Surviving the Storm: A Recipe for Success

Weathering the Storm: As the financial storm makes its way through the Washington DC region, we can expect our fair share of changes that can present perfect opportunities for savvy commercial real estate investors, particularly those with available liquidity. In recent years, the commercial real estate market was a seller's market, with institutional investors and gargantuan private equity firms gobbling up as many properties as possible. The previous conditions spurred this type of irrational exuberance (yes, this term also applies to larger commercial real estate investors) as the carrying costs were low, bank lending terms were lenient, non-recourse loans were plentiful, and CMBSs were the hot-topic. Now, in the middle of the storm, learn how to stay dry and not lose your shirt.

Investment firms like Merril Lynch and Lehman Brothers played this game and funded many commercial real estate operations across the region. Now, as the financial crisis has claimed its victims, commercial real estate funding has become quite scarce as banks hoard cash and build up their reserves to cover all the bad loans they made. Now, don't get me wrong, there is still money out there, it's just that the bar has been raised and the rules of the game have changed.

The Queen of Hearts Dilemma: Bank behavior these days remind me of the Queen of Hearts in Lewis Carroll's epic Alice in Wonderland. Alice described the queen as a "fat, pompous, bad tempered old tyrant," now I don't believe banks deserve this description, although many investors, developers and small businesses may disagree. The Queen of Hearts, when she challenged Alice to a game of croquet, would continuously change the rules of the game to ensure she was always winning despite Alice's noble efforts to play the game.

Changing the Game: Well, banks are changing the rules much in the same way the queen did for Alice. Banks have always done so to gain an edge over the competition. They changed the rules and lowered the lending standards... and got burned with defaulting loans and bad paper. Somewhere along the way banks forgot that their only competitive advantage in the industry is disciplined lending. Nothing more, nothing less. Al the Marketing in the world couldn't save IndyMac or Wachovia from their demise (the same applies to Merril Lynch and Lehman Brothers). Except now, banks have changed their internal rules and made it increasingly difficult for many investors to finance a particular project or acquisition, They've even been so bold as to pull the funding out of previously approved projects! All in all, over $1.3 Billion in commercial real estate projects has been cancelled this year.

What does this mean?

Work with the experts! Banks are scrutinizing loans more carefully; investors would be very well advised to work with a reputable Commercial Broker and Title Company, since these professionals can best help formulate the transaction and anticipate any problems that may scare off a lender. The do-it-yourself-deals won't have the momentum or appeal to make it past the tougher lending standards.

Cash is King! Having available liquidity prior to any commercial acquisition is important these days as most lenders are requesting 20-30% down. Furthermore, banks want to see income sources other than real estate that can guarantee the loan.

Opportunities Abound! As the financing pool has dried up, those liquid investors will be able to jump on the deals others couldn't afford due to bank lending requirements. Also, as banks have pulled the credit lines or significantly reduced credit lines to businesses and investors, many properties are for sale. Some aren't formally on the market, but the parent company is strapped for cash and the only way to raise funds is to do it the old-fashioned-way: liquidating assets!

Gain a Competitive Edge! Working with a commercial real estate broker, whether you are purchasing, selling, or investing, will help you obtain an edge in this difficult market.

Search for properties! Learn how the TG Commercial Property Group can help you succeed: http://www.tgcommercialproperty.com/