Joint Ventures In The Real Estate Bear Market

The current recession has brought significant challenges to the

commercial real estate market. Among the most acute difficulties

are disappearance of capital from customary lending sources and

diminishing property income and property values.

In light of these conditions, commercial real estate owners,

prospective buyers and other real estate investors may increasingly

turn to real estate joint ventures as a means of completing deals.

Property owners needing additional equity capital, real estate

investors looking to assemble capital and existing joint venture

participants with under-performing assets are among the most likely

candidates to (re)consider this structure.

This article will provide an overview, in context of the current

U.S. commercial real estate market, of situations in which real

estate ventures may be considered—as well as new

challenges that may be associated with such arrangements.

Market Background Rise and Fall of CMBS

Prior to this recession, real estate owners could leverage with

high levels of debt at low interest rates. Commercial real estate

was perceived to be a relatively safe investment. In this climate,

low capitalization rates were applied, more investors included real

estate or real estate securities in their portfolios, and property

values rose.

Rise and Fall of CMBS

One way the market met the demand for real estate investing was

through more securitization of commercial mortgage debt. The amount

of commercial mortgage backed securities (CMBS) grew dramatically,

to the point where approximately $230 billion of CMBS was issued in

2007. Commercial banks also became more active in making loans

secured by commercial real estate. Commercial banks, combined with

CMBS, issued up to as much as 83 percent of outstanding commercial

real estate debt.

With the recession, the amount of new CMBS tumbled to $12.1

billion in the first quarter of 2008 and has been virtually dormant

since then. Commercial banks are now focused on shoring up capital

reserves and have tightened lending standards.

The viability of many of these existing loans are now suspect.

It is estimated that much of the CMBS will not qualify for

refinancing at anticipated leverage requirements (perhaps two

thirds of the $154.5 billion coming due by the end of 2012 will not

qualify). Much of the pool of whole loans held by commercial banks

will face refinancing problems with heightened underwriting

standards. (Of the estimated $524.5 billion of whole loans held by

commercial banks coming due by the end of 2012, it is estimated

nearly 50 percent wouldn't qualify for refinancing).

There is less opportunity...