Property loans poised to fail

The Gateway at Aldridge in Murfreesboro looks like any other new apartment complex. It has a workout room, free Wi-Fi and cozy fireplaces.

What's not so obvious is that a bank owns it.

Like other apartments that have fallen into foreclosure in the Nashville area, Gateway is a reminder of a troubling and still growing problem for bankers — commercial real estate loans that have turned sour and could weigh on the economy for years.

The financial crisis over the past two years has brought consecutive waves of unpaid housing loans and a residential real estate slowdown. A third wave of misery — commercial real estate problems — has yet to peak in Tennessee or even nationally.

FDIC Chairwoman Sheila Bair predicted last week the number of banks failing this year will top last year's tally of 140. And smaller banks could be among the victims.

Many small and midsize banks in the state and nation are heavily invested in commercial real estate — projects such as retail centers or offices now going broke for a lack of tenants. But there's still a debate over how bad the situation is likely to get in the Nashville area.

The more than 300-unit Gateway was owned by New York-based real estate investor Tarragon Corp., which went bankrupt last year after investing in home building and apartments in places such as Florida, Texas and the Northeast. PNC Financial Services, one of the largest banks in the nation, bought the apartments last month for $18 million.

Bank of America now controls Fifth and Main, a condominium building near downtown Nashville, after the original developer defaulted on the loan. Roughly 10 to 12 other apartment buildings have been foreclosed upon in the Nashville area since the recession began.

'Underwater' loans

"We're expecting what's already a bad situation to get worse,'' said Janice McQuary, an assistant deputy comptroller in Dallas for federal banking regulator the Comptroller of the Currency. McQuary spoke at a Tennessee Bankers Association conference earlier this month in Nashville.

Katie Edge, a Nashville bank attorney, said she has more banks with problems than she's ever had. "Most of it is (the) borrower not being able to pay you back,'' she said.

A Congressional Oversight Panel that was created as part of the federal bailout of the banking system in 2008 wrote earlier this month of a "wave of real estate loan failures" that "could threaten America's already-weakened financial system."

The report noted that $1.4 trillion worth of commercial real estate loans will reach the end of their terms from this year into 2014 nationwide, and half of them currently are "underwater" — meaning the borrower owes more than the property is worth. Losses at U.S. banks could range from $200 billion to $300 billion.

The state of Tennessee is not immune. Federal regulators generally look closely at banks that have more than 300 percent of their capital in commercial real estate loans. And that figure is exceeded by more than one-third of the nearly 160 state-chartered banks in Tennessee, according to an analysis by Memphis-based banking consultants Mercer Capital.

It's not a sign that those banks will fail, just that the state's vast number of small, community banks are heavily exposed to a growing problem in the national economy. None of the three largest banks in the Nashville area, Regions, Bank of America or SunTrust Banks, exceed that commercial real estate threshold.

High numbers, low risk

Still, some banks with high percentages of commercial real estate loans on the books say their portfolios remain in good shape.

Nashville-based InsBank has just one office and no branches in Nashville. It has more than 480 percent of its capital in commercial real estate loans, one of the heaviest concentrations in the Nashville area.

But few of its loans have gone bad, and it remains well capitalized.

"We monitor our loan portfolio on a regular basis. Historically, we have been fairly conservative,'' said InsBank President and Chief Executive Officer Jim Rieniets.

Citizens Savings Bank & Trust, the state's oldest minority-owned bank, has the highest rate of commercial real estate loans in the Nashville area. But it, too, has few problem loans on the books and remains well capitalized. Chief Operating Officer Floyd Weekes attributes that to the fact that most of the bank's commercial real estate loans are to churches.

InsBank and other local banks have benefited so far from a relatively mild real estate downturn here compared with cities in harder-hit parts of the country.

Not one Tennessee bank has failed during the current recession, a fact partly attributed to the conservative nature of banking in the state, the lack of overheated real estate markets and a state banking commissioner, Greg Gonzales, who prefers to encourage quiet sales of institutions to interested buyers rather than public and embarrassing bank failures.

And a February report by New York research firm Real Capital Analytics found that of 10 cities in the Southeast, including Jacksonville, Charlotte and Miami, Nashville had the smallest portfolio of distressed commercial properties as measured in dollar terms.

Most of the $654.5 million in distressed loans were apartments, many of which were owned by New York investor Steven Green, who was convicted of fraud in Florida and then disabled in a car accident.

"Rent is flat, but occupancy is improving,'' said Bill Freeman, an owner of Freeman Webb Co. in Nashville, which manages about 12,000 apartment units. "We've gone through a couple of years where every quarter was declining. We feel like we've hit the bottom."

Dan Fasulo, the managing director at Real Capital Analytics, said the nature of the commercial real estate problem has been overblown. Investors are getting interested in doing real estate deals again and funding acquisitions, which could help take problem properties off banks' hands.

Plus, banking regulators are allowing banks to restructure loans to put off their problems until the economy improves, jokingly known as a "rolling loan gathers no loss."

"Some banks got a little too excited and invested in too many risky ventures, and some of them will fail,'' Fasulo said. "The failure of some of those local institutions will not have an ability to move the (financial) markets at this point. The market is starting to recover."