Chuck Dannis
It?s a sentiment that I think began in the real estate dark days of the late 1980s. Borrowers who owed money on real estate could frequently be heard saying ?Man, I?m tired. I had one of those 3 a.m. real estate wake-up calls.? This is code for, ?How am I ever going to pay back the bank??
You see, back in those days, most real estate debt carried with it one very bad (for the borrower) requirement?a personal guarantee. From the lender?s point of view, it?s a pretty simple arrangement: If the real estate doesn?t pay us back, you and/or your family will.
Exemplifying the sentiments of those bygone days is a quote attributed in Forbes magazine to the legendary (for many reasons) real estate broker and developer, Preston Carter, who said something to the effect, ?I didn?t sign my birth certificate, I won?t be signing my death certificate, and I will never sign another note again.? Amen.
In this current down cycle, the vast majority of commercial real estate debt does not carry a personal guarantee. Thus, borrowers may have lost more of their own money this time around, but their liability for repaying the entire debt for the most part is not personal. Nonetheless, I seem to be seeing a few more sleepy-eyed borrowers on the circuit these days.
So what?s keeping them up as they try and save what equity?and maybe pride?they have left? Here are the top two nightmares that should keep real estate owners and borrowers awake at night:
? A jobless recovery. It has been talked about a lot on this blog?and just about everywhere else: We need to create jobs to support a broad-based real estate market comeback. It?s great that those who have jobs, have jobs; but we need new jobs. No new jobs, no comeback. It?s that simple.
? A spike in interest rates. There is no question that the historically low interest rates available for apartments have spurred a remarkable comeback in that sector?s value. Plus, low interest rates have enabled owners to continue to make debt service payments, even though their property is likely worth less than the existing debt. Spike these low interest rates?and by ?spike? I mean not a bunch more than rates above 7 percent?and foreclosures will shoot through the roof.
These two factors are not new to the scene, but do seem to be even more in the forefront, given that we have lost more than 8 million jobs, and not yet gotten a meaningful number of them back, and interest rates are so low we all keep saying, ?They can?t stay this low forever.?
There?s about $1 trillion of commercial debt coming due between now and 2014. That debt has to either be repaid or refinanced (well, technically it does; some of it will just go have to be written off). Given the volatility of the current economy, we may be seeing a lot more sleepy-eyed real estate borrowers over the next few years.
Chuck Dannis is co-founder of Crosson Dannis Inc., which provides real estate appraisal and consultation services for many of the nation?s largest real estate lenders and owners. Contact him at cdannis@crossondannis.com.
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