Dire predictions for commercial mortgage lending

Nationally, about $3.4 trillion in commercial real estate loans is outstanding, and some experts predict a wave of defaults in the next few years that could make the mortgage meltdown look like a strong wind before a hurricane. While some call for government intervention to head off the next financial crisis, others say the magnitude is too great. The debt crisis facing Dubai, with its custom-island extravagances, could be a global foretaste.

With a largely jobless recovery from the “Great Recession,” the root of the problem seems deep. Millions of office and industrial workers have been laid off this year alone, meaning a diminished need for physical job sites and a rise in commercial vacancies. Although Baton Rouge seems relatively resilient economically, commercial lending trouble has appeared. Mall of Louisiana owner General Growth Properties filed for bankruptcy in the spring, and banks that financed Tommy Spinosa’s Perkins Rowe development foreclosed on the project in the summer.

“I’m sure there are some loans out there that might be an issue for local banks,” says Larry Dietz, managing broker for Sealy & Falgoust Real Estate. “We’ve already seen major properties have issues in this community. Those are few and far between. How far it’s going to go in terms of smaller properties or smaller investors, I couldn’t begin to speculate.” For the full version of this story, click here.—Todd R. Brown

The new commercial real estate market: Target on hold, Family Dollar building

Over the past few years, the commercial real estate market in Baton Rouge has been dominated by high profile, upscale projects such as Perkins Rowe, Towne Center and the Mall of Louisiana's Boulevard expansion. All those developments cost millions of dollars and featured national chains catering to well-heeled shoppers, such as Whole Foods, Apple and Anthropologie. But national retailers have pulled back on the aggressive expansion plans that fueled these projects. Much of the activity in Baton Rouge over the past year has centered on discount retailers and value priced restaurants -- think pizza parlors instead of steakhouses and dollar stores instead of department stores. The best example of this new reality can be seen on West Lee Drive. Land was cleared last year for Arlington Creek Centre, a development that would be anchored by Super Target and Home Depot. But that property sits vacant and it isn't known when work will resume. Meanwhile, just down the street, a Family Dollar store is taking shape next to Mike Anderson's Seafood.

Former LSU star sells Willow Grove home

Exactly a year after he bought a 4,000-square-foot home in the Willow Grove TND, former LSU football star Jacob Hester has sold the property. Hester and his wife, Katie, sold the home on Gardens Drive for $980,000 in a deal that closed last week. The couple bought the home in November 2008 for $940,000. Hester is in his second season with the NFL's San Diego Chargers. Dr. Vikram Parmar, a local orthopedic surgeon, and his wife, Rinku, bought the four-bedroom, four-bath home.

Poll: Most think national real estate market hasn't hit bottom

Sixty-one percent of the people who responded to a Real Estate Weekly poll say the national real estate market hasn't bottomed out yet. Thirteen percent of people who took the poll say the market will hit bottom by the first half of 2010, while 11% say the market won't reach its low point until the second half of 2010 and another 11% say the low point will be reached in 2011. Thirty-three percent say the market has already hit bottom. More than 150 people participated in the poll.

This week's question: Are you concerned about a crisis in outstanding commercial real estate loans?

Tom Cook: Capstone closes on 58-acre parcel

Beau Box with Beau Box Commercial Real Estate and Edward Rotenberg with Sealy & Falgoust Real Estate have been involved with a 58-acre site near the corner of Ben Hur Road and Nicholson Drive for more than 10 years. Capstone Development, a multi-family developer out of Birmingham, Ala., has purchased the site in a deal that closed last week. According to Box, the site sold for over $9 million or about $3.50 per square foot. Capstone Development had already begun clearing the site prior to its closing, and intends to construct a 382-unit development in two phases, which will house approximately 1,290 residences. Phase I, which is geared toward LSU students, will consist of 583 bed spaces in 159 cottage units. The seller was UPUD, a New Orleans-based investment company represented by Box. Capstone was represented by Rotenberg. Rotenberg and Box had worked through two owners and four potential purchasers. The obstacles included the availability of sewer, existing wetlands and rezoning the property. That coupled with state road access issues made this a complex transaction that took nearly 10 years to complete. The fact, that it has been completed is a testament to both Box and Rotenberg's patience and tenacity. "The typical Baton Rouge resident does not realize how difficult it is to bring a project of this magnitude online," says Box. Part of the problem was that a traffic light was needed at the corner of Ben Hur Road and Burbank Drive, and according to the Louisiana Department of Transportation and Development, this was too close to the intersection of West Lee Drive and Burbank. Therefore, Ben Hur Road had to be re-located approximately 1,000 feet east of its current location. This will enable a traffic light to be installed further east on Burbank and will allow access to the development from a lighted intersection along Burbank and the relocated Ben Hur, along with access from Nicholson Drive. There are still 200 acres available for development owned by UPUD.

