Commercial Real Estate

Sam Zell is considered one of, if not the, biggest commercial real estate investors in our country.

In a presentation last week to the Milken Institute, he said "you have a scenario today where you have very few 2003 to 2007 loans financed that are above water. You have more debt than you have value."

A typical commercial real estate loan comes due and needs to be refinanced after five years. This means that the loans issued from 2004 to 2006 are going to be coming due over the next three years.

These loans cannot be refinanced because they are under water. If they are not under water than something called a debt coverage ratio will most likely keeps banks from issuing a new loan. Remember, a commercial loan is given based on a building's income, not from some phony appraisal like residential real estate.

During the housing mania the major investment banks took control of the residential home loan securitization market. This means they bought the majority of loans from lenders.

The second tier and smaller banks had trouble getting access to this market because the big boys had almost complete control. Therefore, to help boost their profits they focused far more heavily on issuing commercial real estate loans.

This is a very important distinction. We all know that the big banks are going to be saved under any circumstance, however, we also know that most likely the smaller banks are going to be allowed to fail. With the commercial resets fast approaching, most of these small banks are just waiting to close their doors.

So what does this all mean?

First of all, if you have your money at a smaller bank, you should consider bringing it into one of the larger banks. For example, the Wall Street Journal cited this morning that banks such as BB&T, Regions Financial, Fifth Third Bancorp, and Keycorp, all have massive exposure to commercial real estate loans.

If you have less than $250,000 with a bank (which I strongly recommend you do no matter who you bank with), then you should be safe. Anything greater than that could be in trouble as we move forward.

The larger banks are in far worse shape, and all of them are currently insolvent, but they have the backing of our government, which means you will be able to pull your money out when you need it.

Now, when this is over I cannot guarantee if that money that you pull out will have any value whatsoever, but that is a topic for another day.