The Death of Transparency in Commercial Real Estate Lending

Where are Paul Sarbanes and Michael Oxley when you really need them? 
Remember all the hullabaloo about Sarbanes-Oxley, and how that piece of game changing legislation was to make the corporate world fully transparent, and was supposed to provide investors with the ability to make better informed decisions?  Remember the term “full disclosure?”

Anyone who’s anyone in commercial real estate these days knows that some commercial building owners have been given some pretty impressive gifts by their lenders.  Those gifts, substantial to say the least, include delays of foreclosure, reduced interest rates, more time to make mortgage payments, and other efforts designed to keep certain properties in the hands of borrowers and off the books of lenders.  From the perspective of not dealing another blow to an already struggling economy, this may not be entirely bad.  And, given the very real challenges commercial landlords are experiencing, giving them financial relief, and time to bring failing buildings back to health is a good thing.

However, technically speaking, many commercial loan, where lenders are giving landlords more time to make debt payments, are in default under the terms of their original mortgages.  I agree that banks and landlords should seek practical solutions to avoid foreclosure whenever possible.  However, such short-term fixes very often are just that…short-term…and do very little to eliminate the inevitable.

The real challenge here is that some banks are not fully disclosing that such loans are in default.  This “technical” oversight is significant, to say the least.  By masking full disclosure to the world that certain borrowers are in technical default of their loans, these banks are able to show a lower delinquency rate, and therefore appear to be much stronger than perhaps they really may be. This, at a time when some banks have closed and others, even name brand institutions, struggle to survive. 

Should banks be permitted to understate the true risk profile of their commercial real estate loan portfolios…in the interest of supposedly building consumer confidence?  Is that really why they’re doing this?  Is this nothing more than permitting banks to delay the next wave of bad economic news?  If and when the other shoe falls, how might that affect corporate tenants?  What’s the answer? 

Sarbanes-Oxley was enacted to force companies to be transparent in their dealings and to protect the interests of investors, borrowers, consumers, and other stakeholders.  That includes banks.  Where are Paul Sarbanes and Michael Oxley when you really need them?

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Copyright Real Estate Strategies Corporation 2010.  All Rights Reserved.

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8 Responses to “The Death of Transparency in Commercial Real Estate Lending”


  1. 1 Commercial Notes March 16, 2010 at 4:30 pm

    I don’t think lenders (banks) truly realize the predicament they’re currently in. Yes, some landlords are getting leniency but that is better than having to go through the foreclosure process which can take 12-18 months and a 10% commission at the end (brokerage fees and closing costs). Banks/lenders who are looking to get out of this mess need to look to sell their notes – albeit, at a discount. The last thing these banks want is a C&D from the FDIC. Some banks are trying to remedy the situation in the short term like Andrew states but really need to look at the bigger picture as to where all their loans stand.

  2. 3 MCL March 16, 2010 at 5:43 pm

    The real question is “where are Carter Glass and Henry B. Steagall?”

  3. 5 RP March 17, 2010 at 12:42 am

    “Healthy” banks don’t appear to want to sell at 20-30 cents on the dollar. Opportunistic and vulture investors will keep waiting around while preying on illiquid banks and their assets. And it’s pretty transparent at least to me that eventually gov’t will get back involved since banks and borrowers cannot continue to kick the can…

    • 6 realstrat March 17, 2010 at 2:35 am

      Can you blame the banks? Not really, yet their actions still test the principles of disclosure and transparency. Can someone say Resolution Trust Corporation? Yikes!

      Thanks for your thoughts.

  4. 7 lighthouseas March 31, 2010 at 4:01 pm

    It’s the old “Extend and Pretend Game”. If the economy doesn’t get better soon. This game is going to have some dire consequences.

    • 8 realstrat April 1, 2010 at 2:06 am

      Signs of light! Signs of light! More and more signs of light seem to have appeared on the horizon. They may be small lights and not too many of them, but they are their. Let’s hope they stay lit!


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THIS WORK IS DESIGNED TO PROVIDE PRACTICAL AND USEFUL INFORMATION ON THE SUBJECT MATTER COVERED AND REPRESENTS THE OPINION OF THE AUTHOR. HOWEVER, IT IS PROVIDED WITH THE UNDERSTANDING THAT THE AUTHOR IS NOT ENGAGED IN RENDERING LEGAL, FINANCIAL, ACCOUNTING, OR OTHER PROFESSIONAL ADVICE TO THE READER. IF LEGAL, FINANCIAL, ACCOUNTING, OR OTHER PROFESSIONAL ADVICE IS REQUIRED, THE SERVICES OF A COMPETENT PROFESSIONAL SHOULD BE SOUGHT. THE AUTHOR SPECIFICALLY AND EXPRESSLY DISCLAIMS ANY LIABILITY THAT MAY BE INCURRED AS A RESULT OF THE USE OR APPLICATION OF THE INFORMATION THAT IS CONTAINED IN THIS WORK.

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