-- West Feliciana Parish has a plan to promote good growth, which often means it's difficult getting new retail development approved. Spring Creek, a Baton Rouge-based investor represented by Brad Way and Trey Williams with NAI/Latter & Blum recognized this and purchased an existing shopping center at the corner of U.S. Hwy 61 and Wilcox Road. The sale took place last week for $1.23 million or about $68.33 per square foot. The center contains 18,000-square-feet and is occupied by Patrick's Jewelry, Pearls Nails, H&R Block, Wing it Grill and others. The seller was C.P. Daniel Properties, who had owned the center for several years. "It was a good investment for the new owner and we believe the space will only get more valuable as time goes on and St. Francisville continues to grow" says Williams.

(Appraiser Tom Cook owns Cook Moore and Associates. Reach him at 293-7006 or TCook@cookmoore.com.)

Brian Andrews: Lack of sales data challenging for lending

In his recent testimony before the House subcommittee of the Committee on Financial Services, Jon D. Greenlee, an associate director of the Federal Reserve, said "Prudent real estate lending depends upon reliable and timely information on the market value of the real estate collateral." He says this position "has been a cornerstone of the regulatory requirements for real estate lending and is reflected in the agencies' appraisal regulations."

While collateral valuation is not the only factor in a bank's willingness to extend credit, it is certainly one of the most important underwriting considerations. A good appraisal that takes into account appropriate market data including applicable sales is the cornerstone of a lender's underwriting package.

Unfortunately, Greenlee says that, "Given the lack of sales in many real estate markets and the predominant number of distressed sales in the current environment, regulated institutions face significant challenges today in assessing the value of real estate."

Much of the guidance for dealing with troubled real estate borrowers coming from banking regulators is based on appraised values, but values based on distressed sales are not likely to be particularly helpful to bankers or borrowers.

So what are we to do?

Greenlee says that lenders should have "appraisals or other market information that provide appropriate analysis of the market value of the real estate collateral and reflect relevant market conditions, the property's current 'as is' condition, and reasonable assumptions and conclusions." Larger markets are tracked by several national brokerage concerns and such market information is readily available, but Louisiana markets are not as widely followed due to their size and market information is harder to come by. The Baton Rouge and New Orleans markets are fortunate to already have good sources of information, such as the Baton Rouge Trends publications, LSU and UNO market studies, and various apartment reports, but other markets within the state are not as fortunate. And as distressed sales data creeps into mix, it will be more important than ever to differentiate that data from market rate or "arms length" data upon which new loan decisions should be based.

Market participants across the state will have to band together to improve the quality of market information, such as is done in Baton Rouge with the Trends publications scheduled for presentation in April, in order for lenders to have the most accurate information for use in making lending decisions. While it might go against the nature of the highly competitive players in the market, cooperation in sharing data might be the best practice for the foreseeable future.

Read Greenlee's entire testimony here.

(Brian Andrews is a certified mortgage banker specializing in the financing of commercial real estate. His business is Andrews Commercial Mortgage and he can be reached at brian.andrews@acmla.com.)

Real estate recap: B.R. construction jobs down slightly ... EBR Mortgage Finance Authority extends program

Still doing better than most cities: After months of being one of the few cities to see gains in building employment, the number of construction jobs in Baton Rouge dropped slightly in October. The number of construction jobs was down 500, or 1% from October 2008, to come in at 41,700, according to figures from the Associated General Contractors of America. Despite the drop, Baton Rouge was tied for the 11th biggest construction gain, with Fargo, Minn.; Fayetteville, Ark.; Fort Worth, Texas; and Little Rock, Ark.

Helping homebuyers: The East Baton Rouge Parish Mortgage Finance Authority has extended a popular program that allows qualified homebuyers to receive federal tax credits early. The program allows first-time homebuyers to receive an $8,000 credit for buying a home before they file their 2009 federal income tax return. The program applies to people who close on a home by June 30, with purchase agreements signed no later than April 30. The borrowers must use the $8,000 for a down payment or closing costs, and have to pay back the mortgage finance authority either as soon as they get the credit or pay it off over 10 years.