SBA and Commercial Finance and Investment News

So the Federal Reserve is going to buy US Treasury bonds next week, in a big way.  If demand for treasuries goes UP, prices RISE, and, as yields move inversely to prices,  yields on treasury bonds will fall.  Mortgage rates, taxable municipal bond yields, long term bank debt (is there such a thing?) and life company commercial rates, along with fixed SBA 504 rates, are likely to drop if the Fed attacks the middle of the yield curve. That may stimulate borrowing if credit does not tighten further.  An who knows, as we all hope, borrowed money gets spent, and company sales go up, so they hire more workers, who in turn spend more, etc.

So where, my fellow Americans, does the money come from that the Fed uses to buy those securities? 

Psst.  They PRINT it.  No, they don’t even bother. It’s an electronic debit to a fictitious account.  It literally appears out of thin air.

My friend, colleague and WSJ contributor Lou Barnes had the following to say this week. Pithy guy. Read on and amaze your friends.

         A controlling equation: MV = GDP(p). The quantity of money times its rate of turnover (velocity) equals GDP. That (p) notation refers to prices. If you get MV going to fast, you get big GDP andinflation; if too slow, deflation. V rises in good times with credit creation and slows in bad; in extreme cases (bank runs) M disappears altogether. In “quantitative easing,” the central bank bypasses broken banks completely and buys Treasuries in the open market, sustaining M. Done right, price-neutral printing!

       Doesn’t printing money guarantee future inflation? The Fed hopes so! But only to get CPI back in the 2% range, and the economy is so slack (“excess capacity”), and so much money has effectively gone to mattresses that all inflation tinder is soaking wet.

     But, once printed, the money is still there!The easiest of all central bank jobs is to make money disappear. If the Fed overdoes QE, if banks suddenly snort to wakefulness and make loans, all the Fed must do is to sell Treasuries that it bought. Market rates will rise, and the cash will go back into the Fed’s mattress. Coming out of this, expect high volatility in start-stop-start “draining,” but the Fed will not allow the aftermath go to inflation.

     Why bother? Why not just leave well enough alone? The Fed did contribute to the predicament, and is hardly infallible, but its errors were omission, especially allowing a credit bubble to inflate (and no, rates were not “too low” ’02-’04 — underwriting was too easy). Since ’07, the Fed has been the only government institution to rise to the crisis, and a major lesson of the crisis is the need for an active Fed to regulate terms and supply of credit, and cautiously to intervene in asset bubbles.

  The Fed intends to drive down intermediate Treasury rates (3-10 years, “caving-in the shoulder of the yield curve”), and in turn drive down other long-ish rates. Perhaps mortgages in the threes. In further turn, those lower rates will support asset values (houses if the Fed is lucky, stocks and gold if not). As assets stabilize, maybe even rise in value, defaults will wane and the world will become safe for bankers to lend. Last, the Fed’s intent is domestic, not to “drive the dollar down,” although it would be pleased if other central banks were forced to follow, giving global support to M and adding pressure to currency manipulators. 

“Everything, everything ends,”  says the New Moon theme by Death Cab for Cutie.  So it was for SEVEN more banks last week.

Want to know what a bank failure and receivership is really like? Well, they say Friday night is the time the FDIC closing team will show up at your main branch.  Once the senior site agent meets with the Bank president, and the first platoon from the FDIC has secured the cash and begun a count, the remainder of the FDIC takeover team  and subcontractors will show up.  Oh, yes,  and the  CURRENT bank employees are deputized as temporary FDIC employees.   But the influx from the FDIC is huge.  Figure one agent per $5 MM in assets.  $400 million bank, 80 polite, briefcased, laptop flipping, well dressed people show up, all at once.  And along with them, the president of the receiving bank.   Three days later the failed bank is open – with a new name.  FDIC examiners and agents head personnel, operations, lending, investigations, accounting, file review, and other functions  until the receiving bank has its personnel in place and  the dance is  done with the precision of a fine watch.  Visit http://www.npr.org,  click on This American Life and download Ira Glass’ recent podcast entitled “Scenes from the recession.”  It’s  first hand takeover account of a small community bank in Washington State and the drama behind the numbers is poignant, to say the least.   So if you’re not a numbers guru you may be interested in the human side of the bank closure business.

