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Bankers as Brokers?

Two efforts by banks to create a bigger footprint in real estate have met strong resistance, but the fight is far from over. If banks are successful, they'll be competing with brokerage, management, and development firms. But if some commercial practitioners win, banks will stick to handling money.

The first effort to expand bank capabilities involves rules proposed in 2001 by the Federal Reserve and the U.S. Department of the Treasury to reclassify brokerage and property management as financial activities, allowing national banks to offer those services.

The proposal drew objections from the National Association of Realtors (NAR), which has successfully lobbied Congress to insert a provision in each year's budget bill preventing the proposed rules from taking effect, thereby banning banks from selling and managing real estate. The ban must be renewed each year, so the issue remains fluid.

Banks have been more successful in the second effort — developing on properties they own. The U.S. Office of the Comptroller of the Currency has allowed several national banks to develop their own property. In Charlotte, N.C., Bank of America has begun development of a Ritz Carlton hotel on its property. In Pittsburgh, PNC Bank has begun a project that includes office space, a hotel, 32 residential condos, and parking.

Mixed reviews

“There's a real need for competition in brokerage and property management activities,” says Wayne Abernathy, executive director for financial institutions policy at the American Bankers Association in Washington, D.C. “It's rare that you see any competition on the basis of price. If you gave banks the authority to engage in brokerage, consumers would get better services at a lower cost.”

Not so, says Bob McMillan, a commercial broker at Coldwell Banker McMillan & Associates in Decatur, Ala. “The myth that all real estate brokerage companies charge the same thing and that it's ‘a fixed percentage’ is patently untrue,” he insists, noting that for each of the past 21 years his company's commission per transaction has declined.

“Big national banks would have unfair competitive advantages over local real estate companies,” adds McMillan. For example, banks have access to capital at a lower rate, not to mention huge databases of customers.

Gary Nalbandian, president of NAI/CIR, a commercial brokerage and management firm in Harrisburg, Pa., says the threat of banks moving into commercial real estate is overblown because banks aren't equipped to do brokerage and don't have an entrepreneurial mindset.

Property management is no different than money management, Abernathy explains. “Management is a financial activity because if you're managing a building, you're moving payments,” from renters to owners to the service providers maintaining the building. “A bank might be able to handle property management,” Nalbandian agrees, “but I don't know many bankers who'd wake up at 3 a.m. to check on a police call.”

Development quandary

McMillan of Coldwell Banker says that if the comptroller of the currency allows further expansion of banks' ability to develop, banks could end up stealing opportunities from developers.

He cites a hypothetical case in which he decides to develop a strip mall and takes the deal to the bank for financing. “Who's to say my paperwork wouldn't get slowed up, my option on the land expires, and the bank comes in and buys that position and is going to do the same development?” asks McMillan. “If you open the door to allowing the people controlling the money to compete with your project, you've at least opened the door to an extremely unlevel playing field.”

Keith Lord, president of The Lord Cos. LLC, a Chicago-based broker and developer, has no problem with banks doing development. “A lot of companies do their own development,” he says, citing examples of grocery stores and office tenants who develop property for their own use and lease the rest.

But Jon Morris, a developer at Beacon Partners in Charlotte, N.C., does see risk. Giving banks the ability to develop properties “is like giving an addict cocaine,” he says. “They might do projects that are pretty poor just because they can. That would ruin one of the inherent checks and balances on the development cycle, because banks might be less disciplined than they would be if they weren't developing for their own account.”

The issue of banks entering brokerage and property management will emerge again during the next federal budget cycle, when the current ban expires. Expect realtors to push to extend the ban for another year or even permanently, a move that will continue to face strong opposition from the bankers. Stay tuned.

G.M. Filisko is a Chicago-based reporter and attorney who writes on legal and real estate issues. She can be contacted at [email protected].

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