The Journal Record
By Michael S. Laird, Gavel to Gavel

Dec. 3, 2009

There has been no shortage of commentary (and hand-wringing) of late by those immersed in or financially connected with the commercial real estate industry, about what might be the next phase of the overall economy’s stabilization, for the optimist, or demise, for the pessimist, and how in either case, it will impact our local financial health. From an Oklahoma perspective, the striking contrast between the state’s relatively vibrant though hardly unscathed economic picture and what is observed in most other parts of the country, tends to make us feel essentially positive about both the short- and long-term prospects of continued, albeit at a more conservative pace, economic growth. Unfortunately, it may well be that this general optimism will end up working against some pragmatic exit and restructure strategies in the case of marginal or jeopardized commercial real estate loans.

Let me put it another way – from both lenders’ and borrowers’ perspectives, the unwillingness to accept the reality that in some cases, the particular project loan in question, as well as the very future of the project itself, simply will never achieve the good faith expectations of say a year or two ago. It’s just part of human nature that people want deals they structure to work for the better, and commercial real estate loans are certainly no exception to this rule. One of the most difficult things for borrowers and lenders to concede is that the project is not going to develop the way everyone wanted it to.

The next 24 months are going to be an interesting and in some ways, gut-wrenching time for the commercial real estate industry both nationally and here in Oklahoma, regardless to a large extent, of what the general economy does. Why? Most assessments predict that during this period a substantial number of real estate credit facilities will mature and come due, and the borrowers in these relationships will be looking, frantically in some cases, for replacement credit sources or equity injections to take their place. When you consider that this will all be occurring in an environment of real estate asset devaluation, a trend that started over a year ago and may continue for some time, you have a perfect-storm scenario for both borrowers and lenders.

What does all this mean? There are several possibilities and many of them are not good. For certain it means that all real estate industry players will need to develop more adaptive and pragmatic strategies in this brave or not so brave new world of financial industry realities, driven in no small part by whatever the regulatory mandates that congress may eventually put into place. For Oklahoma, the situation will be no different even if we continue to run counter to most of the depressed trends of the national real estate industry. Our lenders and borrowers will need to approach compromised credit relationships with candor and pragmatism given the likely prospect that there may be no other choice in many circumstances. The commercial real estate borrowers and lenders that are stable, if perhaps not robust say three to five years from now, will those that embrace these concepts sooner rather than later.

Michael S. Laird is an attorney and director with Crowe & Dunlevy in Oklahoma City.