We are seeing some glimmers of light, if not portions of the Glory Train of Recovery, in the tunnel. 

lationHousing starts and building permits last month are holding steady in the 550,000 to 650,000 range, rather than deteriorating further, that’s a good thing.  Industrial production rose 0.1 percent in February, while capacity utilization rose to 72.7 percent. That was the eighth month in a row of improvement in the utilization rate. It’s now at a 14-month high.  So maybe we might have to increase capacity.  We might have to, uh, GROW. Why, by golly, the FED might have to raise the discount rate again.  Not In-flation, really, or STAG f, but re-flation.  The air is coming back into the balloon.

NO thanks to the SBA, of course, because ONCE AGAIN the Agency is OUT of money to subsidize guarantee fees and once again 7A borrowers will have to pay big time — up to 3.75% of the guarantee amount,  for a 7A loan — and HLFA A POINT on the SENIOR 504 loan.  We are bouncing back to the dark side yet again because of inaction in Congress.  And you can forget about higher 504 and 7A limits, at least for a while. 

YES, dear readers,  our community banks — those long-suffering bankers conventioning last week in Orlando, and their minions — are getting told to lend, not to lend, told the SBA is there to help, but not really.  They are all struggling and all wondering how to show some solid earnings — which is why my white paper is coming out this week — “Four ways to ramp up fee income without growing assets (or adding to credit risk). ” Stay tuned for that!

Yours truly is leaving Horizon West  Partners, LLC on April 1 to run his own firm, called Silverline Advisors, to provide loan placement and secondary marketing services to those same community bankers  — services they in turn can deliver for a fee to their customers on a concierge desk model.  It’s pretty cool if I do say so myself.   I believe that commercial and SBA loan placement is OVERPRICED and you really CAN deliver what used to cost 100 basis points in broker fees for a fraction of that — anyway, that’s my new model.  Email me at tim@silverlineadvisors if you’d like a copy of the white paper.

Retail sales rose 0.3 percent, while “core” sales excluding autos climbed 0.8 percent. Both figures topped estimates.

My colleague Devin Lee, CCIM and guru of All Things Southern Nevada, reports the sobering morning after numbers on this market.  Devin is a great resource – for workouts, bank portfolio restructuring, you name it — contact him at dl@accesscm.com he offices on Warm Springs Road, on the Web at www.accesscm.com.  Here you go, without further adieu, on those condo towers stretched once into the blue, for now they are read and the market is, well, dead.

Allure — 190 of 427 units unsold; 40 in default; 10 bank owned.

• Juhl — 309 of 344 unsold. 

• Newport Lofts — 23 of 168 unsold; 51 in default, 12 bank owned. 

• One Queensridge Place — 85 of 219 unsold; 8 in default. 

• Panorama Tower 3 — 334 of 372 unsold. 

• Sky Las Vegas — 79 of 405 unsold; 50 in default; 5 bank owned. 

• Streamline Tower — 248 of 275 unsold. 

• Turnberry Towers West — 255 of 318 unsold. 

• MGM Signature 3 — 84 of 576 unsold; 105 in default; 17 bank owned. 

• Palms Place — 204 of 599 unsold. 

• Trump International — 977 of 1,282 unsold.

So I promised three GOOD news items this week — and here they are!

Good News #1

 From the MBA’s Commercial Real Estate Finance Conference this past week in Las Vegas, here’s the word:

Life companies are back in the market

Many if not most have LARGER budgets for commercial RE mortgages than last year

LTVs are creeping up (from 50 to 60, maybe 65% LTV)

And Guess WHAT, there IS a conduit or two –  “like the conduits of the late 90’s,” and for deals of 10MM up there’s NONRECOUSE available at up to 70% LTV for seasoned stabilized properties in good markets with good staggered leases in place

Good News #2

WSJ reports the U.S. Federal Reserve is leaving the door open for restarting its program to support the mortgage market, if the economy weakens or interest rates increase sharply, Federal Reserve Bank of New York President William Dudley said. As things stand, the central bank’s purchases of mortgage-backed securities are scheduled to end March 31. “Obviously, if mortgage rates were to back up a lot and if that had a big consequence for the economy, then we very well could rethink the issue about whether we wanted to buy more mortgages,”

Good News #3

The SBA 7A remains a GREAT deal for banks if the 90% guarantee funding continues, which seems Congressionally likely.   A bank can make a 7(a) loan with a 90% guarantee and sell its guaranteed portion at a premium as high at 110%.  And the guaranteed portion is a zero risk weighted asset. It does NOT get any better.  Ever.  There’s no excuse NOT to get involved in SBA lending.  As 28 Senators wrote to Secretary of the Treasury Timothy Geithner this week, “Small businesses ARE the real engine behind job growth in the U.S. Over the past 15 years, over 64 percent of all new jobs were created by small businesses.”  Yet credit remains tight,  as defaults plague the economy – even so, there’s no reason a good and prudent loan risk cannot be shared with the SBA.  Let’s  do it.

