Extend and Pretend

[Bryan Hancock]

This is the best article on "extend and pretend" that I have seen so far:

[url=http://recenter.tamu.edu/pdf/1962.pdf]TAMU Extend and Pretend Article[url]

I guess there are some intelligent Aggies out there :wink:

What are your thoughts on how the policy will play out and how it will impact the CRE market going forward?

[Joel Owens]

I have been saying for awhile most of what was said in the article.

I agree with most of what was said.

The point about existing banks not being able to lend I don't see as big of an issue.

The big national banks still have a ton of money to lend. There are newer banks opening now or that have in the last few years that have healthy balance sheets with little to no toxic assets.

I agree that many of the local and regional banks cannot take the write downs on commercial or they will be insolvent.They might have only funded a few commercial loans that went bad but they were big ones compared to the residential notes they are holding.

I disagree that regular sellers won't sell.Core markets have already heated up and have driven cap rates down for A product and A location to just a little above the boom times.

The problem is the local to regional banks hold the majority of the commercial distress in tertiary and secondary markets where recovery will be slow and painful over many years.

Recovery starts with A assets in major urban city cores and grows outward over time.

There are many buyers looking to purchase and to get a standard commercial loan need a performing property with high occupancy.

Otherwise they need all cash or a hard money or private partner going in.Restructuring of notes on the pre-foreclosure side with a capital injection is also gaining traction.

There are groups that have to deploy capital in a certain time frame who have optimal areas.

Once they see they cannot hit the numbers they want in that area they have to adjust the expectations of the investors,return the money,or branch outward to areas that offer greater returns more inline with the investors fund expectations.

Regular sellers are selling.Cash buyers want a real low basis.

So I am seeing sellers do a wrap or hold a second or other creative means to get a higher price with some down for a buyer.For the buyer it lets them leverage the limited cash they have into a larger deal for upside in the future.

Example for a 40 unit with a wrap and all cash investor would demand 13 to 14 going in. An investor getting owner finance from a bank owned property or a regular seller might be happy with a 10 cap.

So the deal you create and value is relative to what's at stake for the parties involved.If I have 1 million and I can owner finance for a 10 CAP with 100,000 down and then leverage into 9 other deals I might find that more attractive than a 14 cap all in on one deal.

I think we are years and years away from a recovery.I think some will wait on the election in 2012 and who becomes president to see where the next 4 years of policy will be heading.

Big national banks can take the write downs and sell the properties.I have had better luck with national than with the local banks.

Just my .02