April 1 (Bloomberg) — Royal Bank of Scotland Group Plc is selling bonds backed by commercial mortgages from several borrowers in the first sale of its kind since June 2008, gauging investor demand for the debt amid climbing defaults.

The $309.7 million offering, backed by 81 properties in states from New York to Missouri, includes $240.8 million in top-rated securities, according to people familiar with the sale who declined to be identified because terms are private. Of those properties, 78 are retail sites, the people said.

The new issue highlights a challenge facing Wall Street in reviving the $700 billion market as delinquencies rise and the value of mortgages fluctuates. Unlike other banks working on sales, U.K.-based RBS skirted the risk of holding the debt by not closing the loans as they were being pooled, the people said. RBS bankers have been arranging the deal for several months, they said.

“Nobody wants to sit with a huge book of business they haven’t sold,” said John Levy, president of Richmond, Virginia- based real estate investment banking firm John B. Levy & Co. “Accumulating this stuff for the long term is a problem. What if the music stops again?”

Bank of America Corp., JPMorgan Chase & Co., Deutsche Bank AG, Wells Fargo & Co. and Goldman Sachs Group Inc. are all approaching borrowers with terms for commercial mortgages to be packaged into securities and keeping the loans on their books until they’re sold, according to people familiar with the discussions.

Price Swings

That exposes the banks to risk because they need several months to assemble the mortgages from different borrowers, and it’s hard to guard against price swings on the debt in the interim, the people said.

In February of 2009, RBS said it would transfer 540 billion pounds ($820 billion) of toxic assets, including commercial property loans, into a new unit to be wound down or sold over three to five years. RBS CEO Stephen Hester said at a Jun. 16 conference that the bank would “never lend as much to real estate as we did, because we lent too much.”

The largest loan in the new offering is a $77.7 million mortgage on the 1,022,692-square-foot South Plains Mall in Lubbock, Texas, home to J.C. Penney and Dillard’s. A $72.6 million loan on Four New York Plaza in New York is the second largest. JPMorgan Chase & Co. occupies about 75 percent of the 22-story building.

CMBS Sales

Sales of commercial mortgage-backed securities plummeted to $11.2 billion in 2008 from a record $232.4 billion in 2007 as the credit market seized up, according to data compiled by Bloomberg. Even with U.S. government aid, only $3.04 billion of the bonds were sold last year, the data show. Those sales were backed by loans to a single borrower.

As of the end of February, late payments occurred on about 6.29 percent of commercial mortgages bundled and sold as bonds, more than five times the rate a year ago, according to Fitch Ratings. That figure may climb to 12 percent in 2012, the ratings service said.

Top-rated commercial mortgage-backed securities yield about 2.45 percentage points more than Treasuries, compared with 10.29 percentage points a year ago, according to a Barclays Plc index.

Investor demand for such debt has been strong, and other banks will be watching how the RBS deal sells to set the bar on where to price loans for future offerings, according to James Grady, a managing director at Deutsche Asset Management in New York.

“A data point on where investors are interested will help underwriters feel more confident,” Grady said.

Previous Issue

The last so-called multiborrower offering for commercial mortgage-backed bonds was a $1.09 billion sale in June 2008 from Bank of America that contained debt on 140 properties, according to a prospectus.

Michael Duvally, a spokesman at Goldman Sachs, couldn’t be reached for comment. Brian Marchiony at JPMorgan, John Gallagher at Deutsche Bank and Gabriel Boehmer at Wells Fargo didn’t immediately return phone calls seeking comment. Michael Geller, a spokesman at RBS, declined to comment, as did Kerrie McHugh at Bank of America.

To contact the reporter on this story: Sarah Mulholland in New York at smulholland3@bloomberg.net

An uncertain economy and jobs market continue to make it difficult for investors to deploy capital with conviction, but a new kind of normalcy is creeping its way into the market.

Normalcy is far from normal, but, like kids adjusting to the wacky new rules of a temporary parent in ABC’s “Wife Swap,” a degree of order is making the marketplace more active than it has been in almost two years.

In this environment, normalcy means spending time looking at distressed assets to purchase or negotiating with a lender to discount a loan.