To get you started we are cooperating with COLORADO LENDING SOURCE, Denver’s great CDC, to TRAIN you on the 504.  Email me at tim@horizon-west for information, its FREE and it is FEBRUARY 11th and it is a DIAL IN WEBINAR

Commercial real estate in this country saw  prices rise 1 percent in November, after a 13-month run of steady price declines.  Was October the bottom?  Maybe close.  According to REAL Capital Analytics, “After two years of value declines, commercial real estate reached its lowest value yet in October ’09, nearly 44 percent below the peak level.”  So down 44, up 1.  Not bad, if you are an incurable optimist.   Moody’s Investors Service says however that it expects prices to resume falling in the coming months as occupancy and rental rates decline in tandem “Prices in the commercial sector will rebound off the bottom as markets recover, but we expect that commercial property prices will ultimately flatten out for the longer term at levels 30 percent to 40 percent below the peak,” the report said.

2009 is best forgotten.  2010 is the time of the cash crunch, the debt crunch, and increasing realization by commercial real estate sellers that they are going to have to get real if they want to get liquid.  As CRE multimillionaire guru Sam Zell said recently at a press conference, his old advice of “Survive ’til 95″ which was oft quoted during the last crises, has been replaced by, “Come Clean by 2013.”   Bid asked spreads are going to narrow.  Sellers wanting that 6 cap will settle for 8.5.  Reality will set in.  Maybe 2010 is not the bottom, but it’ s close.  It may be the BEST year to buy your own building — or invest in something in CRE.

And WHERE does one invest?

Here are the seven cities — economies driven by OIL and TECHNOLOGY — that may lead us out, says RERCC (Real Estate Research Corporation):

• Austin, Texas
• Houston
• Oklahoma City
• San Antonio
• Seattle (tech and engineering)
• Salt Lake City
• Denver

And WITHIN the Seven Cities, what property types will lead?

The top three are:

• Multifamily
• Central Business District Office
• Industrial

And at the bottom of ALL, beneath even retail power centers?  Hotels.   If you have a hotel, you can lower your ADR (rate) EVERY DAY to meet and greet lagging demand.  Until employment picks up, and we are PAST the end of the tunnel, if you own hotels, every day may likely be more depressing than the last.  Bummer.  Multifamily or owner user.  That’s what I would buy.  Or lend upon.

The Treasury reported Thursday that  the top 30 banks in the US – many the target of the Obama administration – are really cutting back – and continue to do so – in business lending.  They want their commercial loan portfolio – and its concomitant risk – to roll off the books.  As a whole, the major banks’ small business lending balance FELL  by another $1 billion in November 2009.  That is the seventh straight month of declines. The 22 banks that got the most help from the Treasury’s bailout programs have cut their small business loan balances $12.5 billion since April.  Not surprising if you have tried to get a deal – a 504 or a 7A, even with a guarantee – approved lately.  Credit people continue to run scared.  If you do not have a 125 or better DSCR on the 08 and 09 EBITDA numbers, or if you have a downtrend of more than a few percentage points in sales, look out.  It’s the waste can for your deal.

But remember, as Virgil said, or was it Caesar, ” Per aspera ad astra,” through hardships to the stars.  We will get through this.  Solvitur ambulando. show it can be done by doing it.

So —  if you visit www.coloradolendingsource.org, you can still sign up for the SBA7A training webinar FOR FREE on Thursday, February 11 at 9:30 MOUNTAIN time.   Or email me at tim@horizon-west.com I will send you the details.

