Commercial Real Estate Domino Hits Small Business (Portfolio.com)
The collapse of the commercial real estate market is one reason why many small businesses can’t get loans.
Declining values for office buildings, shopping centers, and other commercial projects have weakened many community banks, traditionally a strong source of capital for small businesses. Many small businesses, meanwhile, use their property as collateral for business loans, and now they find it’s not worth what it used to be.
While the housing market is slowly working its way up from the abyss, the worst days for commercial real estate may still lie ahead. Despite improvements in some markets, the number of distressed commercial real estate properties in the United States more than doubled this year and likely will continue to rise, according to the Real Estate Roundtable.
That’s bad news for banks, especially since $1.4 trillion in commercial real estate debt is coming due through 2013.
“There is a very real possibility that there will be many more bank failures in the next few years because of banks’ commercial real estate holdings,” said Senator Mary Landrieu, Democrat of Louisiana.
“Once a bank closes it doors, the economic engine of Main Street is gone,” said Landrieu, who chairs the Senate Small Business and Entrepreneurship Committee. “Not only does everyone at the bank lose their job, but it makes it that much harder for any small business in town to get a loan.”
Landrieu views her committee as “the congressional protector of small business across America.”
For that reason, she held a roundtable today on what can be done to address the commercial real estate crisis.
“We must get in front of this issue,” she said.
Congress took a small step in September, when it passed the Small Business Jobs Act. That legislation included a provision that allows small businesses that own their own buildings to use the Small Business Administration's 504 loan program to refinance commercial real estate debt. But that program is capped at $7.5 billion in loans—a drop in the bucket compared with the amount of commercial mortgage debt coming due.
Robust job growth would be the easy answer for the commercial real estate crisis. Businesses would then look to expand their space instead of cutting back. But that’s not on the horizon any time soon.
So until the economy starts humming again, what can Washington do to prevent a commercial real estate crash from crushing Main Street? Here are some ideas from today’s roundtable:
• To revive the secondary market for commercial real estate loans, Representative Walt Minnick, Democrat of Idaho, pushed for legislation that calls for the Treasury Department to guarantee packages of loans sold to investors as mortgage-backed securities. This would do for commercial real estate what Fannie Mae and Freddie Mac has done for residential real estate. That idea isn’t going anywhere, not only because Minnick lost his re-election bid, but also because the last thing a Republican-controlled House will do is create another Fannie Mae. Even Landrieu acknowledged that “antennas go up” when Fannie Mae is mentioned as a model for a new program.
• Bankers want regulators to judge the health of a commercial real estate loan based on whether borrowers are making their payments on time, not on values given to properties by appraisers. Many appraisers “fear their own shadows” and are low-balling buildings based on distressed properties instead of a well-performing building’s cash flow, said Stephen David, president of Peoples Bank and Trust in New Roads, Louisiana.
• Jeffrey DeBoer, president and CEO of the Real Estate Roundtable, said banks should be allowed to amortize their losses on commercial real estate loans over seven to 10 years, instead of taking an immediate hit. This would give banks time to use earnings to restore their capital base while encouraging them to sell assets to create the liquidity needed to resume lending.
• Dan Sight, a Kansas City, Missouri commercial broker representing the National Association of Realtors, said banks should be allowed to extend terms on existing commercial real estate loans without having to worry that regulators would then consider those loans to be nonperforming.
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Kent Hoover is the Washington bureau chief for bizjournals.
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