These activities have taken the place of buying from a willing seller or negotiating with a lender to get acquisition financing. Nonetheless, certain patterns are emerging that make the market seem orderly.

Distressed assets are hitting the selling block from a variety of sources. In addition to the FDIC, which continues to sell portfolios of performing and nonperforming loans and real estate owned assets, several healthy banks are also marketing loan portfolios.

In a departure from the nuanced world of price discovery through passive “reverse inquiries,” Bank of America is marketing several loan portfolios directly to investors.

Marketing a loan for sale forces a bank to write the asset’s carrying value down to market. A more common strategy, known as reverse inquiry, allows a bank to leave the carrying value of a loan on the books without adjustment even if an offer comes in well below that level. Under a reverse inquiry, the bank’s role is passive versus active, which affects the accounting treatment.

According to a recent study by Commercial Mortgage Alert, banks wrote down less commercial real estate loan value in the fourth quarter than in the prior quarter.

Interestingly, Bank of America had the largest writedowns, which amounted to $837 million. Combined with the strategy to dispose of loan portfolios through direct investor sales, this is perhaps a sign that Bank of America is able to recognize and deal with its problem loans more aggressively than other large banks.

While it is too early to measure the overall impact, it could mean that things are loosening a bit in the distressed market.

Most industry participants believe the only way back to normal is through more liquidity in the capital markets and a return to a vibrant commercial mortgage backed securities (CMBS) market.

In fact, that was the government’s objective in February 2009 when it added CMBS to the TALF (term asset lending facility) program.

TALF provided bond investors a lending facility so they could leverage their capital and buy more securities. Approximately $12 billion in bonds were purchased under the program.

The idea was that a healthy market would eventually return and the government could stop its support, which is what happened March 31. The problem is that CMBS is not healthy yet, so the market is unsure of the program’s success.

In a promising signal for CMBS, however, RBS Greenwich (Royal Bank of Scotland) is coming to market this week with the first multi-borrower CMBS deal in several years. It is said to amount to less than $500 million and is made up of six borrowers with competitive loan pricing.

Although little capital is available for transitional properties or new development, loan pricing is good for stabilized properties that seek low-leverage loans.

Despite uncooperative U.S. Treasury yields, which are pushing pricing higher, five-and 10-year mortgages range from 5.75 percent to 6.50 percent, according to the John B. Levy & Company National Mortgage Survey.

Another example of the new normalcy is the sale of the 1.3 million-square-foot former Qimonda facility in eastern Henrico County to an affiliate of QTS out of Overland Park, Kan.

QTS manages data-center facilities throughout the country, and this facility could double the square footage in its portfolio.

Although the purchase price of $12 million is nowhere close to the former assessed value of $155 million, the facility now is in a position to become functional again. In this environment, functional is the new normal.

While not even on the menu six months ago, the market for commercial mortgage-backed securities (CMBS) has become a front-burner entrée as lenders finally have all the ingredients for making new loans.  According to “Mastering the Recipe,” the latest podcast produced by John B. Levy & Company (available online at www.jblevyco.com),  commercial real estate lenders continue to search for the right mix of leverage level and loan pricing as they try to bring a tepid secondary market to a simmer.

“After groping around in the dark for the right combination of ingredients, commercial lenders just might have found the right recipe for exciting the current market,” says John Levy, founder of John B. Levy & Company.  “And this is happening as the Federal government – through the TALF program – seems to be backing away from helping private enterprise, both for the commercial and the single-family markets,” Levy adds.  “Interestingly, only one of the three CMBS deals completed last year came through TALF, and this program expires shortly.”

As the TALF program comes off the lending menu, the market is seeing an uptick in the number of borrowers who have decided to access mezzanine debt.  Today, rates for mezzanine debt fall in a range between 10 and 13 percent, a collapse from the 15 to 20 percent range of six months ago.  These lower rates give borrowers additional leverage.  Investors need either more equity, which they are now able to raise, or they need mezzanine debt because their existing borrowings cannot be replaced by a new first mortgage.

“The surge in the Dow certainly isn’t hurting matters,” says Levy.  “A year ago, we were at around 6,500, and the banking system was on the verge of collapse.  Today, the Dow is approaching 11,000.  The banking system is starting to be profitable again, and people are paying off their TARP loans.  It’s understandable that people look at the Dow and feel confidence.  And in the financial markets, confidence expresses itself in a willingness among lenders to make new loans.”

