A little over a year ago our national economic toilet overflowed. It caused a big mess, and we realized that we had a problem. The wad of paper, we suspected, was subprime mortgages, so we plunged the financial system with TARP. That stopped the overflow, at least, but the toilet still wouldn’t flush. So we augured it with more bailouts and stimuli, and even poured in some subsidy drain-o for good measure. Now we’re looking at an empty bowl.
The question is, is the problem fixed?
Let’s assume, for a moment, that simply depressing the lever a couple more times will push the clog through. Some economic indicators (e.g., unemployment trends, productivity increases, factory order increases, housing turnovers) suggest that this is the case. If indeed it is, what does it mean for you, the real estate investor?
It means that you need to capitalize on the recovery. Full analysis of your entire portfolio needs to be done now so that you can (1) maximize the value of your current holdings, (2) prepare for tax increases (someone has to pay the plumber), and (3) present an attractive package to lenders as soon as the credit spigot is turned back on. Interest rates are at historic lows, but they will not remain there for long. Be prepared to act quickly whether you are refinancing or snatching up a new deal.
Beware, though, that the financing packages you’ve used in the past will no longer suffice. Lending standards have tightened, and they will not be loosened just because credit is flowing again. Memory is short, but not that short. All parties must have confidence in the deal. An objective third party with the expertise in presenting all the relevant information in an understandable manner will be the determining factor in getting approved.
But what if that wad of paper snags on the toy that the three-year-old flushed when no one was looking? Or what if the clog runs into a root in the waste line and starts backflowing into the entire house?
If, as some speculate, we are heading for a double-dip recession—the root in the waste line—then we have a serious problem, and fixing it is not going to be pretty. In that event, there is no amount of flushing or chemical that will unclog the line. The only remedy will be to dig up the yard, cut out the root, and repair the pipe.
Don’t be caught with your pants down if a major backflow occurs. We know that we have a problem, so it is foolish to delay-and-pray, hoping that the root is not a root. Yes, there are things you can be doing now to mitigate disaster. First, stop adding to the clog by needlessly flushing more cash. Second, be prepared to overhaul your entire portfolio. If we’re digging up the yard anyway, you might as well save time and money and clean out the whole system at once.
How? Let a team of interdisciplinary professionals who are focused on real estate perform a comprehensive analysis of your portfolio. Get reliable information on which to take action regarding managing cash flow and keeping or disposing properties. And implement properly structured asset protection strategies to protect yourself and your family.
Perhaps, though, a stuck toy is the problem. Over the next three years, an estimated $750 billion of commercial real estate loans will mature. Unfortunately, due to the disappearance of the CMBS market (it’s not just three-year-olds that recklessly play with things they don’t understand), our financial system does not have the liquidity to refinance them, much less originate new mortgage loans. Add in declining rents, increasing vacancies, and rising cap rates, to name a few, and it looks like the toddler has been at it again.
If we find that our near-term economic problems are confined to commercial real estate, then the Fed will concentrate on removing that blockage to clear the pipes so the economy can fully recover. That may mean another credit infusion to dissolve the clog. It may mean installing a fancy S-trap in the form of a "e;bad bank"e; to catch toxic mortgages until they can be properly cleaned out. It may mean that the FDIC and OCC plunge other pipes (i.e., troubled banks) in an attempt to jar loose the clog. At this time, though, all that is speculation.
Regardless of what action the government takes, you should be prepared, knowing that whatever technique is used, your point of contact will still be your lender. Show your lender that you are not the toddler who has clogged his personal toilet, and he’ll turn from you to pursue his problem children.
To prove your innocence, as it were, you need to provide your lender with information he can trust as well as with a viable plan for maximizing his value from your properties. The concept is simple, but the execution is far from easy for most investors. An internally generated rent-roll and your personally prepared financial statement will not cut it. In these times, you need the assistance of a credentialed third party in preparing your information and presenting your plan in order to give them sufficient credibility.
The economy will eventually clear the clog. Make sure that you don’t get flushed out with it.