Information on Real estate loans los angeles

Bankers take harder look at real estate portfolios

Increased vigilance applies to new and existing loans

Los Angeles-area banks have started taking harder looks at their commercial real estate portfolios, according to a number of industry consultants.

"The banks have seen problems arise with commercial real estate in other parts of the country, so they are exercising greater care here," explained Larry Caddle, senior manager at the downtown Los Angeles office of Deloitte & Touche.

Despite the relatively resilient real estate market in Southern California, banks have begun to view the market as slowing, with rising vacancy rates and overdevelopment in some markets, Caddle said.

Consequently, these banks have stepped up monitoring of their commercial real estate borrowers as well as required more disclosure from them on an ongoing basis, according to Douglas McEachern, partner at Deloitte & Touche.

The increased vigilance applies to both existing loans and new loans, said Barry Rubens, CEO of Santa Monica-based California Research Corp.

While greater caution is a good sign for those who think banks have discarded some basic tenets of banking, throwing caution to the wind, it could mean greater costs associated with a given loan, McEachern said. These costs could well be passed onto the borrower in increased fees or higher interest rates, if they have yet been factored into either, he cautioned.

David Martins, chief accountant at the Office of Thrift Supervision, dismisses the significance of this cost factor for the average borrower but suggests that credit will become tougher to find for the marginal borrower. "Borrowers with good credit should continue to have no problem," he said.

Martins pointed out that credit availability has already become tighter under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), the savings and loan association bailout law, because of stricter capital standards and loan to one borrower limitations.

Under FIRREA's risk-weighted capital requirements, commercial real estate loans have become more expensive for banks as well as thrifts, McEachern indicated.

In their increased conservatism, banks are also avoiding commercial real estate loans which are strictly equity-based -- loans based on the value of the real property itself, Caddle said. Rather, banks are looking to the cash flow of the project, the creditworthiness of the borrower and other credit factors, he explained.

The initiative for the heightened bank diligence comes from the highest levels in the banks, Caddle commented.

"Senior management is trying to understand their portfolio better -- the types of loans in their portfolio and the markets they are in," Caddle said.

Senior management, in turn, is feeling the heat from regulators. "The regulators want management of the banks to control their institutions so that they can monitor management," said Caddle.

The activist regulators in this area include both the Office of the Comptroller of the Currency and the FDIC. Both are particularly concerned about senior management's accountability for the loan portfolios of their banks, Caddle said.

"The regulators want to make sure borrowers can repay the loans at the end of their terms and not simply rollover or reschedule the loans," Rubens said.

Additional pressure is also being exerted by the public accounting firms, Rubens indicated. Hit by a multitude of law suits from their lax auditing of savings and loans associations, the accounting firms have become more conservative in their auditing of banks, he explained.

The increased vigilance does not mean profits have dried up in commercial real estate, even with the departure of many battered savings and loan associations from the field.

In fact, many banks still have a huge appetite for commercial real estate loans, Caddle said. Rubens, a board member of Santa Monica-based Columbia National Bank, mentioned that the bank is currently looking for loans.

Although banks have stepped up their review of all kinds of commercial loans, certain types are likely to bear the brunt, including small strip shopping centers, minimalls and small office buildings, according to Rubens. These are all areas that have experienced reckless overbuilding in recent years,

These kinds of loans may also lose out because banks, insurance companies and mortgage companies -- the most active remaining players in the commercial real estate field -- tend to steer away from smaller projects, Rubens added.