But not all is well.  Despite the growing confidence that comes from a rising Dow and upbeat loan market, smaller retail and community banks continue to be pruned.  Those institutions with an asset base between $100 million and $10 billion that fall in the bottom 5 to 10 percent of their competitive set are at the greatest risk.

“Loan markets are definitely up,” says Levy.  “People are entertaining new investments in the form of loans, preferred equity, mezzanine debt – for all types of property.  We’re even finding an active market for shopping centers,” adds Levy, “and that’s after all the talk around the Christmas season that retail was dead.  This doesn’t mean we’re running at thoroughbred pace, however.  We’re more like the tortoise.  But when you consider that we weren’t running at all six months ago, tortoise pace is good.”

Firm Background

John B. Levy & Company, Inc. is a real estate investment-banking firm headquartered in Richmond, Virginia.  Since John Levy founded the company in 1995, the firm has structured over $3.5 billion in financing for developers and owners of commercial and multi-family projects nationwide, often investing its own proprietary funds into transactions with its clients. 

Mr. Levy is an expert on commercial real estate financing and the effects of interest rates on commercial real estate markets.  He is the originator and author of the Barron’s/John B. Levy & Company National Mortgage Survey, which Barron’s published for 23 years, and co-creator of The Giliberto-Levy Commercial Mortgage Performance Index (sm), the first and pre-eminent index to measure and analyze the performance of investments in the commercial mortgage industry.  Additionally, he is a former member of the Board of Directors of Anthracite Capital Inc. (NYSE: AHR), a New York Stock Exchange REIT managed by BlackRock, Inc. and a former director of Value Property Trust. 

A seasoned speaker, Mr. Levy has presented nationwide to major real estate associations and key industry groups, including the Mortgage Bankers Association and the Urban Land Institute.  He has also appeared on Bloomberg and CNBC.  Most recently, Mr. Levy appeared as a guest commentator on FoxBusiness.com and FoxNews.com.

For more information about John B. Levy & Company, please visit our website at www.jblevyco.com or call Andrew Little at 804-644-2000, extension 260.  You can also follow us on Twitter at www.twitter.com/jblevyco and become a fan on Facebook.

ANDREW LITTLE – TIMES-DISPATCH COLUMNIST

March 8, 2010

Virtually everyone in commercial real estate these days will say things are better than they have been in some time.

Though not altogether supported by the data, a positive outlook is spreading slowly but surely into the business.

Nothing compares well with commercial real estate activity in the good old days of 2007, but “off the bottom” is not a bad place to be when the industry’s prospects over the next few years “could threaten America’s already-weakened financial system,” according to a recently released government report.

The 183-page report was completed by the Congressional Oversight Panel, whose task was to assess commercial real estate loan loss risk to the country’s financial stability.

Other observations in the report include that $1.4 trillion of loans come due between now and 2014, and 50 percent are underwater; and that there are nearly 3,000 banks with problematic exposure to commercial real estate.

The panel’s bleak assessment of the industry is probably close to accurate if all banks with more than 30 percent of their assets tied up in commercial real estate loans closed shop tomorrow and liquidated.

The reality is much different.

Most banks that are overexposed to commercial real estate loans will continue to tread water, and those with capacity to lend will quite likely excel in growing their brand in the coming years.

Interestingly, it is the large banks that currently have the most capacity to lend. The top 20 banks in the country possess more than 80 percent of total bank assets. Of those, only two have commercial real estate exposure that exceeds 20 percent of their total assets (BB&T and Regions).

Conversely, all others – the 8,080 smalland medium-sized banks – have an average exposure that is closer to 40 percent (i.e., 40 percent of their assets are commercial real estate loans).

Another troubling commercial real estate trend is that loans are going into default and over to special servicers at an alarming rate.

Special servicers are tasked with handling problem conduit loans – the loans originated by Wall Street firms, bundled together and sold as commercial mortgage backed securities (CMBS).

According to data provided by Trepp, 10 percent of all CMBS loans are now specially serviced. Property types with the largest problems are hotel, multifamily and retail properties, with 19.7 percent, 13.8 percent and 10.7 percent, respectively, of each category being specially serviced.

