Commercial Real Estate Frontline

Late last year, my friend Chris called me to ask whether he should withdraw all of his deposits from his local bank. Chris was afraid that his bank might fail and he’d lose his savings.  “This isn’t 1929,” I said.  “Your deposits are insured and the government’s taking action to shore up our lending institutions to protect your deposits and to keep our banks solvent.”

While Chris’s deposits may be safe, the same can’t be said for the bank’s borrowers.  Last week I had dinner with a Kansas City based developer who was telling me about his stalled project because his lender has applied the new mark to market rules, which has resulted in a revaluation of his assets and is now requiring him to put more cash into his properties to recapitalize the assets.  This developer, who has financial partners, told me that his cash is getting tighter and his partners are growing wary of putting more money into the deals.

“It’s just like the early 90’s all over again–it’s a reverse run on the bank.  Instead of the depositors draining the bank, the bank’s draining its borrowers,” he complained.  “Last time, banks required more equity or called loans.  Investors gave up, let the properties go back to the lender, and took the loss and then started over. The funny thing that happened is the banks then sold those properties at a discount back to the very investors they took the properties from. The investors bought them back at a discount and then they were worth more 5 years later than when they originally owned them.”

Sounds like a short term lose-lose to me.  Are our banks just going to end up hurting themselves trying to recapitalize?  Is it inevitable and have our regulators gone too far?  Maybe it’s time to change the mark to market regulations so that investors can hold onto their properties and do what they do well–operate the assets.  Let the banks focus on lending and keep them out of the asset operating game. Doing so may be the best way to ride out this downturn and keep everyone in business.

About the Author:Jeremy Cyrier is a principal with MANSARD Commercial Properties and member of the CCIM Institute faculty.  He offers advisory services and brokerage expertise to commercial real estate owners and tenants.

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