Post by Sapphire Capital on Jul 24, 2008 3:05:44 GMT 4
chicagotribune.com
In commercial projects, lending again personal
By Lingling Wei
The Wall Street Journal
July 20, 2008
After a decade of easy lending, the personal guarantee is making a comeback in the real-estate industry, and with it the tough terms borrowers didn't miss.
As loans for commercial projects have become difficult to come by, borrowers are being forced to consider loans that would give the lenders "recourse" to the borrowers' personal fortunes—terms that led many a developer, including Donald Trump and William Zeckendorf Jr., to near ruin in the real-estate crash of the early '90s.
These recourse loans had largely fallen by the wayside during the past decade as banks found ways to minimize their risk.
Now, with the securities market for commercial loans still anemic, recourse loans are back.
Dale Anne Reiss, global director of real estate for Ernst & Young, recalls the efforts involved in restructuring recourse loans, with some people losing numerous properties, including their own homes: "Some of the workouts were extremely painful," she said.
Yet commercial investors who can't wait out the credit crisis may have little choice but take a deep breath and sign a recourse loan. "Oftentimes, it's either sign personally or you don't get the loan," said Donald Isken, a real-estate attorney at Morris, Nichols, Arsht & Tunnell LLP.
Take, for example, Judah Hertz, chief executive of Hertz Investment Group in Santa Monica, Calif. About 31/2 years ago, Hertz took out a $50 million mortgage from LaSalle Bank to buy an office building in New Orleans. That loan required no personal guarantee. As the loan is due this month, he is left with little choice but to accept a new $50 million loan from Wells Fargo that requires him to guarantee 25 percent.
"If you're going to banks today, they all require recourse," said Hertz.
During the recent sales frenzy for commercial properties, non-recourse loans were the norm.
Typically, this meant that the developers put up as collateral only the buildings they were purchasing. If they couldn't pay off the loans, they handed the building's keys to the lender and walked away. The borrowers' other holdings—including personal assets such as homes and boats—remained intact.
The investment banks that originated many of these loans were comfortable with the arrangement because they typically packaged those loans into commercial-mortgage-backed securities and sold them as bonds, reducing their risk if the borrowers couldn't pay.
Now, with a 90 percent drop in sales of those securities, banks have all but stopped originating loans aimed at the bond markets. Instead, they are returning to the traditional model of holding the loans.
"We're not closing loans for securitization. We're closing loans for balance sheet," said Brett Smith, managing director in Wachovia Corp.'s real-estate group.
And with the return of balance-sheeting lending comes the return of recourse loans.
Even for banks, recourse lending can cause headaches.
Borrowers are more likely to fight the banks if they face losing much of their net worth over one bad gamble.
Plus, the banks make less money; the interest rates they can charge on recourse loans are about 1 percent lower than on non-recourse loans.
Banks that have suffered losses related to residential mortgages are increasingly viewing recourse loans as a necessary layer of protection.
When prices were rising, the bank could take control of a building and sell it to pay off the loan. Now, with falling valuations, the building could be worth less than the debt on it.
Investors who buy debt welcome the return of discipline that recourse loans represent.
"With more discipline, you're going to develop and derive a better product," said Jack Foster, managing director for Franklin Templeton Real Estate Advisors.
In commercial projects, lending again personal
By Lingling Wei
The Wall Street Journal
July 20, 2008
After a decade of easy lending, the personal guarantee is making a comeback in the real-estate industry, and with it the tough terms borrowers didn't miss.
As loans for commercial projects have become difficult to come by, borrowers are being forced to consider loans that would give the lenders "recourse" to the borrowers' personal fortunes—terms that led many a developer, including Donald Trump and William Zeckendorf Jr., to near ruin in the real-estate crash of the early '90s.
These recourse loans had largely fallen by the wayside during the past decade as banks found ways to minimize their risk.
Now, with the securities market for commercial loans still anemic, recourse loans are back.
Dale Anne Reiss, global director of real estate for Ernst & Young, recalls the efforts involved in restructuring recourse loans, with some people losing numerous properties, including their own homes: "Some of the workouts were extremely painful," she said.
Yet commercial investors who can't wait out the credit crisis may have little choice but take a deep breath and sign a recourse loan. "Oftentimes, it's either sign personally or you don't get the loan," said Donald Isken, a real-estate attorney at Morris, Nichols, Arsht & Tunnell LLP.
Take, for example, Judah Hertz, chief executive of Hertz Investment Group in Santa Monica, Calif. About 31/2 years ago, Hertz took out a $50 million mortgage from LaSalle Bank to buy an office building in New Orleans. That loan required no personal guarantee. As the loan is due this month, he is left with little choice but to accept a new $50 million loan from Wells Fargo that requires him to guarantee 25 percent.
"If you're going to banks today, they all require recourse," said Hertz.
During the recent sales frenzy for commercial properties, non-recourse loans were the norm.
Typically, this meant that the developers put up as collateral only the buildings they were purchasing. If they couldn't pay off the loans, they handed the building's keys to the lender and walked away. The borrowers' other holdings—including personal assets such as homes and boats—remained intact.
The investment banks that originated many of these loans were comfortable with the arrangement because they typically packaged those loans into commercial-mortgage-backed securities and sold them as bonds, reducing their risk if the borrowers couldn't pay.
Now, with a 90 percent drop in sales of those securities, banks have all but stopped originating loans aimed at the bond markets. Instead, they are returning to the traditional model of holding the loans.
"We're not closing loans for securitization. We're closing loans for balance sheet," said Brett Smith, managing director in Wachovia Corp.'s real-estate group.
And with the return of balance-sheeting lending comes the return of recourse loans.
Even for banks, recourse lending can cause headaches.
Borrowers are more likely to fight the banks if they face losing much of their net worth over one bad gamble.
Plus, the banks make less money; the interest rates they can charge on recourse loans are about 1 percent lower than on non-recourse loans.
Banks that have suffered losses related to residential mortgages are increasingly viewing recourse loans as a necessary layer of protection.
When prices were rising, the bank could take control of a building and sell it to pay off the loan. Now, with falling valuations, the building could be worth less than the debt on it.
Investors who buy debt welcome the return of discipline that recourse loans represent.
"With more discipline, you're going to develop and derive a better product," said Jack Foster, managing director for Franklin Templeton Real Estate Advisors.