Patience

Friday, January 16, 2009

The hands went up. Some thought economic recovery begins this year. More thought next year. A
handful for 2011. "Practically everyone is de-leveraging," said Gary Leach, a senior vice
president at Eastern Bank. "And that doesn't bode well for the economy."

Brian Kavoogian, president of Charles River Realty Investors LLC, was the moderator this week
of NAIOP's "Lending in the Commonwealth: What to Expect in 2009," at the Hyatt.

He has his own indicator of how things are going: who pays when he goes to lunch with bankers
and lenders. "Increasingly I've been buying lunch," he said.

Not every money guy in town wanted to sit up there and answer questions in this climate, but a
few of the brave did, including John McCullough, senior vice president at HSBC Bank; Cheryl
Glantz, senior vice president for the region at First Trade Union Bank; and Kevin Lyons, not a
banker, but as a senior partner at the law firm Riemer & Braunstein LLP he knows a lot of 'em.

The real estate debt market, which is the one frozen and whose condition we don't yet fully
know, amounts to $3 trillion.

Kavoogian said 50 percent of it is bank-held, 10 percent by insurance firms, and 25 percent by
commercial mortgage-backed securities.

That last category is at the heart of the problem now. In 2005-'07, 40 percent of debt issued
was CMBS, which is moribund today.

And, all agreed, it's got to come back in some way before things will approach normal.
Eastern, a bank owned by its clients, has seen its first commercial portfolio losses in 12
years, Leach said.

The bank gives 10 percent of what it makes annually to its foundation, and did last year,
though it was less than the year before.

But, like a lot of regional and smaller banks, it's not in need of a bailout.
"We have cash, we're open for business," he said. Most will be done with local clients,
especially "if they buy our non-credit products too."

McCullough, of "the world's local bank," which started in Hong Kong in the 1860s, offered the
misery-loves company view.

"England is an about as bad a shape as we are," he said. Spain too. Germany, which has been a
great source of capital for real estate in the United States, not as bad.

In the US, "Mergers is the story," he said, and the banks will be preoccupied with these for
six to 12 months.

One big reason things aren't moving is the values are unclear. "Some banks are starting to
clear the market, and there's some distress," he said. But still the uncertainty.
Business will resume with "people you know."

Two years ago, McCullough said, all someone needed to hear was "The bank is providing a letter
of credit."

Now the response is: "Which bank?"

It's important to build back the trust, the relationships, so the dollars will move again.
"They will free up. Conduits will return. It's a time for patience," he said.

Brian Kavoogian answers a question after this week's NAIOP breakfast on lending.

Lyons, the attorney on the spot, said one thing that's new with the sinking economy is "hard
floors on interest rates -- not just LIBOR-plus."

Also -- sorry, developers -- "Guarantees. Certainly recourse is going to be back in ... you're
going to see it in a lot more documents."

What Lyons awaits is to "see how CMBS works out, especially this year."

There'll be some battles among lenders as to "who's going to be the decision maker," as loans
come due.

The documents on these loans were all carefully written long ago, but nobody really expected to
have to resort to them to this extent.

"The rubber is hitting the road," Lyons said. "These documents are going to be taken out for a
spin."

With a first loan and then levels of mezzanine debt, "Who's going to be making the decisions?
Who does the lender negotiate with?"

When syndicated loans with six lenders were written, it seemed it was the borrower who had the
risk. "Now it's sort of becoming a lender risk."

Glantz, who's been at First Trade nine years, went there to get back to community banking, and
she said she's glad she did. (It's owned by the pension fund of the carpenters' union, and she
said it's well-capitalized.)

Now that some of the bigger institutions aren't lending, people are calling. "They need a
community bank," she said. "It's wonderful.... We look forward to 2009."

Now that's downright refreshing to hear.

Leach said his bank isn't doing any development right now. "It doesn't make sense."

For buying/investing, "We'll look at 70 percent loan-to-value," though not in, say, the riskier
categories, like hotels.

On loan ratios, McCullough said, he likes the slogan, "Sixty is the new 80."

"You'd have to pick me up off the floor if I saw a 75 percent loan."

There was agreement that, as McCullough put it, "Multifamily is everybody's favorite" for
investing. (Apartments, not condos.)

Why? "There's an exit." As badly as they behaved, "Fannie Mae and Freddie Mac are still there."

Also, "Multifamily moves up and down more slowly," in value. That market doesn't just crash.
Office is not quite as coveted, to lend for. Then comes retail -- where expectations are pretty
low right now.

"Over the next 60 days who knows what we're going to see," said McCullough.

And hotels he put near the bottom of the desirability list, with "land, condos, and single-
family" in the

Glantz said the largest deals are the most difficult to finance, but, "There are construction
loans to be had. Location, location, location will always work."

Anything over about $25 million would be difficult today, Leach said.

"Liquidity will continue to work extraordinarily well today," Glantz said. "Don't talk to me
about equity."

With the banking sector in the worst condition in at least 50 years, Leach said, "Time is the
key. To get out, take the long-term view. You can't make short-term decisions."

The interest rate spread between LIBOR and the prime rate is so high that, "It may be LIBOR is
no longer going to be a reliable benchmark to lend off of," he said, calling the condition

Kavoogian and others noted one positive note, compared to the early-'90s crisis. "We're not
hearing too much about bank examiners and regulators."

Last time around, they went across the country enforcing market values. This time, lenders and
customer may have more leeway to be flexible and get through the crisis.

Said McCullough: "In '90, '91, '92, it felt like someone had a gun to your back every decision
you made."

"So far it's not like that this time."

He said the government seems to be doing everything it can this time to avoid the worst,
including pumping money it. "There wasn't a floor under it last time like there is this time."

He wasn't worried about the money going to the wrong places. "Money is fungible," he said. "If
you give it to the banks it will find its way."

Glantz said that Wall Street is still a question mark. "Where is all this debt? Who holds it?"
That has to be figured out, and it probably will, soon.

"The best tracking mechanism is the stock market," said McCullough. "Things do stabilize over
time."

He cited a study that the stock market's performance, and rents, to find the relationship and
what to expect. "It's tight fit. There's approximately a six-month lag."