February 2009

COMMERCIAL CREDIT CRISIS ENDANGERS RECOVERY

An area hit hard by the economic crisis and the resulting credit crunch is commercial real estate. Loans involving commercial real estate are generally shorter than their residential counterparts and are typically refinanced as they become due. The credit crisis that hit last year has led to commercial lenders being less willing to refinance. If this situation is not resolved there could be a wave of defaults in the next couple of years adding a double whammy to an economy that is suffering enough as it is.

The National Association of Realtors (NAR) is pointing out commercial real estate’s importance to the entire economy and the need to ease credit restrictions on this critical segment of the market.

“Most lenders have withdrawn from the market, and there is no secondary market for commercial mortgages,” NAR President Charles McMillan said. “If lenders cannot meet the growing demand for credit to refinance performing commercial real estate loans, which are due to mature soon, a wave of defaults could worsen the current credit crisis.”

According to NAR, there is currently about $5 trillion worth of income-producing commercial property in the United States. This sector provides for more than 9 million jobs, as well as millions of dollars in tax revenue. While these taxes help out the federal and state governments, local governments collectively depend on commercial property taxes for about 70% of their revenue.

“Commercial real estate creates the framework for much of what happens in our economy,” Realtors Commercial Alliance Chairman Robert Toothaker said. “A major collapse in this area would be felt throughout the economy.”

TALF TO INCLUDE COMMERCIAL REAL ESTATE IN RESCUE PACKAGE

In an effort to curb the developing crisis mentioned in the above article, the U.S. Treasury announced on February 12 that commercial mortgage-backed securities are now eligible collateral for the Term Asset-Backed Loan Facility, better known as TALF.

TALF was created last November by the Federal Reserve Board in an effort to stimulate the credit flow following the economic downturn. At the time of creation, TALF authorized the Federal Reserve Bank of New York to lend up to $200 billion to holders of AAA-rated asset-backed securities collateralized by credit card loans, automobile loans, student loans and loans guaranteed by the Small Business Administration. The National Association of Realtors (NAR), through its subsidiary, Realtors Commercial Alliance (RCA), has been advocating the inclusion of commercial mortgage-backed securities in the group of loan securities backed by TALF.

“Expanding the TALF and opening it up to commercial mortgage-backed securities is a movement in the right direction and welcome news for the American economy,” said NAR President Charles McMillan.

“Though much still remains to be done, this policy decision will help reassure investors in the vital commercial real estate sector,” added RCA Chairman Robert Toothaker. “NAR will continue to work with Congress and the regulatory agencies as further options are considered to address the crisis in the credit market and ensure overall economic recovery.”

HOUSING HAS BEEN THROUGH TOUGHER TIMES

For most of us, the recent period has seen the biggest drop in housing values during our lifetime. Recent figures released by the Winans International Real Estate Index indicated that new U.S. home prices were down 23% from what they were in March 2007.

While this period of housing-value decline is probably not yet over, the Winans report said that housing prices declined 68 percent from 1929 until 1932. Not so coincidentally, those Great Depression years are when real-estate-appraisals became a standard part of the mortgage loan process. The appraisal profession was strengthened somewhat when state-appraiser licensing became mandatory during the late 1980s in the wake of the Savings and Loan Crisis.

Now that we are undergoing another real-estate-related economic crisis, more teeth are being put into the appraisal-independence mandates via the Home Valuation Code of Conduct. Appraisers must be responsible, professional and free of any influence to place a certain value on property for us to avoid further serious housing related economic problems in the future.

ALL FHA APPRAISERS MUST BE CERTIFIED BY OCTOBER

The U.S. Department of Housing and Urban Development (HUD) is raising the standards it requires for an appraiser to be qualified to perform appraisals on FHA home loans. In the past, FHA-approved appraisers had to be state licensed appraisers, but they did not have to be state certified.