According to Fitch Ratings Service, the actual delinquency rate for the same CMBS loans sat at 6 percent at the end of January, but with specially serviced loans at 10 percent, delinquencies are expected to rise.

So with all kinds of bad news, what’s making commercial real estate people more optimistic?

As Franklin D. Roosevelt said, “There are many ways of going forward, but only one way of standing still.” Said another way, things are starting to move.

Special servicers are so overwhelmed with problem loans it’s forcing them to take action and dispose of what they can. The market has been waiting for this and views it as vital to commercial real estate’s recovery.

Another disturbing problem for many institutions was lack of clarity and direction from the government. While this problem still haunts many lenders, those that have good controls in place and are not overexposed to real estate are back in the game.

The FDIC has not provided explicit direction on new lending activity, but its lack of ability to shut down banks with problematic loan exposure allows relatively healthy banks to move forward and go about their business.

The other positive factor is a pickup in transaction activity, particularly in larger cities.

The latest data from Real Capital Analytics indicate that December 2009 transaction volume for commercial real estate deals larger than $5 million was up 75 percent from the same period a year earlier.

Activity is a telling sign that we are moving away from the bottom.

Surprisingly, money is available at reasonable rates from the revised CMBS market as well as institutional lenders, such as pension funds and life insurance companies.

According to the John B. Levy & Company National Mortgage Survey, commercial mortgage pricing for five-and 10-year loans is in the 6 percent to 6.75 percent range for conservatively valued properties with good sponsors and solid leases.

The Richmond area is also showing promising signs.

Several large office properties are being marketed, and the Reynolds land near the Canal Walk is under contract.

Another positive example: A significant loan closing took place on the MeadWestvaco headquarters building. PB Realty Corp. financed the building for $68.4 million with a guaranty from NewMarket Corp.

ANDREW LITTLE TIMES-DISPATCH COLUMNIST
Published: February 15, 2010

Commercial real estate lenders got the chance recently to talk about the coming year and reflect on the past year at the annual Mortgage Bankers Association Convention in Las Vegas.

Most conversations about 2009 were dim and short-lived, but views for 2010 were decidedly optimistic. Money from Wall Street to Des Moines, Iowa, is stacking up and poised for investment.

However, the overwhelming notion is, never has so much money been chasing fewer real opportunities.

Despite wanting to invest money in mortgages, most lenders have a cautious view of the current market, so new loans for transactions are conservative.

Lenders’ views are formed by two things: macro-level economic data and countless stories of deals gone bad.

Perhaps the best example of a deal gone awry is the stunning downward trajectory of value for one of the largest apartment complexes in New York City.

Stuyvesant Town-Peter Cooper Village is an 11,227-unit apartment complex that was purchased in 2006 for about $5.4 billion by a partnership led by Tishman Speyer Properties LP and BlackRock Realty Advisors Inc. with a total investment of $6.29 billion.

As with the New Jersey Nets, who have gone from making the playoffs in the 2006-2007 season to an abysmal record now, the situation has worsened dramatically – the project’s worth has plummeted and currently is valued at about $1.8 billion, according to the Fitch Ratings service. Last month, Tishman and BlackRock decided that the hole they were in was too great, so they handed over the keys to the project to their lender.

Because the lender in this case is spread out among many classes and issues of commercial mortgage-backed securities, the blowup has wreaked havoc on the secondary market for bonds backed by commercial real estate.

But even as investors struggle with CMBS that were originated in years past, a new version of CMBS is gearing up in a serious way.

Bank of America, Citigroup, JP Morgan Chase and Goldman Sachs all have announced plans to amass loan portfolios that they intend to pool together and sell as CMBS.

Unlike in 2006 and 2007, these “conduit loans” will be characterized by conservative valuations and tight underwriting.

Regardless, some predict that this year, $12 billion to $20 billion in new CMBS offerings will hit the market.

While even $20 billion is a small number compared with the $224 billion in domestic bonds floated in 2007, it is a fantastic beginning and necessary for the commercial real estate market to heal.

The confusing contradiction between investors running from “legacy” CMBS but also interested in buying new CMBS is similar to the story of banks with unrecognized problem loans compared with those that have clean slates.

