Franzetti estimates two years at minimum until the clouds start to part. "There's about $1 trillion worth of loans maturing over the next two to three years, much of it backed with underwater assets," he states. "Those banks will have to weather those loans and that time line, digest those assets and then recapitalize balance sheets." It is, essentially, the same advice doled out when the crash occurred, albeit with a closer end goal.

But while the commercial banking industry appears to be frozen in an unhappy time warp circa 2009, there are, in fact, some subtle new trends underway that promise to affect both distress investors and the borrowers who traditionally do business with these banks. Investors, not surprisingly, are getting the better end of this deal, especially as they benefit from hindsight: namely, they have learned to go straight to the source for the best opportunities.

In 2009 and 2010, Clancy says, "buyers looked increasingly at CMBS and distressed securitized loans, picking over whatever was being processed by the special servicers." The problem, he said, was that distressed buyers were having trouble getting scale and were frustrated that so many others were looking at the same small number of assets. "Over the past six months, we've seen a lot more inquiries from distressed buyers trying to go right to banks with big portfolios of troubled loans."

Investors able to take this complex path will find a lot of opportunities, Clancy says. "If you can identify them, you can approach the banks quietly and make a deal." (For more insight into approaching banks about their distressed assets, see the DAI July 2011 issue, "7 Tips to Navigate the Next Wave of Distressed Securities.")

Borrowers, unfortunately, will find their side of the road a bit bumpier. For the most part, commercial real estate borrowers are facing a minimum of another 12 months of a tight lending environment, unless the property and credit in question are top-notch. Just ask Henry Walker, CEO of the Fullerton, CA-based Farmers & Merchants Bank, a large community bank with more than $4 billion in assets. At one time the bank lent to a number of real estate product types in the Southern California region, but in 2004 it limited its reach to retail and industrial.

F&M has changed some (well, many) of its lending practices for commercial real estate, due to the crash and subsequent regulatory clampdown. "Our underwriting has tightened regarding cash flows from primary, secondary and tertiary sources," Walker explains. By secondary and tertiary sources, he is referring to additional income streams a borrower might have on the balance sheet that are unrelated to the asset in question. This, in fact, is an approach regulators have been taking, and in many cases can include global cash flows as well.

It is a draw whether this approach is beneficial to a borrower, Walker adds, since it all depends on the balance sheet is question and whether the credit is weakened or strengthened by such an accounting. In other ways, though, borrowers are indisputably feeling the pressure that banks are getting from regulators. "Real estate is out of favor in the regulatory climate because of all the trouble that sector has had," Walker says. "Regulators are definitely not easing up."

Trepp's Clancy, by contrast, does detect a nuanced difference in the way regulators approach banks now. "Yes, regulators are still holding banks' feet to the fire," he says. "But they're also giving them more time to work out the problems, at least more time than they did a year ago."

A year ago, he says, most seizures by the government took place within four quarters of the moment a bank's problems became evident to regulators. "Now we're seeing banks get seized only after a year-and-a-half to twoand- a-half years." Regulators, he says, are giving banks more time to raise capital or earn their way out of their problems. This slight relaxation, Clancy says, makes sense. The economy is not in the deep trough it was in 2009, and regulators see a greater likelihood for a faltering bank to recover.

Still, whatever breathing room regulators may be giving banks, and there are many who would dispute that characterization, the end environment for borrowers is still the same. Banks such as F&M are limiting themselves to quality loans. The result is that commercial rates drop as banks compete on price for the best deal. That, of course, is good news for borrowers with the best deals, but such transactions are in the minority. For the most part, banks are turning away far more borrowers than they're accepting for their commercial lending programs, and the situation is unlikely to change any time soon, Walker says. He notes that in the past banks were able to treat non-accrual loans as accrual under certain conditions. That is no longer the case, although legislation has been introduced in the House to reverse that. According to a recent article in the American Banker, the legislation faces an uphill battle, especially since regulators are generally against it.

Walker hopes to see it pass. The situation as it stands is bad for borrowers and banks alike. The change in non-accrual loan treatment, Walker says, is having a direct impact on earnings.

More than likely, he is not going to get his wish. The uniform response to the crisis on the part of banking authorities has been to clamp down on systemic risk throughout the system, says Lawrence Remmel, a banking and finance attorney with New York-based law firm Pryor Cashman. Also, he says, regulators have taken the view that commercial real estate lending is riskier than other asset classes. All of this, he says, has led to "untoward and unintended consequences."

One such consequence is the debate over how banks should treat non-accrual and accrual loans. Another has been the entrance of third-party non-regulated entities providing commercial real estate loans, Remmel says. This is a group that includes private equity and hedge funds. Some of these entities are providing floating rate loans, Berkadia's Franzetti explains. Between Basel III and the Dodd-Frank law, he says, the competitive environment has worsened considerably for banks. "That's why you see nontraditional lenders moving forward."

CIT Group, a financial services company that borrowed money from the Treasury under TARP and then wrote off the loans when it declared bankruptcy shortly after, is also part of this group. It was one of the few TARP recipients to actually lose money for the government, to the tune of $2.3 billion. The company has emerged from bankruptcy and since cleaned up its balance sheet.

Recently one of its units, CIT Healthcare, served as lead arranger in a $44-million, senior secured credit facility that allowed a joint venture between Bickford Senior Living and Harrison Street Real Estate Capital LLC to acquire a portfolio of six assisted-living and dementia-care properties. The 342-bed portfolio is located in Illinois, Iowa, Nebraska and Missouri. Terms of the transaction were undisclosed, but president Michael Eby did say in a statement that CIT Healthcare's involvement was critical to the deal.Untoward and unintended consequences have been the story line of the commercial real estate market's crash in this so-called Great Recession. In this instance, those consequences happen to be favorable, for the borrowers at least. Meanwhile, as the second phase of bank failures rolls out, one where the number of banks seized by the government remains high, opportunistic investors are hoping for a similarly happy ending.

GlobeSt.com News Hub is your link to relevant real estate and business stories from other local, regional and national publications.