Money makes the world go round.

The winds of the commercial real estate crisis are sweeping across the Atlantic. It is very clear that, worldwide, the financial debacles of the 80's have drastically changed the entire infrastructure of the real estate industry and with it the approach to real estate investments.

As a result, more and more companies are looking into novel funding techniques such as debtor-in-possession financing (lending to companies in Chapter 11), just to mention one of them. Given the difficulty in obtaining financing, one has to re-evaluate the current real estate situation and try to find applicable solutions to it.

The problem currently facing the market if threefold: A) The investor, assuming the worst, "Anyone selling property today, has to sell. And when the word gets out you have to sell, the price is chilled." When an owner or developer puts a building up for sale, it suggests a need for cash or at least a desire to reconfigure his portfolio. It is a thin guise that will be uncovered as sophisticated investors perform their due diligence. B) Contracting financial availability. The days of lenders willing to loan up to 110 percent on an asset value have been reversed. In the current real estate climate and with the increasing influence of regulatory authorities, it is virtually impossible to obtain financing on hotels, office buildings and construction projects. Also the financing of mixed use properties and the refinancing of existing, performing loans is hardly available.

Gone are also the days of relationship-driven financing because of the extensive exposure to the scrutiny of credit and third party committees. In today's environment in order to obtain financing based on a 60 percent to 75 percent Loan to Value ratio, properties must generate adequate current cash flow, be at least 90 percent occupied, have adequate Debt Service Coverage, usually 1.25 percent to 1.30 percent, and last but not least most require recourse.

Recognizing the above and holding in view approximately $350 billion in loans that are coming due within the next few years, it appears very clear that banks and insurance companies throughout the U.S. are the least likely sources of fresh realty capital in the near future.

Besides U.S. pension funds and large Japanese trading companies, both of which have begun to provide debt rather than equity, the largest source of capital continues to be found in Europe. Even during the recession in the late 70's and now, countries like France, Germany and the Netherlands have been great providers of debt and equity financing. C) Tightening regulatory environment. Another very important element is the approach to investment opportunities and their presentation through a thorough understanding of the regulatory environment. In today's real estate transactions most decisions are being made by non-real estate decision makers, operating within the confines of a "fish-bowl" imposed by banking, insurance and pension regulators. Therefore an acceptable decision presentation must describe forensic accounting, real estate and credit issues affecting the real estate and must utilize real numbers for presenting various decision alternatives.

This approach was effective during the equivalent of the U.S. Savings & Loan disaster in Germany during the early 80's. This situation should serve as the perfect case study as it highlights the importance of Liability Management including all aspects of cost-benefit evaluations and forensic accounting in a troubled real estate environment.

The lesson illustrated through this ongoing contraction of the real estate capital market emphasize the need for both new capital sources and an updated strategy on how to present real estate investments in the tightened regulatory environment of the 90's. Solely hands-on experience in accounting, real estate or credit and the availability of financing are not enough to succeed in the 90's. This must be enhanced with extensive transaction expertise and financial and due diligence presentations. These presentations prepare the ground for institutional grade transactions suitable for the new generation of real estate investors.