It is a good time to have money and to be lending on commercial real estate because values have collapsed and there is still very little capital.

In essence, those banks with a clean slate can write conservative loans on conservative values, but those hampered by unrecognized problem loans will remain on the sidelines.

A group that recognizes the current opportunity is Abu Dhabi Investment Authority, which is the largest sovereign wealth fund in the world with more than $627 billion to invest.

The fund is looking to put out more than $10 billion in commercial real estate debt in the United States during the next three years.

While many borrowers and banks continue to struggle with loans written in an entirely different market, new money for conservative deals is very cheap.

Commercial mortgage pricing for fiveand 10-year loans is in the 5.5 percent to 6.5 percent range for well-leased, conservatively valued properties, according to the John B. Levy & Company National Mortgage Survey.

A number of deals in the Richmond area are microcosms of the happenings around the country.

Several overleveraged properties already have imploded, such as the former Circuit City headquarters building and Chesterfield Marketplace, and others are showing signs of stress.

But even as the real estate market absorbs these problems, new loans are being originated.

To be sure, these new loans will be underwritten in such a way that the borrower and lender wholeheartedly agree that the risk of default is virtually zero.

John Levy was recently interviewed on FoxBusiness.com and discussed the current commercial real estate market.  The show is hosted by Chris Cotter and Tracy Byrnes and streams live on FOXBusiness.com and FOXNews.com every weekday from 12-1pm ET. 

The interview may be viewed at http://video.foxbusiness.com/v/3992304/comeback-kid-commercial-real-estate/?playlist_id=87030

The 2010 Market Outlook from John B. Levy & Company Explains How Commercial Real Estate Investors Can Get Their Share of Stimulus Pie

(Richmond, VA – January 18, 2010) – Following a year that saw the near meltdown of the banking system and the sweeping impact of a global recession, 2010 could shape up to be a better year for investors, though perhaps not as robust as some would wish. According to “Ordering Your Slice of the Stimulus Pie,” the latest podcast produced by John B. Levy & Company (available online at www.jblevyco.com), the new year has ushered in an uptick in market activity for commercial real estate investors, putting some in a position to secure stimulus bailout dollars.

“2009 started out with what I’d call the Armageddon trade,” says John Levy, founder of John B. Levy & Company, “with people predicting the collapse of not just individual banks, but the entire banking system. That mood has changed, and 2010 feels a lot better. The second half of the year promises to be better than the first. However, that doesn’t mean we’re through with the bank failure business,” Levy adds. “I see problems in areas from Arizona to Florida and California to Michigan, and the reasons can vary from cars to condos.”

Undergirding Levy’s muted optimism is what he sees as the rebirth of the market for commercial mortgage-backed securities (CMBS). While Levy believes the government definitely needed to step in last year with its TALF program, he predicts that improvements in the CMBS market will occur because of activity in third-party and public markets, not because of assistance from the government.

“The rebirth of the CMBS market is absolutely going to happen this year,” Levy says. “Last year, we had three CMBS deals, and that was three more than anyone predicted. The CMBS market in 2010 won’t resemble the one we knew and loved in 2007, but we will see a rebirth with reasonable and rational underwriting. I even think we’ll see the first multi-borrower CMBS deal this year.”

Levy is decidedly guarded about whether commercial real estate values will rebound in 2010. While some investors are optimistic about a resurgence in property values in 2010, Levy doesn’t share their sentiment. Rather, he believes the road to recovery for commercial real estate values will be protracted.  

“Consider commercial real estate from the perspective of NASDAQ,” Levy explains. “As you recall, that index hit 5,000 in 2000. Here we are ten years later, and NASDAQ is still under 3,000. So will there be a resurgence in commercial real estate values? Yes, most likely in 2011. But returning to the levels we saw in 2007 will take time.”

In light of the huge bank bailouts we saw in 2009, there is one question on the minds of real estate developers and investors: “How can I get a piece of the stimulus pie?”

“When it comes to getting a slice of stimulus pie, some developers and investors have a place at the table,” Levy says.  “Some don’t. If you own or invest in apartments, you’re in luck. When you get a real estate loan on your multifamily apartment from Freddie Mac or Fannie Mae, rates are one-half to one percent less than if you borrow from an insurance company. So if you happen to invest in multifamily housing, you get a direct bailout. That’s enough to make anyone’s 2010 look promising.”

