Commercial Property Herald

Troubled CRE Assets Take Down Another Six Banks - CoStar Group

I read this article, Troubled CRE Assets Take Down Another Six Banks - CoStar Group, from CoStar, feeling a bit like Michael Corlioni from the Godfather.  "Just when you think that you got out of it, they keep dragging you back" or words to that affect.  I haven't heard much about bank failures lately only to hear that 6 more banks were taken down by the FDIC in the past two weeks. Analysts suggest that many of the failures are due to the CMBS and commercial mortgage issues. I guess bank failures are alive and doing well, back in the US.

Earlier in the week, Costar also reported that there has been a significant increase in CMBS defaults in the office sector.   There can be no doubt that my law practice, which currently focuses on post-foreclosure representation of lenders and buyers has seen a significant uptick in office properties as compared to the last 3 years in retail.  I will add that I have also seen a significant increase in new lease work and not just tenant collections.

The good news is that the pace of bank failures has gone down to an average of 5.5 per month over the first 4 months of 1012 as compared to an average of 7.7 in 2011 as reported by CoStar.

The bad news is that some analysts believe that some of the reduction in failures is attributable to giving banks more time to get the financial house in order rather than pulling the plug as fast as they did in 2010.

So what does this say about the state of commercial property and the economy.  Well, what I see is continuing economic pressure in both directions leading me to believe that we are close to the bottom, with slight blips in both directions but no real clue in which direction will be sustained.  Bottom line for me is that I really don't see a sustained major dip but a slow gradual improvement with some slight hiccups along the way.

Commercial Foreclosure Basics in California - Part 2 An Update

I am often asked by borrowers whether of not a lender can sue the borrower for any amount that is owed on the loan, over and above the sale price received at a private sale.  Well, there are many, "it depends."  The first depend is, "it depends what state the property is located in."  First and foremost, you have to be aware that each state has different rules and procedures and I am not qualified to advise in any state other than Califonia, so this post is limited to property and laws in California.  However, while I am only referening certain laws and rules in California, the are many similarities from state-to-state.

In very short summary, if the lender proceeds with a NJF, (non-judicial foreclosure), a procedure provided by California law and the property is sold as a result, the lender cannot proceed against the borrower if there is any deficiency.  By deficiency, I mean that the property sold for less then what was owing on the secured loan.

In California there are two procedures generally used by lenders and trustees when foreclosing on the collateral given by a defaulting borrower, (1) judicial foreclosure, and (2) non-judicial foreclosure.  In a commercial context, in California both procedures are used.

Often, the lender proceeds with a non-judicial foreclosure to begin the statutory process allowing the lender to foreclose on the property, usually without the involvment of an attorney.  The non-judicial foreclosure process is relatively quick and inexpensive as compared to a judicial foreclosure and is also typically used in residential foreclosures.

Concurrently with or a short time after the commencemnet of the non-judicial foreclosure process, a lender will often file with the court, a judicial foreclosure lawsuit, seeking an immediate appointment by the court of a receiver.  Usually, the main purpose of the receiver is to manage the property and collect rents during the pendency of and until the sale of the property as a result of the non-judicial foreclosure.  This will preserve and protect the lender's collateral, to the extent possible. Usually, the judicial foreclosure lawsuit remains open and active for a period of time beyond the sale of the property at a non-judicial foreclosure in order to allow the receiver to finalize the administration of the property while the receiver was responsible for managing the property and upon the final report of the receiver, the lawsuit is usually dismissed.

However, there are some occassions where the judicial foreclosure lawsuit is not dismissed and the lender can continue to proceed with a lawsuit, seeking damages against the borrower and, in some cases, a guarantor.  A lender will continue to proceed against the borrower and/or the guarantor including instances in which the lender believes that the borrower or its principal was involved in some sort of fraud relating to the loan or missapropriation of rents that part of the lenders collateral.  Continuing actions may also include action against guarantors who fully or partially guaranteed the loans or were otherwise subject to certain carve-out rules.t

Following posts will address The Bird Rule and carve-out exceptions to limited guarantees.

