Weekly Commentary from Investcap Advisors LLC - This week’s topic: Bringing product to market

By John J. Richard, Managing Director, Investcap Advisors LLC

In addition to the commentary posted last week on the Public-Private Investment Program (PPIP) for legacy CMBS, there is also a component of the program meant to provide financing for legacy loans on commercial real estate. The purpose (or thinking, in terms of the federal government) is to help alleviate bank balance sheets of the burden of carrying troubled loans originated before the beginning of the liquidity crisis. The existence of these loans raises two very critical issues that have far-reaching implications. First, where should financial institutions that hold this debt be marking it from a valuation perspective? To some degree, regulatory relief has been provided as some institutions have exercised the language of FAS 157. The issue is, however, what is the true value and will banks need additional capital relief from the government if they are forced to write down the value of the debt. Second, the other broad implication that stretches into the CMBS arena concerns price discovery and the necessity of that process. If banks begin dumping their debt holdings into a very thinly traded market, that valuation will and should be translated into the debt in the securitized world of CMBS. For now, PPIP is encouraging buyers to step forward, but the real need is for sellers to emerge with items on which to bid.