumptions.
The end result is it’s going to take some time before liquidity returns to the capital markets. The economy needs to sustain a clearer direction for buyers and sellers to come to terms and for lenders to truly understand the depth of their write-downs.
When looking for a loan, owners should explore a variety of options, such as commercial banks, regional banks, life insurance companies, credit and finance companies to find the best deal. They should also be prepared to accept more recourse, less proceeds and shorter terms.
At the end of the day, this too will pass, and the capital markets will correct. In the meantime, having the knowledge to properly navigate this turmoil will help you keep one eye open for the opportunities that always arise during a crisis.
Eric Snyder is a senior vice president with Buchanan Street Partners, a real estate investment management firm in Newport Beach, Calif. Buchanan delivers complete capital solutions to commercial real estate developers and owners through its discretionary funding of equity capital and by providing commercial real estate advisory services. For more information, visit www.buchananstreet.com.