A New Meaning to “Extend and Pretend”
November 16th, 2009 | 
Author: In the commercial real estate space, you likely by this time have heard the phrase “extend and pretend,” usually in reference to what a bank will do when faced with a non-performing loan coming due on their books. Rather than foreclose and ending up owning an asset, which banks are not in the business of (nor do they have the proper asset and property management staff requisite to keep the asset from devaluing further over time), they would rather extend the term of the loan and allow the borrower to continue to try and turn the asset around. In the mean time, they will sit on there collective hands and pretend there is no impending doom in relation to the asset, or their portfolio full of similar problem properties. After all, it is likely the borrower is more of an expert in how to fix the asset’s issues than the bank.
But after attending a brokerage conference last week that was full of investors of the four major food groups (multi-family, retail, office and industrial product), I think perhaps that there is a new phenomenon. Banks may be extending and pretending, but investors are doing the opposite: Pretending and extending….as in their hopes and expectations for their assets, and the markets for them.
From the days of the savings and loan crisis and the RTC came unsubstantiated mantras of when the market would turn. First it was “See it through to ’92″ and a few years later it became the universally popular “Stay alive till ’95.” Of course what most people fail to remember is that there was no real economic data to suggest that it would all be better in 1992, or 1995. As time pressed on and another year passed without property fundamentals improving much, if at all, people simply created new slogans on which to fall back on to make themselves feel better.
In the most recent downturn, any and everybody (with an inkling of an ego anyways) has “boldly” and loudly proclaimed their prognostications as to when we will reach the bottom, when property fundamentals will return, when cap rates will begin to trend back downward, and so on. I’ve heard 2011, 2012, 2013 and up to 2017 as years in which the commercial real estate industry will see a recovery. New slogans have been created (“Keep clean till ’13″). But aren’t we just fooling ourselves? Aren’t we simply “extending” the dates of the recovery as fundamentals continue to slide beyond our previous expectations and “pretending” we know what the future will hold?
Instead of guessing and wishing and hoping and pretending, perhaps these owners should be solely focused on whatever is necessary to keep their assets out of a foreclosure scenario. I know that nobody likes to foster the concept that they could lose money on a deal they had underwritten to throw off 20% plus IRR’s, but if owners continue to pretend and extend, they’ll wake up in 2013 or 2017, or whatever year they predicted, without their property.
Posted in Economy | 
Tags: assets, cap rates, economic data, economic downturn, Extend and Pretend, forclose, loan portfolio, non-performing loan, property fundamentals, recovery, RTC, savings and loans
I agree that landlords have to focus on tightening up their assets amidst the deteriorating fundamentals.
More importantly, however, the nation has to decide whether we’re going to recognize the losses or continue to let banks extend and pretend. If you extend and pretend and delay the point where you re-value these assets, transactions volume will remain low, price discovery is going to be impaired, and as long as price discovery remains impaired, we’re not going to be able to get back on a long-term growth path.
If the banks had to mark-to-market, a significant percentage would be insolvent, which is something the government doesn’t want to deal with.
It’s a question about how you want to recognize the losses, you can recognize it in workers unemployed, underutilized resources, or you can bite the bullet, someone has to pay the check, and the economy moves on.