Firm Background

John B. Levy & Company, Inc. is a real estate investment-banking firm headquartered in Richmond, Virginia.  Since John Levy founded the company in 1995, the firm has structured over $3.5 billion in financing for developers and owners of commercial and multi-family projects nationwide, often investing its own proprietary funds into transactions with its clients. 

Mr. Levy is an expert on commercial real estate financing and the effects of interest rates on commercial real estate markets.  He is the originator and author of the Barron’s/John B. Levy & Company National Mortgage Survey, which Barron’s published for 23 years, and co-creator of The Giliberto-Levy Commercial Mortgage Performance Index (sm), the first and pre-eminent index to measure and analyze the performance of investments in the commercial mortgage industry.  Additionally, he is a member of the Board of Directors of Anthracite Capital Inc. (NYSE: AHR), a New York Stock Exchange REIT managed by BlackRock, Inc. and a former director of Value Property Trust. 

A seasoned speaker, Mr. Levy has presented nationwide to major real estate associations and key industry groups, including the Mortgage Bankers Association and the Urban Land Institute.  He has also appeared on Bloomberg and CNBC.  Most recently, Mr. Levy appeared as a guest commentator on FoxBusiness.com and FoxNews.com.

For more information about John B. Levy & Company, please visit the firm’s website at www.jblevyco.com or call Andrew Little at 804-644-2000, extension 260.  You can also follow us on Twitter at www.twitter.com/jblevyco and become a fan on Facebook.

ANDREW LITTLE TIMES-DISPATCH COLUMNIST
Published: January 11, 2010

As the “aught” decade comes to a close, for the real estate industry it can best be described as a wonderful love affair that came to a fiery ending.

Developers experienced a glowing, bubbly kind of relationship with lenders and in vestors in the early part of the decade.

But the past year saw an unwinding of that love. More specifically, many developers probably think of “I Hate Everything About You,” a song by Canadian metal band Three Days Grace, when they reflect on 2009.

Long-term banking relationships were thrown out the window as lenders cut off credit to struggling borrowers as both battled for existence.

And pressure from investors, lenders and tenants made developments come to a screeching halt across the country and in our backyard.

Now, perhaps worst of all, 2010 brings no real clarity on where things are headed or how the market is going to climb out of the mess it is in.

Commercial real estate values peaked in October 2007 and have since fallen 43.7 percent in aggregate through October 2009, according to the most recent Moody’s/REAL Commercial Property Price Indices report.

Interestingly, the most dramatic part of that drop occurred in the past year, as values are down 36.4 percent since October 2008.

The report hinted at good news by mentioning that the pace of decline has slowed and transaction volume has started to pick up. Unfortunately, such massive declines in value are hard to manage effectively.

The difficulty in managing the fallout is best depicted by current delinquencies in loans that were originated, bundled together and sold as CMBS (commercial mortgage-backed securities).

According to Realpoint LLC, a Horsham, Pa.-based credit-rating agency, delinquent balances of loans sold as CMBS grew to $37.93 billion in November 2009, a 440 percent increase from November 2008 when only $7.03 billion in balances were delinquent.

By Realpoint’s estimation, 4.71 percent of all loans that were originated and sold as CMBS are now delinquent, and that percentage could grow to as high as 9 percent in 2010, according to the report.

So while the calendar turned the corner on 2009 and moved into 2010, problems remain in commercial real estate.

Despite the clouds, real estate investment is expected to pick up in 2010, both in purchases and in loans. Many permanent lenders (life insurance companies and pension funds) are heading into the new year with larger appetites than last year and more aggressive underwriting guidelines to attract borrowers.

Although U.S. Treasury yields ended the year at the high end of the trading range for 2009, according to the John B. Levy & Company National Mortgage Survey, rates have remained somewhat steady.

Today, permanent lenders are providing new loans that price from 5.65 percent to 6.65 percent for five-and 10-year mortgages. Cheaper, floating rates are available from community banks, and loans for multifamily properties also price lower.

Beyond the fallout of 2009 and veiled optimism for 2010, a number of localities are struggling with the dramatic shift in outlook for projects and budgets that were planned in an entirely different environment.

