ABA Banking Journal - July 2010 - (Page 30)
credit report | CRE updatE
take a lease?
Brother, would you
A sputtering recovery gives landlords, developers, and lenders fits. There are some bright spots
By Steve Cocheo, executive editor
ommercial real estate lending has been battered down. But it is not without hope. In fact, though you won’t find them listed on any exchange, some bank commercial real estate lenders have invested in “hope notes.” The notes are one of the ways some lenders have applied the regulators’ late 2009 “Guidance on Prudent CRE Loan Workouts,” according to Constantine “Tino” Korologos, managing director in the Real Estate Consulting Practice at Deloitte FAS. As he explains, workouts of many
commercial real estate projects, especially those still being built, hinge on additional capital being brought into the deal. Developers and sponsors frequently balk, however, at the idea of sinking more cash into a project with uncertain prospects, especially if the new money stands behind the lender and every other interest looking for payoff. Enter the hope note Let’s say the lender holds a $50 million loan on the property or project. It agrees to split that loan into two pieces: a fat slice of $40 million that
has first call, and a smaller, $10 million slice. In exchange for the sponsor/developer’s fresh capital, the lender agrees to give them priority over the $10 million slice, slipping their priority between the $40 million and the $10 million. What does this accomplish? The project gets back on track. The bank keeps a loan in the “performing” column, avoiding write-offs and impact on capital. And the bank also finds itself with the chance of recovering, eventually, that $10 million slice. That’s the “hope” in the “hope note,” says Korologos: The bank hopes
30 | ABA BANKING JOURNAL | july 2010
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