FDIC pushes for Bank Flexibility on Commercial Real Estate

Nashville Business Journal - by Eric Snyder Staff Writer

Nashville real estate professionals don’t necessarily agree on what it all means, but the FDIC got everyone’s attention when it recently issued new guidance on commercial real estate loan workouts.

Depending who you ask, it will either force banks to identify bad loans on their books, jettisoning struggling properties into the hands of opportunists, or it will postpone a recovery in the commercial real estate market while the FDIC clears other matters from its plate.

The 33-page policy statement — offered by the Federal Deposit Insurance Corp., Federal Reserve and Office of Thrift Supervision — emphasizes that “prudent CRE loan workouts are often in the best interest of the financial institution and the borrower.”

The FDIC is encouraging banks to work with creditworthy borrowers — those who can continue funding a loan’s principal and interest — to restructure loans that might otherwise be deemed high-risk because the loan value exceeds that of the collateral against it.

“The financial regulators recognize that financial institutions face significant challenges when working with commercial real estate borrowers that are experiencing diminished operating cash flows, depreciated collateral values, or prolonged sales and rental absorption periods,” begins the policy statement. “While CRE borrowers may experience deterioration in their financial condition, many continue to be creditworthy customers who have the willingness and capacity to repay their debts.”

In restructuring such loans, the statement calls on banks to accurately identify their potential losses when doing so. Such restructured loans won’t be considered high-risk by regulators, even if the collateral backing them has declined below the original loan value.

Mike McGuffin, managing director for Eakin Partners’ retail division, said the guidance will force banks to address potential problems on their books, “so that it doesn’t surprise them in the near future.”

“It’s forcing people to make decisions a little earlier than they normally would,” McGuffin said. Those decisions could lead to more distressed sales, getting some money off the sidelines and into the real estate market.

And while banks can hope that extending loans will give commercial landlords and tenants more breathing room to increase revenue, the guidelines will force banks to look at those loans “in today’s terms, in today’s environment,” McGuffin said.

“You can’t just keep them locked in the closet and pray that things are going to get better,” he said.

Waddell Wright, who works in investment services for Colliers Turley Martin Tucker, said he’s glad the FDIC is “doing something, because there are some legitimate claims that are being made by tenants who are suffering because of the (economic) downfall.”

Struggling tenants may seek rent concessions that landlords are not able to grant because of their own loans.

“The landlords are kind of trapped in the middle,” he said. “There’s only so long you can hold on before it sucks all your cash up.”

Giving banks and tenants more time, he said, will protect struggling shopping centers, keeping the centers occupied.

“You’re keeping it viable,” he said, as opposed to vacant and rundown. That — coupled with banks who turn to third-party groups to help in a workout — also protects property value for the rest of the market, Wright said.

“You have to protect the market as much as you can,” he said.

Tom Frye, managing director of the Nashville CB Richard Ellis office, was less optimistic about the guidelines’ future impact. As he sees it, the FDIC has pressed the pause button.

“It’s delaying the inevitable. It is kicking the can down the road,” he said.

“They’re letting the banks play around with the non-performing loans a bit longer, and not forcing them to discharge the non-performing assets,” Frye said, adding that it’s those assets that are largely keeping banks from making larger loans. “Values have dropped already, there could be another [drop in value] in store, and the FDIC is not helping by treating the banks leniently.”

Mike Hendren, a real estate senior credit officer with Pinnacle Financial Partners, doesn’t see it as leniency.