While Dubai and Las Vegas deal with massive projects that are half-filled and half-completed, communities across the U.S. are dealing with smaller-scale versions of the slowdown.

The Richmond area has a number of high-profile projects limping toward reaching their potential. It is likely that scaled-down versions of planned developments will emerge when the dust settles.

For example, homes at West Broad Village and Magnolia Green will most certainly fall short on scale and value from the original plans.

Chesterfield and Henrico counties are already struggling with declining assessments related to residential development. They now will be hard-pressed to maintain assessments on commercial development.

Both counties had small adjustments to commercial assessments in 2009 despite property values dropping some 43.7 percent across the country.

Chesterfield has a smaller problem than Henrico as commercial assessments account for 13.7 percent of the total real estate assessment base versus 31.1 percent in Henrico.

An example of how far assessments can be off on commercial properties is the former Qimonda facility in eastern Henrico.

Henrico assesses the property at $95,536,700, down from $155,934,100 when the property was occupied. The 210-acre property is being sold and will likely fetch less than $25 million in sales proceeds.

It is clear that Chesterfield and Henrico will need to draw up battle plans for fighting reassessments in 2010.
Andrew Little is an investment banker with John B. Levy & Co. He can be reached at alittle@jblevyco.com or 804-644-2000, ext. 260.

ANDREW LITTLE GUEST COLUMNIST

Richmond Times-Dispatch
Published: December 14, 2009

Commercial real estate is starving for credit Smart money continues to pile up on the sidelines, anxious to take advantage of bargain-basement pricing for broken commercial real estate loans.

Government policy, however, seems geared toward preventing breaks by letting bad loans go unrecognized on banks’ books in hopes that they will become good loans.

And despite Treasury extending the Troubled Asset Relief Program (TARP) for a year, the program is now focused on other areas of the economy.

The gyrations have credit-starved commercial real estate participants screaming, “What’s going on!?”

Markets are no longer in a free-fall, so optimism can be seen in some quarters. But 2009 is ending with as many or more questions as when it started.

Credit to commercial real estate is still virtually nonexistent, and there is no clear path defining from where more will come.

Bank examiners have guidelines to follow when they review banks’ books, but none of the guidelines forces banks to ultimately resolve problem loans.

Through a combination of low interest rates and forbearance on problem loans, policy seems designed to allow banks to continue earning money so that they can write down problem loans over many quarters, and, perhaps, years.

The alternative, the argument goes, would be to put many of them out of business.

This policy may prolong life for many banks and their borrowers, but the larger impact is that potential problem areas of the economy, such as commercial real estate, are starving for credit.

The latest Federal Reserve data regarding commercial banks in the United States show total assets (of all commercial banks in the U.S.) of approximately $11.8 trillion at the end of October 2009 compared with $11.96 trillion at the end of October 2008 — a shrinking of $160 billion in one year.

Commercial real estate loans accounted for $60 billion of the shrinkage during that time span, while consumer loans represented $6 billion.

The original intent of TARP money was to allow banks to continue lending, but the data show outstanding loans have decreased.

This has put most commercial real estate players on the sidelines. Credit for deals is as tight now as it was earlier in the year.

TALF (Term Asset-Backed Securities Loan Facility), another major government program intended to bring back the securitization market, has been ineffective.

The rebirth of the CMBS (commercial mortgage-backed securities) market is starting, but TALF has little to do with it.

JP Morgan’s recent underwriting of the Inland Western deal is a template for future deals.

It provided a 75 percent LTV (loan-to-value) loan versus the 50 percent offerings from Fortress and Developers Diversified Realty, which was the only new offering that was TALF eligible.

The problem for the majority of commercial real estate borrowers is that they are not the size of Inland Western, and JP Morgan and the other banks have little appetite for small transactions or those in secondary or tertiary markets.

As large loan portfolios begin to make their way through the securitization process, many smaller borrowers wonder when the money will trickle down to them.

In the meantime, according to the John B. Levy & Company National Mortgage Survey, rates for 5-and 10-year fixed-rate mortgages range from 5.75 percent to 7 percent for low leverage loans secured by real estate with good tenants and operated by solid borrowers.