Please take care when using the above information.  As in most cases, the devil is in the details and the exceptions are what keeps lawyers employed.  A thorough analysis by your attorney should be done before you act on any of the advice contained herein.

 

Are Insurers Going to Take the Lead on Commercial Real Estate Lending?

The Wall Street Journal writes that in Europe, insurers are influencing terms and making credit both easier and cheaper.

I can recall in the 90's do a great deal of post-foreclosure work for some of the larger insurance companies that had made numerous commercial loans earlier in the decade and in the 80's.  If my recollection serves me correctly, at this time, before the CMBS market, insurance companies were a very significant source of finance for the commercial real estate market. 

Is it possible that insurers are coming back to the market and to how influential will they be?

California Appeals Court Rules Oral Promises Are Binding

A recent California appeals court ruling found that an oral promise by a lender to modify a loan is enforceable, by the borrower.
California Appeals Court Rules Oral Promises Are Binding.

To an experienced lawyer, a recent court ruling in California finding that an oral promise to modify a loan can be enforceable even when the loan documents require a writing to modify the loan, is not new or surprising law and is nothing more than what we learned in law school.  What us lawyers would refer to as "Hornbook Law." We know this defense as "Promissory Estoppe and can be raised as a defense in almost any contract dispute, not just loans. The defense arises when one party reasonably relies upon, to their own prejudice or harm, the person making the promise may be bound by their oral promise. 

There are some difficulties in the defense, not the least of which is proving that the promise was actually made, that the promisee reasonably relied upon the promise and that the promise relied upon the promise to their prejudice.

Why Close the Bank, Just Bail it Out.

Carrie Bay writes in DS News Regulators Shut Down Four Banks, about the recent spate of closures by the FDIC of community banks including shutting down La Jolla Bank FSB. According to Carrie:

"The FDIC brokered a deal with OneWest Bank in Pasadena to take over La Jolla Bank’s $2.8 billion in deposits and reopen its ten branches. One West, which was formed to take over IndyMac Bank when it collapsed, also agreed to purchase “essentially all” of the La Jolla Bank’s $3.6 billion in assets, $3.3 billion of which the FDIC agreed to share losses on. The California bank’s failure is expected to cost the FDIC $882.3 million."

This deal follows on the heels of questions raised about the deal brokered by the FDIC when One West Bank took over Indy Mac Bank and One West Banks most recent profit disclosures.

All of this raises the question, what would happen if the FDIC didn't close the community banks holding the toxic loans and instead, simply shared the losses with the failing banks?  What if, in the case of La Jolla Bank, the FDIC just agreed to share the losses with the bank, expecting to lose $882.3 million?

How Far Down will Commercial Real Estate Continue to Go

Ariel Fisher, a co-member of the Corporate Real Estate Group on Linkedin asked the question:

"How close is the real estate industry to hitting "bottom?" And what do you think is the number one sign that we've reached that point and are on our way to a real recovery?

A Colleague of mine recently wrote a blog post on the state of the real estate industry. He believes that the "bottom" is in sight and that we are on our way to a real recovery.

He cites private REITs recently going public and Tishman Speyer handing Stuyvesant Town back to the lender in lieu of bankruptcy, with several creditor/buyers trying to snap it up at a bargain price, as just two examples that the "bottom" is near.
(Click: http://blog.buildingengines.com/?p=423 to read the full article, including other examples of an impending "bottom.")

Once we see employment rates increasing, he argued, we will know real estate recovery is on the way. What do you believe is the number on sign to look for that things are on the up-and-up?"

I answered as follows:

Commercial real estate still has a way to go before it bottoms out and I think that we are only still in the early stages of the problem. Probably about 1 1/2 to 2 more years before it bottoms out. The fact that there is still money out there to spend on real estate only means that there are potential bottom dweller buyers, including REITS looking to snatch up the deals, which I believe there will be plenty of. This is what the REITS did in the mid to late 90's.

The more interesting questions is how will the continuing fall of commercial real estate effect the economy? In answer to that question, I answer, "some," but not as much as the collapse of the residential market. I see the economy more likely to continue to effect commercial real estate then the other way around. As long as unemployment continues to remain high and less money is available from a large pool of consumers there will continue to be commercial real estate failures and bank or lender failures and maybe some REIT failures.

