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Banks and CRE:The Road Ahead

March 2010

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Our two primary businesses

Portfolio Management Solutions

Clark Street Capital professionally and quickly assess a bank loan

portfolio, (construct asset summary reports, provide loan valuation, site

inspections, title searches, etc) , and provide the management, officers

and the board with a path, template or strategy to resolve their situation.

The “BAN” Loan Sale Platform

Clark Street has a successful “high touch” group that markets

individual, pools and portfolios of whole loans to national clientele of

vetted, discreet and institutional buyer group.

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Where are we?

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The Bid/Ask spread is basically b/w those who believe the chart above and those who don’t!

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• CMBS is coming back: B of A, Goldman, Chase, Citibank, Deutsche Bank, RBS are

entering the market

• Loans north of $10MM, $20MM + preferred

• 10 year terms

• 30 year amorts

• Rates in the 6% range

• Fees ½ to 1%

• LTVs 70-75%

• Non-recourse

• Life companies, banks have picked up activity

• Regional bank real estate lenders (Key Bank, 5/3) have cut back

• Most banks scared to lend

• The big question: who will refinance the $1.8 trillion in bank loans that will come

due over the next few years?

Financing on CRE

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Real Capital Analytics completed a study of defaulted commercial mortgages that

were liquidated in 2009. The data set included nearly 300 defaulted commercial

mortgages with an outstanding balance totaling over $5.6 billion. Here are some of

the findings:

Of the $5.6 billion in liquidated loans, the gross proceeds recovered by the lenders

totaled $3.3 billion, which equals an overall weighted average Recovery Rate (RR) of

59% and an overall mean RR of 64%, before costs and fees

Recovery rates differ substantially between A&D (acquisition and development)

loans and loans made for the acquisition or refinancing of existing properties. Prior

to fees, the mean recovery rate was 67% for existing properties, 56% for A&D.

Recovery rates dropped in the fourth quarter versus the first three quarters. Q4’09

recovery rates dropped to 59% from a 65% average through Q1-Q3 ’09

“Throughout most of 2009, lenders were generally liquidating loans without

incurring losses significantly beyond what they had already written down. Buyers

targeting these opportunities have been frustrated at the lack of distressed sales and

the reluctance of lenders to sell troubled assets. Thus, the increased liquidations

and lower RR experienced in Q4 could be a signal that lenders are now more serious

and realistic about resolving their commercial mortgage loans."

What Can We Expect?

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1. Unclear sources and uses of proceeds.

2. Relationship loans that didn’t pencil out.

3. An inability to properly assess the total cost of a project.

4. Poor appraisals and appraisal review.

5. A heavy concentration amongst a few large relationships.

6. A severe concentration in acquisition and development loans in transitional sub-

markets, in which the recession halted growth projections.

7. An excess of interest-only construction loans at high leverages.

8. Inadequate resources to service the portfolio.

9. Imprudent loans to shareholders and directors.

10. Poor information on property occupancy and cash flow.

Top Ten Worst CRE Lending Practices

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• Pay close attention to the October 2009 Policy Statement on Prudent Commercial

Loan Workouts. The examiners are following this document very closely.

• Workouts are a preferred resolution than a foreclosure.

• According to the regulators, a preferred resolution on a non-performing CRE loan

was a split into both an A and a B loan. The A loan debt services at a 1.05X and is

classified as performing, while the B loan becomes the problem asset.

• So far, few banks have tried the A/B structures. According to a prominent

regulatory attorney, unless the loan documents allow a split, the A/B structure is

impractical as it requires borrower consent and knowledge of the bank’s

impairments. Borrowers will often expect something in return.

• The OCC is picking up the ball again on CRE. Expect hard limits on CRE.

The Regulators on CRE

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1) Sell the bank with the assets assumed with an 80/20% loss share

Under a “loss-share” the bank pays a slight discount for the assets (usually

around 10%) and shares with the FDIC on the losses up to a threshold. We

expect the FDIC to move towards less generous arrangement and allow

negotiations on the size of the tranche.

2) Structured sales

Earlier this year, the FDIC announced the winner of a $1.02 billion structured

“sale” to Colony Capital. In a structured “sale,” the FDIC sells a 40% equity stake

in a limited liability company to an investor. FDIC provides attractive financing

(in this case, $233 million). Investor manages, services, and disposes of the

assets. 44 cents on the dollar was the value of the winning bid, but we believe

the financing added approximately 5-10% to the disposition price.

FDIC’s Resolutions on Assets

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Jon Winick

601 S. LaSalle St., Suite 504

Chicago, IL 60605

312-662-1500 ext. 1

jon.winick@clarkstcapital.com