Two More Looks at a Developer Bailout

Our sister publication NREI posted a story before Christmas about the proposed bailout.

At the time the TALF facility was proposed last month, the government had also mentioned that it could be expanded to include commercial real estate mortgages, according to Grupe.

“Our sense is that they are predisposed to such a program. Whether it is implemented through the existing program or a new companion program would be something that the Treasury and the Federal Reserve would need to determine,” Grupe notes.

The trade groups would also like the government to provide liquidity to unsecured commercial real estate loans through the corporate bond market. It is not clear how this would be done, but unsecured loans would probably be subject to a bigger discount at the point they are purchased by the government, Grupe notes.

The ailing retail sector clearly favors government assistance. “What this letter is proposing is that the highest-quality mortgages be guaranteed by the federal government so that banks would start refinancing good loans again,” says Michael Kercheval, president and CEO of the International Council of Shopping Centers (ICSC).

ICSC has been in direct conversations with the Treasury department, legislators and the Obama transition team, says Kercheval. “What we've been told is that a decision on this could be made early in [2009].”

The problem in the retail sector is that the majority of mortgages on shopping centers are balloon mortgages, where most of the principal is due at maturity. “If there is nobody out there to refinance that mortgage, the loan is technically in default,” he says. In the case of default, in theory, banks could take back the property.

What happens if this doesn't go through? “That's our big concern,” says Kercheval. “We think that this will be unlike the heart attack or stroke that's killing the auto industry, but rather like a slow, insidious cancer, with bits and pieces of the industry dying off.”

Yesterday, the New York Times also looked at the efforts.

“We have profound risk on our hands at the moment,” said Bruce Mosler, the president and chief executive of Cushman & Wakefield, a commercial brokerage firm.

Jeffrey DeBoer, the president and chief executive of the Real Estate Roundtable, an industry group based in Washington, agreed. “Commercial real estate debt will be the next major problem that policy makers need to address,” he said.

The commercial real estate industry relies on a steady stream of relatively short-term financing; loans are refinanced every several years or so. With the two main sources of commercial funding — bank lending and commercial mortgage-backed securities — effectively shut down, hundreds of billions of dollars worth of loans are in jeopardy of defaulting.

The bulk of the loans coming due, industry executives say, were originated two or more years ago to help finance a rash of deals in office towers, hotels and industrial buildings, many of which are generating healthy cash flow today. “We're talking about performing loans — that's the rub,” said Thomas J. Bisacquino, the president of the National Association of Industrial and Office Properties.

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