To make my answer even more verbose, with the current backlash over government spending, the federal deficit and the effectiveness over prior and existing bailout plans, I have serious doubts that the government is about to bail out commercial real estate investors, anytime soon. The most likely scenario that I see is that commercial property owners will continue to fail, causing banks to continue to fail, which the FDIC will have other banks take over who will pick over the good assets of the failed bank and leave the rest to the FDIC, who will then sell the bad assets at a highly discounted rate. When that process begins to slow down is when you will see signs of the real estate industry hitting bottom.

For other interesting discussions and information on commercial real estate, visit the Corporate Real Estate Group of LInkedin, which can be found at http://www.linkedin.com/groupAnswers?viewQuestionAndAnswers=&discussionID=13118264&gid=35901&trk=EML_anet_qa_ttle-d7hOon0JumNFomgJt7dBpSBA

Frank Suggests Tarp Funds To Be Used for Unemployed Mortgage Payments

Representative Barney Frank is now suggesting that Tarp funds be used to pay the mortgages of unemployed workers Congressman Calls for Bailout Money To Go to Unemployed Workers.  Now this is an idea that I might actually get behind as long as the government can assure that the funds are used to pay the mortgages.  In this way, we are not just giving money to the bank's executive's bonuses and are actually doing something to help the unemployed.  Might actually slowdown the foreclosures and prop up property values.  Sounds good so long as you believe the government can get this done and actually control the fraud and abuse.

Deficiency Judgments allowed in Arizona

For those living in California, take heed of Arizona's new law allowing deficiency judgments in foreclosure actions.

In July, Arizona passed legislation removing the ban on a lender obtaining a deficiency on a foreclosed home except in instances in which the borrower lived in the residence for more than 6 consecutive months and was able to prove it with a certificate of occupancy. The bankers love it but public criticism has prompted legislators to repeal the July legislation.

Arizona bankers are not taking this sitting down though and are appealing to the Arizona Supreme Court trying to block the repeal on technical grounds.

For more of an explanation of when a lender can obtain a deficiency, see my earlier article Commercial Foreclosure Basics, Part II.

Some Say Commercial Property Market to Hit Bottom in 2010

Finally an article on the state of the commercial real estate market that I can almost agree with. Roger Vincent of the LA Times reports in Commercial property market to hit bottom in 2010, report says,  that many experts believe that the commercial market will hit bottom in 2010. The report, a study by PriceWaterhouseCoopers and the Urban Land Institute further says that the commercial property market has been stuck in neutral.

I think that "neutral," description is pretty accurate although I might describe it as "neutral, looking down." I also don't think the "looking down" will remain looking down but more like "going down," in 2010 with a bottoming out in 2011 with some aggressive investing by those with cash in mid 2011.

Geithner confident that Economy has Stabilized

DSNNEWS.COM quotes Timothy Geithner as saying that the financial system is stabilized in their article, Banks can Handle Commercial Real Estate Losses Geithner Says. Sounds a little like Prime Minister Chamberlain stating that "Peace in our Time," after meeting with Hitler just before Germany attacked Poland to start World War II.

I get it that part of Mr. Geithner's job is to instill confidence in our financial system.  The less confidence, the more instability.  But lets get real.  I just don't see how he can be so confident.  No, I don't think that our banking system will collapse, but I do see many, many more bank failures and while we don't have the RTC taking over banks and Savings & Loans as they did in the 90's, I see us doing the same thing by having the government give money to the big banks so they can survive all of the loan defaults and so that they can buy out the smaller banks.  Can you spell g o v e r n m e n t  s u p p o r t e d  b a n k  c o n s o l i d a t i o n? And by the way, I am paying for all of this along with the bonuses being paid to the bank executives for doing such a great job.

The only thing that I am confident in at this point is that someway, somehow, we or our children are going to have to pay back all that this is costing and the rich will likely get richer and the middle class and the poor will likley get poorer.