New plan could give hard-driven lenders a soft landing.

The tremendous influx of new money chasing deals has forced many lenders to take on new risk and to do so in an uncertain real estate climate.

The lines between savings banks, securitized lenders, opportunity funds, pension funds and commercial banks have become blurred.

Many funding sources have gone beyond their traditional "comfort zones" to achieve a lower yield amidst the increased competition in both the debt lending and equity investing arenas.

In addition, while the pace of job growth and the stock market continue to improve, neither have rebounded as robustly as anticipated.

Add to this the epidemic of condo conversions, office buildings trading at historically low cap rates, aggressive hotel financing and a widely anticipated housing bubble--all strong indicators that point to a commercial market that is due for an adjustment.

What does this all mean? A very complex real estate market, combined with increased lending competition, has created a very challenging environment in which to manage risk.

Within this context, U.S. regulators recently proposed guidance for banks and thrifts that lend largely for office building, rental apartment building and other commercial real estate transactions.

The joint proposal by the FDIC, the Federal Reserve, the Office of the Comptroller of the Currency and the Office of Thrift Supervision addresses the risks of aggressive real estate lending in an environment characterized by sky-rocketing property values.

Under the proposed guidelines, lenders whose activity in commercial real estate exceeds specified thresholds could face greater regulatory scrutiny and more stringent lending guidelines that are intended to make them less vulnerable to any downturns in the market.

This is because commercial real estate loans historically have shown to be a volatile asset group, leaving. banks that are highly concentrated in them especially vulnerable in market downturns.

The proposed guidelines also include risk management provisions, such as continuous monitoring of a commercial real estate downturn and analysis of risk ratings on commercial real estate loans that take into account vacancy, rental and interest rates as well as inflation.

We maintain that these guidelines would provide for more sound risk management approaches among lenders and ultimately prevent a crash within the commercial real estate market.

There are generally two ways that investors can manage increased risk--either pursue a wider array of deals while maintaining yield requirements (thus increasing risk on the asset level but maintaining yield), or lower yield requirements while choosing investments more selectively (thus decreasing yield but maintaining risk profile).

By adopting the latter approach, we have continued to invest equity in markets where we have had prior success, specifically with local operating partners with whom we already have a proven track record, for slightly lower yields than historically anticipated, but with increased due diligence.

Our driving principal is to protect against the downside, while realizing respectable equity returns.

On the debt side, we follow the same philosophy of investing: choose selectively, protect the downside, even at the expense of some yield, having instituted both stringent underwriting and hurdles in the loan documents to ensure compliance.

Certainly no investment strategy is better than anyone else's; it is simply about creating the right risk-adjusted returns. All real estate lenders and investors are feeling the pressure of increased competition, and most recognize that this is a tricky environment in which to invest.

However, the proposed regulations should help fortify lenders' approaches, if the commercial market undergoes an adjustment, that will allow them to still achieve yield while mitigating their exposure.

SPENCER GARFIELD,

MANAGING DIRECTOR

HUDSON REALTY CAPITAL LLC