Bad news for investor real estate:  The Wall Street Journal reported Thursday (January 7) that commercial mortgages delinquent 30 days or more hit 6.07% last month in the U.S., the highest rate since commercial mortgage-backed securities were first marketed.  The rate for November was 5.65%. By the end of 2010, the rate of delinquent commercial mortgages probably will be in the range of 9% to 14%,

And on the vacancy front — The Mortgage Bankers Association (www.mbaa.org) reports that office vacancy rates shot up from 16% to 19.4% in the third quarter of 2009, while the number for retail climbed from 12.9% and 18.6% and the proportion of empty units in apartment properties rose from 6.5% to 8.4%, the Mortgage Bankers Association said. The falling occupancy rates drove down asking rents for office and retail space in the same quarter. Mortgage delinquency rates rose across all property types. Housing Wire (1/6)

Meanwhile, back on OUR little ranch – CNN MONEY reports that in the three months ended Dec. 31, the SBA’s 7(a) lending program processed 12,393 loans totaling $3.8 billion  A great showing, don’t you think, versus the  the 9,070 loans for half as much volume  ($1.9 billion,) processed in the  same quarter a year ago.   Yee Ha.

Happy New Year from NYC!  This from Bob Bach at Grubb and Ellis,  courtesy John Clapp at SERVICING MANAGEMENT.  Something remotely but encouragingly upbeat yesterday:

“The good news is that the freefall we saw in 2009 is over, and the future is more certain, giving owners and users of real estate the confidence to begin making decisions again,” says Bob Bach, Grubb & Ellis’ senior vice president and chief economist. The company predicts an increase in sales volume of 20% to 30% over 2009’s levels, with prices perhaps dropping another 10% to 20% to accommodate buyers’ expectations.

Claims that commercial real estate is the “next shoe to drop” are exaggerated, Bach says. Comparing the potential commercial real estate fallout with losses tied to the subprime crisis, he notes that “the value of outstanding commercial mortgages is a fraction of the value of outstanding residential mortgages.

 “Nevertheless, losses will mount over the next several years,” he adds. “If banks aren’t lending because they’re coping with losses in their real estate portfolios, this could impede the economic recovery.”

Grubb & Ellis expects the national office market’s vacancy rate to hit 18.5% to 19% by the end of the year, which would make it the highest vacancy rate for that sector since the firm began tracking national data in 1986. The sector’s recovery depends heavily on job growth. Bach projects sustained growth in employment is “unlikely” before the second half of this year.

“The fact that the recession has come and gone, however, should provide the certainty necessary for tenants to start making decisions,” he says. “We may see leasing volume increase in 2010 as a result.”

In its quarterly data book on commercial real estate and multifamily finance, published Tuesday, the Mortgage Bankers Association said that monthly job gains need to be in the 125,000-150,000 range in order to reverse the rise in unemployment.

“Gains of this magnitude are not expected in the months ahead,” the report said. “Accordingly, the unemployment rate is apt to increase somewhat further before peaking in the spring of 2010, and then beginning a gradual, slow decline during the remainder of the year.

The industrial market, which saw increased vacancies and negative net absorption in 2009, has the potential to recovery more quickly than the office, retail and multifamily sectors because it’s less dependent on job growth. While Grubb & Ellis expects vacancy in the sector to reach 11.4% by the end of the year – 70 basis points higher than year-end 2009 – a new report from the trade group Institute for Supply Management suggests the manufacturing sector is rebounding sooner than expected.

Based off results of a survey of U.S. purchasing managers, the report showed the institute’s manufacturing index hit 55.9 in December, its highest reading since April 2006.

“Overall, this was a very strong report, and it suggests that the recovery in the U.S. manufacturing sector is gaining further traction,” TD Securities economist Millan Mulraine wrote in a note to clients, according to a San Francisco Chronicle report

In the SBA universe we are awaiting:

(1) News about whether the 7A limit may grow to $3MM or $5MM, or not at all

(2) News about the 504 senior loan (known in my circles as the companion loan) guarantee – and its impact on the secondary market

(3) And that’s about it.  We know the stimulus money is gone and those poor folks waiting in the que for stimulus money (no fees for the guarante) may well be out of luck.

But our bretheren in commercial real estate lending have a lot more to worry about.  The write-downs have just begun.  The National Association of Real Estate Investment Trusts reported today that

“ Banks in the U.S. will take an additional $336 billion of write-downs through the end of 2010 and commercial-property loans will account for about 23% of that total.  So that’s a capital hit of $77 BILLION dollars.  That will wipe out a lot of former lenders. 

As for me, I’d rather be awaiting the good news about SBA credit growth than the bad news about my commercial real estate loan portfolio and the coming,  utter absence of tangible capital for many former players in the market.  Tough times, these.  I’m staying in the SBA world.