Commercial Real Estate Finance

We’ve been hearing more and more stories about commercial real estate owners handing the keys back to the bank on properties that are under water.  We’ve heard even more stories about banks extending financings so that they don’t actually have to take those keys back.  The reason being that banks are not in the business of owning real estate, they are in the business of taking deposits and lending those deposits out to make interest revenue.  With the economy in the doldrums, this is happening not just in the real estate world, but the corporate world as well.  Many companies are giving up huge stakes in their business to their commercial lenders to alleviate indebtedness.  Wouldn’t banks like to take advantage of some of the opportunities that are falling into their laps?

Of course they would.  But the fact of the matter is the vast majority of lenders do not have the operating experience needed to capitalize on these situations.  But what if they did?   There are a few private equity firms deploying their capital as debt to operating companies who have taken advantage of their “loan to own” positions.  These PE shops have realized huge returns in the past pursuing this strategy.

As far as commercial loans go, lenders are not allowed to take over their debtor unless that takeover is in lieu of being paid back their loan obligation.  Even in such cases, the lender cannot be the majority owner of the enterprise beyond a period of 5 years.  It seems to me that in many cases 5 years would be more than enough time to turn a company around and sell it at a premium once it is operating efficiently again.  PE shops do this all the time, but usually through an LBO process.  If banks would just hire people with operating experience (CRE experience if they are a CRE lender or corporate experience if they are a commercial lender), they could pursue a similar strategy through a direct lending process as opposed to an LBO.

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