Pitfalls of Private Versus Institutional Financing
By Larry K. Kimball Director of Hotel Development, C. W. Clark, Inc. | November 28, 2010
This past tumultuous two year period has seen large and small banks come and go, regulations rise, consumer demand fall, hotels close, and the general public's acceptance of uncertainty about the future. While we are all reluctantly drinking the "new normal" kool-aid manufactured by Wall Street and politicians, commercial real estate developers need to consider the implications on financing. Are the traditional US institutional lenders lending? Not really. Will institutional banks, pensions, and life companies return and who are all of these new private capital groups? This article is a roadmap for successfully navigating the 2011 financing maze.
What is now affecting the traditional institutional lenders?
Basel Global Cure All
Like the case where the medicine harms the patient, the recent introduction of a global liquidity standard for the largest banks is expected by many to restrict credit and increase borrowing costs . As a contrary indicator that helps prove this growing consensus, Treasury Secretary Geithner said the opposite will be true- US banks can meet higher capital rules through future profits without crimping lending. If that is true, why did Deutsch Bank, historically an aggressive hotel construction lender, announce in September 2010 plans to raise $13.3 billion in new capital through a stock offering? Why would Angela Knight of the British Banker's Association state "All the changes are good from a stability perspective but add billions to the fixed operating cost of a bank. The result is that the cost of credit - the price that borrowers pay for money - will rise. The cheap money era is over. " As you can see, the new liquidity standard that essentially requires a doubling of risk capital over the next few years is an international standard and not a US-only issue.
US Dodd-Frank Reform
Financial regulatory reform in the form of this 2,300 page law adds uncertainty while providing new safeguards. A recent AEI publication summarizes the potential impact of the law very well: