Filling the Lending Vacuum

As credit tightens and higher and higher numbers of commercial real estate loans enter default, CDCs are stepping up to fill the financing gap in economic development deals from which conventional lenders have been retreating.

Commercial real estate is reportedly in trouble. In February 2010, the Congressional Oversight Panel for TARP (Troubled Asset Relief Program) issued a report suggesting that half of the $1.4 trillion in short-term, commercial real estate loans coming due in the near future (2010 – 2014) were underwater. At hearings in February and March 2011 on the subject, Matthew Anderson of Foresight Analytics noted that the value of commercial real estate has declined by 42 percent since 2007. Richard Parkus of Morgan Stanley Research provided a graph showing that practically half of loans maturing each month since the onset of the financial crisis have been unable to find timely refinancing. Columbia University Professor and Nobel Laureate Joseph Stiglitz summarized, “Our economy is not back to health and will not be until and unless lending can be restored, especially to small- and medium-size enterprises.”

Commercial defaults, continued restrictions on commercial lending, and the related problems facing retail ventures in these neighborhoods will have profound implications for economic development projects.

Commercial Credit Squeeze

In a down economy, bankruptcies and vacancies can devastate a retail plaza or larger commercial development project. Meanwhile, financing for in-the-works economic development projects is being jeopardized as skittish banks change terms or pull out entirely. Private-sector entrepreneurs and real estate developers have been stunned as banks reduced prior commitments or revised long-term relationships despite positive track records by successful borrowers.

Even government guarantees and subsidies haven’t been enough to bring the big banks back into the game. Wisconsin’s Housing and Economic Development Authority (WHEDA), for example, is an independent authority created by the Wisconsin legislature with over $3 billion in assets. In addition to its affordable housing financing, WHEDA provides capital for economic development through its small business guarantee and related programs. WHEDA regularly furnishes 80 percent loan guarantees and enhances projects with subordinated debt, a percentage of which (often 10 percent) frequently can be converted to equity or forgiven entirely. And yet, WHEDA’s participation doesn’t generally bring financing down to the 60 percent loan-to-value level that national banks have been demanding.

As a result, says WHEDA’s director of economic development, Farshad Maltes, national banks have disappeared from the authority’s deals in recent years. With the exception of U.S. Bank’s CDC, which has been an active purchaser of New Market Tax Credits in Wisconsin, the financial institutions participating in WHEDA-funded projects are primarily local community banks.

If major banks are less active even when loan guarantees and similar credit enhancements are available, recovery in lower-income communities will be considerably slower than in other segments of the economy. Despite the pressure generated by the Dodd-Frank financial reform legislation and nationwide efforts by advocacy organizations such as the National Community Reinvestment Coalition, many national lenders are apprehensive about being considered by regulators to have unhealthy concentrations of risky commercial real estate loans in their portfolio. Replicating the WHEDA approach might allow more community banks to step into that space and participate in larger real estate deals.


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