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Longer leasing terms aid commercial lenders

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The Federal Reserve has launched a program to boost commercial lending, but how much it will help is anyone's guess.

"I don't think anybody thought the 10-year treasury would be at around 3.10 percent and the banks wouldn't be loaning any money," said Mark Goode, of Venture One Real Estate during a recent Society of Industrial and Office Realtors conference at the Manchester Grand.

The Federal Reserve has announced plans to launch a program in June to bolster dormant commercial real estate lending. What's more, the Fed intends to provide longer five-year loans.

Shorter terms have been another major complaint of borrowers -- that is if they could get the funds at all.

The commercial real-estate lending industry especially welcomed the Fed's decision to offer longer loans.

"A five-year term (rather than three) is more consistent with the longer-term nature of commercial lending and will provide more flexibility to borrowers as they navigate the current real-estate cycle," said Christopher Hoeffel, president of the Commercial Mortgage Securities Association in a news statement.

The association "strongly advocated for a term of five years to kick-start investor demand," he added.

The longer five-year loans also will be available in June to investors who want to buy securities backed by student loans and loans guaranteed by the Small Business Administration, the Fed said.

A total of $100 billion in commercial mortgage-backed securities could have these five-year maturities, the Fed said.

The new commercial real-estate component is part of a broader program that aims to jump-start lending to consumers and small businesses under the Term Asset-Backed Securities Loan Facility, or TALF.

It figures prominently in efforts by the Fed and Obama administration to ease credit stresses and stabilize the financial system.

The TALF has the potential to generate up to $1 trillion in lending for households and businesses.

Earlier this year, the government said it planned to expand the TALF to include help for commercial real estate lending.

Under the Fed's program, investors would use the money to buy securities backed by commercial real-estate loans.

The goal is to boost the availability of these loans, help prevent defaults on commercial properties like office parks and malls, and facilitate the sale of distressed properties, the Fed said.

While distressed residential properties have gotten the most press, troubled commercial properties -- retail in particular with all the major store closures and heavy debt loads -- have also come to the fore.

General Growth Properties (NYSE: GGP), a real estate investment trust that owns the Otay Ranch Town Center and the Chula Vista Center, which filed for Chapter 11 bankruptcy earlier this spring, is a case in point.

"There's a looming crisis in commercial real estate whereby owners of shopping malls, hotels, rental properties and many other types of buildings are unable to refinance or to pay for new construction," Fed Chairman Ben Bernanke warned lawmakers on Capitol Hill in March.

Surprisingly, while commercial loan problems seem to becoming more prevalent, a California Mortgage Bankers Association first-quarter survey concluded that commercial loan delinquencies in California actually dropped from 0.15 the fourth quarter of last year to 0.12 percent in the first quarter of 2009.

The commercial delinquency rate stood at just 0.02 percent in the first quarter of last year.

Delinquencies were low at a time when the market for so-called commercial mortgage-backed securities, or CMBS, came to a "standstill in mid-2008," the Fed said last Friday in announcing a new piece of the TALF program.

The CMBS market had accounted for almost half of new commercial mortgage originations in 2007, the Fed said.

Getting equity isn't the only problem, as Goode noted that there has been little available debt financing.

Money may become more available with the new federal program, but whether or not such programs will be enough to stem the huge job losses remains an open question.

Herb Krumsick, J.P Weigand & Sons senior vice president, who was attending the SIOR conference from Wichita, said between the Beech, Boeing, Cessna and Lear aircraft firms, at least 7,000 jobs were lost in his city during the past year.

That translates to a lot of empty space, and perhaps distressed real estate.

The other issue is that even if financing is available, finding buyers for commercial real estate in this climate remains exceedingly difficult.

"As an investment broker I've noticed that there are a lot fewer buyers than there have been for the past 10 years," Goode said.

Meanwhile, to boost the investment pool, the Fed, also in June will offer loans for those wanting to buy securities backed by "insurance premium finance loans."

Those are loans extended to small businesses so they can obtain property and casualty insurance.

The loans "have become more expensive and more difficult to obtain since the shutdown of that market last fall," according to the Fed, which hopes its program will provide relief on those fronts.

Created by the Fed and the Treasury Department, the TALF has gotten off to a very rocky start.

It has been hobbled by rule changes, investor worries about financial privacy, and perhaps most importantly, the anti-bailout backlash from the public and Congress.

The other problem is simply getting the money distributed. Of the $200 billion consumer-lending part of the program, just $1.7 billion in loans was requested for the second round of funding in April -- down from $4.7 billion in March.

For whatever reason, a lot of the money isn't circulating.

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