Commercial loan
 losses a rising storm

By Russell Grantham and John Perry

The Atlanta Journal-Constitution

Que Nice has been cutting hair in his barbershop across Peachtree Street from the Fulton County Government Center for 13 years.

But lately, he fears his stay could be cut short.

Signs of financial stress are multiplying. His shop is often nearly empty. The landlord has put his building up for sale, after buying it less than two years ago. The small office building next door is under a foreclosure notice. So is a mini-mall just down the street.

“You know we’re worried,” he said.

He’s got plenty of company. Hundreds of metro Atlanta’s commercial properties face potential foreclosure these days as they battle the anemic economy and haggle with bankers for more time to repay loans. Many have already lost those battles, as evidenced by empty storefronts and office buildings across the city and region.

Industry experts worry that more banks in Georgia and across the nation could be the next casualties.

More than 30 Georgia banks have failed in the last two years, mostly because of losses on loans to residential subdivision developers, home builders and homeowners. That total could grow if a wave of loan losses on commercial real estate also swamps the state’s 300-plus banks, which collectively reported more than $3 billion in losses last year. Further strain on banks could also prolong the drought of new loans to small businesses and other borrowers.

Meanwhile, mounting commercial foreclosures would likely continue to depress rents and property values for shopping centers, offices and other properties already staggered by the recession and overbuilt market.

“Over the next few years, a wave of commercial real estate loan failures could threaten America’s already weakened financial system,” a congressional oversight panel concluded last month, not long after conducting a hearing on the issue in Atlanta. The panel — created to oversee the federal government’s $700 billion bailout fund — said hundreds more small and midsized banks nationwide could become insolvent.

The reason: About half of roughly $1.4 trillion in commercial real estate loans nationwide that are coming due in the next five years are “underwater” — the borrowers owe more than the properties are worth.

That makes it extremely difficult for borrowers to repay or refinance the loans, which typically have a large balloon payment at the end.

A growing problem

Georgia’s banks are already seeing rapidly rising tallies of problem loans on commercial property.

Loans to office buildings, shopping centers, hotels, apartment complexes and other commercial properties that are at least 30 days late have more than quadrupled to $2 billion at Georgia banks in the past two years, according to figures from the Federal Deposit Insurance Corp. More than half of that total is in “nonaccrual” status, meaning bankers have given up hope of collecting the full loans.

Georgia Bankers Association President Joe Brannen contends that the problem isn’t as serious as such numbers imply. He notes that the figure represents not much over 1 percent of the state banking industry’s total loans outstanding, and is only about a third as large as bankers’ problems with bad residential loans.

Much of the losses on commercial real estate loans, he added, will be borne not by banks but by large institutional investors such as pension funds and insurance companies that financed office buildings and other large projects.

“Our guys don’t have that much exposure,” said Brannen.

Still, banks’ fast-growing pile of sketchy commercial real estate loans are adding to the mountain of bad loans to homeowners and real estate developers that banks have been struggling under for the past two or three years.

Georgia banks have more than $5 billion worth of shaky construction and development loans and more than $6 billion in problem home mortgages on their books.

Troubled properties vary

Georgia’s problem commercial properties range from the storied 82-year-old Sea Island resort on the Georgia coast, which owes Columbus-based Synovus Financial Corp. $191 million by some estimates, to an unassuming office building at 97 Peachtree St., next to Nice’s barbershop at 101 Peachtree.

The building at 97 Peachtree sits across the street from the Fulton County Government Center and appears to be mostly vacant. A company controlled by former congressman Pat Swindall borrowed $2 million on the property in 2007.

Swindall, who was convicted of perjury two decades ago and recently was charged with making illegal campaign contributions, faces potential foreclosure on a mini-mall just down the street on which he borrowed more than $10 million, according to Equity Depot, a foreclosure data service.

In between are properties like the Extra Space Storage facility at 4951 Lower Roswell Road in Marietta, which faced possible foreclosure this month. A Kennesaw firm, East Cobb Self Storage LLC, borrowed $6.1 million from Security Exchange Bank in Marietta in 2007 to build the self-storage facility.

The Kennesaw firm, the bank and Salt Lake City-based Extra Space Storage did not return a reporter’s calls.

Attorney Thomas E. Austin Jr., who is handling the case for the bank, declined to discuss it. However, he said he has been handling rising numbers of commercial mortgage foreclosures in the last six months. “I wouldn’t say it’s a deluge,” he said, but the number of foreclosures will keep rising unless the economy improves significantly. “If there are no tenants or fewer tenants because they’ve moved out, [borrowers] are going to get into trouble.”

To be sure, a major rebound of the economy could ease the threat of a deepening crisis. And more banks are quietly extending commercial loans in hopes that a stronger economy will help bail them and their borrowers out, say some industry experts.

But many economists doubt the recovery will lead to a jump in jobs or consumer demand sufficient to fill offices and retail shops — and stave off commercial loan losses — any time soon.

In many cases banks are concluding that it makes more sense to foreclose on the properties and try to sell to a new owner, said William Rothschild with law firm Sutherland Asbill & Brennan in Atlanta.

Lots of investors who borrowed heavily at the top of the real estate boom in 2005-07 are nearly tapped out, said Rothschild. “I think it’s early in the process,” he said.

“We’re probably not at the bottom yet,” agreed Mercer University economist Roger Tutterow, noting that loans on many projects are coming due in the next few years even as commercial property values have been dropping for the last year and a half.

Meanwhile, regulators have been pushing banks to shed high concentrations of commercial real estate loans through selling the notes — often at steep discounts.

Under pressure from regulators, Georgia’s banks also have been reserving cash and other capital more aggressively in the last two years to deal with expected loan losses. These “loan loss provisions” accounted for much of the banks’ steep losses last year. Cumulative loan loss provisions topped $13 billion over the past four years.

Enough, or too much?

Georgia banks had nearly $15.7 billion in loans at least 30 days late at the end of last year — almost five times more than in 2006.

“We’ve overbuilt like crazy,” said Peter Eisemann, a finance professor at Georgia State University.

While banks don’t need to reserve as much as their bad loan totals because losses will likely be smaller, “the question is, have they gotten realistic yet?” he said. “My sense is they are still being a little bit Pollyanna-ish.”

Others disagree, saying the pressure on banks to boost their loan loss reserves has made it difficult to raise new capital or to make new loans.

“What this says is, this bank is going to fail and why should the investor put in any money,” groused Alpharetta bank consultant Steve Johnson, who is also chairman of Bank of Atlanta. Regulators pushed that bank to boost its loan loss reserves by $1.9 million last year, he said. “We made a profit last year. It wiped it out,” he said.

At the TARP oversight panel’s Atlanta hearing in late January, Atlanta developer Hal Barry complained that he couldn’t find bank financing to complete buildings that he already had deals to lease.

“We saw just a total shutdown in the banking world which ... has just caused the real estate values to tank,” Barry, chairman of Barry Real Estate, said in an interview. Barry has been negotiating with North Carolina bank BB&T to avoid foreclosure of 50 Allen Plaza, a downtown property on which he borrowed $9.5 million with hopes of building a skyscraper.

He said the bank has agreed to temporarily extend the loan. “Hopefully we can work something out,” he said.