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Long-term growth seen for NY after consolidation.

For owners of income producing properties seeking to refinance, news that the recession if "officially" over is less than cause for celebration. Today, it is not unusual for a borrower to enter the credit markets only to learn that his property is already over-leveraged by today's conservative underwriting standards. This is particularly frustrating for borrowers who are denied access to the prevailing low interest rates available in the capital markets. Who's to blame for the conservative lending practices that have paralyzed banks and have spread to insurance companies?

Listen to the conventional wisdom these days, and you're bound to hear more than your fair share of real estate bashing. But this should not be a surprise to our industry as it is a trend that has been gaining momentum since the mid 1980's. Here are some of the unfortunate signs of the negative bias: * Debate on whether too much capital has gone to the "unproductive" real estate sector * Elimination of passive-loss deductions in 1986 * Laying blame on the real estate industry for the saving and loan fiasco, the banking crisis and mounting insurance company problems * The humbling of one major real estate player after another culminating in the recent "melt down" of Olympia & York.

Who's to blame? Was the real estate industry responsible for the current quagmire? Or, was it the deregulated financial industry with few alternatives for growth and earnings to report to stockholders? Was it local governments feeding off ever-growing property taxes? Was it "hot" money or junk bonds? Was it fraud, lack of oversight, connivance? Or was it all of the above?

Rather than dwell on who should pay the piper for the sins of the 1980's, we in the real estate industry should ask, what can be done to change the tune?

For lending conditions to change, we must rebuild confidence with the investment community and consumers. Regardless of who wins the election in November, don't expect much help from our friends in Washington, although rational modifications to the Tax Reform Act of 1986 wouldn't hurt.

In order to renew confidence, the real estate industry must focus on the fundamentals of sound financial practice. There are signs that this is already happening: * New bank capital requirements and the spate of mergers and consolidations in financial services is creating a stronger, less fragmented lending community * Evidence of longer-term strategies is seen in five-year liquidating loans and 15-year leases * Market innovators, such as Washington Mortgage, are finding new ways to access the secondary markets * Although highly leveraged real estate transactions are a thing of the past, the combination of double digit cap rates and the availability of mortgages with single digit interest rates has created the opportunity for the astute investor to take advantage of "positive leverage"

When the industry returns to long-term thinking and adjusts to new capital structures, we will again be able to sell real estate as an investment to consumers and the investment community. As an example of the implications this could have, consider that just a 5 percent increase in pension fund investment would create $250 billion in new capital.

At Washington Mortgage, we remain dedicated to providing credit liquidity to owners and operators of multifamily properties. Through a variety of loan programs, including funding as a Fannie Mae DUS lender and accessing the capital markets via securitization, we are eager to work with borrowers to accommodate their needs in today's turbulent market.
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Title Annotation:Review and Forecast, Section II; New York, New York real estate industry
Author:Kokalari, Gary Q.
Publication:Real Estate Weekly
Date:Jun 24, 1992
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