Martin Melaver  @  ChelseaGreen

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A Tale of Two Banks

Posted on Sunday, March 22nd, 2009 at 4:19 pm by Martin Melaver

Several hundred billions of dollars in commercial real estate loans are up for expiration in the coming year, with a multiple of that ($1.7 trillion) coming in the ensuing 12 months.. Reports of vulture capital in the $500 billion + range are reportedly poised to pounce on anticipated flea-market pricing. And the question on the minds of so many in the nation is simply this: How are our nation’s banks ─ pushed on the one hand by stress tests by Treasury regulators to reduce overexposure and on the other hand by solid, established businesses to support longstanding relationships and work through this downtown ─ going to respond?

It’s a huge question. On the one hand, there’s the lesson of Japan, working sluggishly through its own overload of questionable loans in the 1990s, slow to write off problematic debt, and providing an object lesson that such slow-to-respond leadership resulted in a 15 year stagnant economy. The lesson of Japan: bite the bullet hard and fast, call all challenging loans ASAP, and set the ground work for a faster recovery on the back end. Seems logical.

On the other hand, there’s the undocumented case history of a large corpus of businesses, many of them small, many of them relatively prudent in their business practices that absolutely NEED the capacity of banks to work with them through this downturn, so that they survive. After all, much of the financial growth of this country over the past three decades has come from small business, whose growth has been both deliberate and local. In the interest of faster economic stabilization at the global/national level, do we promote stringent fiscal policies that perhaps unduly cripple the heart of what has been the economic lifeblood of the nation?

What’s a financial system to do?

I think the big picture issue is more easily graspable by some specific case studies. My own company is currently dealing with two distinct challenges that provide as good a picture as any.

We have two loans which are coming due in the next three months. How our banks work with us, or don’t, will affect our business. Their approaches will probably serve as a synecdoche as it were for what’s going on in the nation as a whole.

Story #1. One loan is with a LEED-certified condo project, a portion of which is set aside for workforce housing. It’s a cool project in an up-and-coming area of Atlanta, mixed-use, in close proximity (one mile) from the downtown area. Unfortunately, our completion of the project coincided with the downtown in residential real estate. Sales are limping along.

More fortunate is the fact that our banker on this project seems willing to work with us on extending the loan for several years until we can generate enough sales to pay off the bank debt. The negotiation on our renewal is not yet finished. But the bank, to its credit, recognizes that we are a long-term, local business committed to delivering on its obligations. And so they are willing to ride with us during this downturn, knowing full well that if they create flexible terms, we will pay off principal and debt and provide the community with a produce that is clearly needed.

Story #2. Loan Number 2 is a different story. It’s on a sweet piece of real estate in downtown Atlanta, beautifully situated as part of the redevelopment of Atlanta’s urban core. However. Since the downturn, real estate values have decreased. Which means that the leverage on the project has increased. Our bank, following the recent trend in the economy is looking 1) to de-leverage its loans, and 2) to increase fees to help with productivity. As such it is expecting us to a) pay down the principal, b) pay an increased rate on interest, and c) pay a new loan origination fee for an extension that may only be for 12 months.

Their demands, should they hold sway, could set off an unfortunate ripple of events. It could force us to sell a current performing asset at a steep discount to what it’s probably worth in a stabilized market. The sale of a performing asset might result in forcing our hand to reduce our workforce (since we no longer have the income from that asset). A staff member losing his or her job could easily result in the inability to pay a house mortgage, the loss of a home, and managing through the downturn by subsisting on unemployment payments. And so on.

In short, a banking crisis that began with greed and the over-leveraging of credit in the past could result in a bank making moves to shore up its balance sheet at the expense of hardworking members of our society who deserve better and who had absolutely nothing to do with the cupidity occurring at levels way above their pay grade. It’s not only unfair. It’s immoral.

It is probably clear from the way I’ve framed things that I feel that, in a tale of two banks, story #1 has a lot more going for it than story #2. I’m hopeful that cool heads will prevail to make this happen. The vitality of solid, slow-growth, local businesses probably hangs in the balance.

If you have your own story to share along these lines, I’d love to hear from you.

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