That is beginning to change. Last October HUD stopped accepting FHA-approval applications from appraisers who did not have state certification. Non-certified appraisers who are currently FHA approved have until October 1 of this year to obtain state certification. If they fail to do so, they will be dropped from the FHA-approved appraiser roster. On that same date, all FHA-approved lenders will be required to use state certified appraisers on loans involving FHA-insured mortgages. The appraisers must be certified in the state where the property involved in the mortgage is appraised.

ELLIOTT® can get its clients appraisals from FHA-approved appraisers anywhere in the United States. We constantly monitor the status of all of our appraisers and maintain records of which FHA appraisers are certified and which ones need to obtain certification by October.

FOREIGN INVESTORS RANK USA AS MOST SECURE

Most members of the Association of Foreign Investors in Real Estate (AFIRE) rank real estate in the United States No. 1 in secure property investment. An AFIRE membership survey, conducted late last year revealed that 53% of its members listed the USA as the “2008 Country providing the most stable and secure real estate investments."
 

“Our investor members have expressed a growing confidence and interest in U.S. real estate,” said AFIRE CEO James Fetgatter. “Their investment plans for 2009 for the U.S. resemble the flight to quality that is creating the demand for U.S. Treasuries."

Although AFIRE has less than 200 members, they collectively own about $1 trillion worth of real estate, over a third of which is in the United States. The survey also indicated that foreign lenders plan to increase lending by 58% in the USA during 2009.

“During the past year, AFIRE members generally took a measured stance towards new acquisitions,” said AFIRE Chairman MacLaine Kenan. “As they expect more favorable investment fundamentals to return in 2009, our members are posed to move more aggressively on acquisitions.”

MARKET FOR MEDICAL OFFICE SPACE REMAINS HEALTHY

Despite the difficult economic climate for commercial real estate, as well as other facets of the economy, the medical office business appears to be weathering the storm.

“There certainly are investors who want this type of property in their portfolio,” Dan Fasulo, managing director of Real Capital Analytics, said of medical offices. "It’s kind of a recession-proof bet.”

Sources, including the National Association of Realtors and the New York Times, indicate that real estate investors who deal in such property tend to have better access to credit than their non-medical counterparts. Doctors are, on the whole, considered less likely to move than other commercial tenants. Health care is also an industry where jobs are increasing, even during this period of economic downturn.

“There is still real leverage out there,” Neil Shapiro, who heads the health-care finance group of the New York law firm, Herrick Feinstein. “There is still the ability to get these deals done, versus a standard office building or shopping center.”

ELLIOTT® regularly performs appraisals and other real estate services on doctors offices, dentists offices, hospitals, nursing homes and other health care facilities.

ASK MARTITIA

QUESTION:  Is there a guideline or standard regarding the use of MLS photos for comparables in an appraisal?

MARTITIA: Uniform Standards of Appraisal Practice (USPAP) does not specifically address the use of MLS photographs in an appraisal report, but it does specify that the appraiser cannot use false or misleading information in an appraisal. It is best that the appraiser use his or her own photographs in an appraisal report, taken during the inspection, but sometimes circumstances prevent this from happening. If a source other than appraiser is used to provide photos, the source should be identified in the report, and the date of the photos should also be identified if possible. If an appraiser included some older photos, without explanation, of parts of the property that since had been damaged or altered, the appraiser would be in violation of USPAP.

Martitia Mortimer, Elliott’s executive vice president, answers appraisal questions on a regular basis in Elliott Real Estate News.

QUOTES

“An intellectual is a man who takes more words than necessary to tell more than he knows.”
                                                                                                                   -- Dwight Eisenhower

“Life is the art of drawing without an eraser.” -- John Gardner

“There is only one boss; the customer. He can fire everybody in the company, from the chairman on down, simply by spending his money somewhere else.” -- Sam Walton

“Treat your password like your toothbrush. Don’t let anybody else use it, and get a new one every six months.” -- Clifford Stoll

“Why shouldn’t the truth be any stranger than fiction? Fiction, after all, has to make sense.” -- Mark Twain
 

Newsletter Editor: kevin@elliottco.com
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