M id A tlantic Real Estate Journal — Financial Digest — Tax Issues /Accounting — July 2023 — 5A
www.marej.com
T ax I ssues /A ccounting
By Howard Applebaum, Corporate America Realty & Advisors What Is Keeping “You’re Friendly Banker and Real Estate Investors” Up at Night?
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of loan repayments, which reduces its cash inflow. If the bank has to step in and manage the property, the rental income (if any) might need to be in- creased to cover the shortfall. 3. Operational Cost: Run- ning a commercial property is not a bank’s core competence. It might involve significant opera - tional costs, eroding the bank’s profits and cash reserves. 4. Capital Adequacy: Regulatory standards like Basel III ( the 2009 interna - tional regulatory accord that introduced a set of reforms designed to improve the regu-
potentially also its solvency - its ability to continue operations in the long term. While regulatory bodies and central banks have systems in place to prevent bank failures and their potential impact on the broader economy, the insolvency of a bank due to exposure to bad commercial real estate loans can still have sig- nificant economic consequences. This is particularly true if the failing bank is a major lender in its region or if many banks face similar issues simultaneously. Howard Applebaum is pres- ident of Corporate America Realty & Advisors. MAREJ
he newspapers and business media have stories about the prob-
on its balance sheet, decreasing its overall net worth. 6. Risk Concentration: Regional banks are often more exposed to local market conditions than larger, more diversified banks. If a regional bank has a high concentration of commercial property loans in its portfolio, a downturn in the local real estate market could hit the bank particu- larly hard, potentially leading to insolvency. The combination of these factors can strain the bank’s liquidity - its ability to meet short-term obligations, and
lation, supervision, and risk management within the global banking sector) require banks to maintain a certain level of capital compared to their risk-weighted assets. If the property loses value or can’t be sold, the bank might need to raise money to meet these regulatory requirements. In an extreme situation, failure to do so could result in regula- tory sanctions, including the bank being declared insolvent. 5. Asset Devaluation: If the real estate market is doing poorly, the bank may need to write down the property’s value
lem in Com- mercial Real Estate and Ba n k i n g with what is currently occurring with Mort- gage Financ- ing and Loan Defaults.
Howard Applebaum
This article provides back- ground on what today’s “Friend- ly Bankers” and those that rely on the “Capital Markets” are worried about. Banks are in the business of lending money and earning interest on those loans. When they lend to commercial real estate projects, they expect the borrowers to repay the loans from the rental income or sell the properties at a profit. However, when a borrower defaults and a bank is forced to take back a commercial property, it can create severe liquidity and solvency issues. Here’s why: 1. Illiquidity of Real Estate Assets: Commercial properties are not readily convertible into cash. Unlike other assets such as Treasury bonds or cash reserves, selling a commercial property can take considerable time and often at a discount to the market value, particularly in a distressed situation. 2. Loss of Income: The bank loses the expected stream SCOPE arranges sale & financing of multifamily portfolio in Mantua PHILADELPHIA, PA — Scope Commercial Real Es- tate Services, LLC (SCOPE) has announced the sale of a 36-unit, seven-building multi- family portfolio located in the Mantua neighborhood of Phil- adelphia. The entirety of the portfolio sold for $6,750,000. Saam Tashayyod , vice president at SCOPE, had the listing to market the prop- erty on behalf of the seller, Haverford Square Proper- ties . Fahd Malik , director at SCOPE procured the buyer, 2X2 Capital. Edward Brown , senior director with SCOPE Capital Group, secured the acquisition financing. The loan was structured with a five- year fixed rate of 5.93%. MAREJ
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