Tuesday, October 7, 2008

Random Tuesday thoughts - bailout, banks, capital gains and loans

I'll probably write about the news later. For you sky-fallers, I can't really jump out a window because (a) I don't want to and (b) I'm writing from a basement.

Why commentary instead of news? There's a few things on my mind and thoughts I want to share.

The first is about the bailout. Okay, it passed. Now what? As my friend and client Dan Lukas discussed yesterday, perhaps nothing. Of course, the Treasury's going to buy the toxic loans and get them off the books of the banks.

To which I say, so what? I don't know of anything in the legislation that requires the banks to start lending money again. Indeed, in these market conditions I would not be surprised at all if banks sat on the reserves, fearful of a run on the bank or because they are afraid of their own shadows.

Should there have been some kind of requirement to loan money again? That's tough for me to say yes to. The free-market guy in me says, "Well, lenders have to lend to make money, so this will have to open things up." But the worrier in me thinks the CRE lending market may stay really tough for a long while because banks are more worried about staying in business than making cash.

Does that mean you can't get a loan? No. Some deals are getting done. But you'd be surprised at what is happening these days. Example I heard of through the grapevine: everyone is at the closing table for a nine-figure deal on an office building. The two main lenders are banks, and one pulled out at the closing table, refusing to fund its portion of the deal.

I don't know what happened next -- for instance, whether the seller walked away from the closing with what could be presumably millions in earnest money or how the contract was structured -- but it did get some of us to think about some things. Lenders will often insist on being able to walk from a deal at any time for any reason (which always made me wonder why it is called a commitment). So, who is at risk in a deal where the buyer is not only "very pregnant," but about to give birth? Buyers are going to have to think hard about how to structure a contract with a seller in a buyer's market and the loan commitment itself, because there could be serious money at risk if a buyer is ready to go and the lender walks away.

Money is supposedly out there, but it may not be easy to get for a long time. And, right now at least, expect to pay a premium. One reason banks may get back into the market is because LIBOR (yes, the rates at which banks lend money to each other) is so crazy high these days. But that's bound to change, especially if credit does loosen.

And how about capital gains? I think I am going to start ramping up for a wave of 1031s in the next few years, because capital gains taxes might be about as low as we'll see them for a long, long time. This will, in my humble opinion, cause many people to try to find ways to defer gain. Joe Biden notwithstanding, I don't think many Americans consider paying higher taxes patriotic.

Enough ranting for one day.