December 13, 2010
Congress and the Obama Administration have apparently struck a deal. After much wrangling and partisan bickering on both sides of the aisle, our elected officials are on the verge of delivering a two year extension to the Bush-era tax cuts that are set to expire on December 31, 2010. There is also a 13 month extension of unemployment insurance benefits for the long-term unemployed, and the estate tax will be reinstated on much higher estates and at a lower overall tax rate than before. In the truest American spirit, the parties have found a compromise position that is greeted warmly by some while utterly galling others. We are guaranteed to revisit the tax cuts in the next election cycle of 2012 as they will be set to expire yet again. Congress is kicking the can down the road in hopes that two years from now the political and economic climate will support a more semi-permanent solution to this taxing issue (pun intended).
There seems to be a lot of can-kicking these days, as parties increasingly hope the future will bring better news. Whether delaying studying for a test or increasing the national debt, the desire to postpone today’s pain (in hopes that a snow storm will cancel the test or inflation will minimize the debt) is hard-coded into our nature.
However, there are occasions, especially in times of uncertainty, when delaying decisions can be a good thing. As my wife recently told me, “If you force me to choose a paint color today, you just increase the chances that you’re going to paint the room twice.” If you owned leveraged real estate over the last 18 months of uncertainty and had the luxury to delay rash decisions associated with your debt, congratulations; delaying hasty actions probably paid off. Debt capital markets for real estate have returned faster than recent predictions. Spreads are down, leverage is up and the CMBS pipeline for Q1 2011 is bigger than all the deals done to date in 2009 and 2010 combined. The market fundamentals in a number of asset classes and markets are improving, and sales transactions have increased for all major property types. All this good news not only gives real estate owners more clarity for today’s market, but, more importantly, also gives owners more options for their leveraged properties.
The downside of the increased certainty in the market is that the period of “extend and pretend” is rapidly coming to a close. Commerical real estate in the US and in many other countries around the globe is still an industry in crisis. The stats are truly staggering: since 2006, default rates on CMBS have risen from around 1% to roughly 8%. Approximately $245 billion in commercial loans are set to mature in 2011, and nearly $1.4 trillion in commercial loans mature through 2014, most of which will need refinancing from a new capital partner. At the same time, there are fewer insured depository institutions in the US to handle the business, as more than 300 banks have been shuttered since December 2007, and the number of “problem banks” on the FDIC’s watchlist now stands at 860, more than 10% of all financial institutions in the US. While there is still a desire by both lenders and borrowers to simply kick the can down the road in hopes of better days, it is becoming more and more difficult to hide from the facts. For upcoming maturities, borrowers and lenders are going to have to work out permanent restructurings or recapitalizations.
While newsletter readers are familiar with Chatham’s hedging services, many may not be aware that Chatham also advises clients in capital market and restructuring transactions. Over the last 18 months, Chatham Capital Advisors has helped clients restructure and recapitalize more than $4.0 billion of real estate assets. The team recently expanded by bringing on board real estate capital markets veterans Mike Havala and John Avioli, who also launched the firm’s new Chicago office. Whether the loan is securitized or owned directly by a financial institution, senior or junior, recourse or non-recourse, Chatham Capital Advisors can work with you to create the right strategies and execute them effectively. Further delay in addressing your debt issues is about as advisable as waiting three more weeks to start holiday shopping.