Rough Banking Seas Ahead?

[WestMichiganCG]

Great point. But can a federally regulated financial institution keep that blue sky value on the books? I know there are ways around it but generally the exposure is based on real property, or am I wrong?

They can't keep the blue sky in the books but I've been asked the question many times. Why would someone spend $700,000 on a small addition on an industrial building when it only adds $200,000 in value? I end up writing a brief explanation in the back of my report highlighting business value vs. real estate value. The book value should also be the appraised value the way I see it. If the bank asks me to appraise a $3,000,000 construction project and I come in at $2.5 Million then the loan is based on the appraised value.

 

[Elliott]

IAT is a Regional Bank ETF and it seems to be doing pretty good. Banks don't send out 1099's when they pay less than $10 in interest on checking accounts and they take the customer's money and get 5% in money markets I guess. I don't really know how they make their money, but my barber's son started off as a assistant golf pro and then went into banking (international) and lives in one of the best Portland area neighborhoods on a lake, so banks must be doing something profitable. I bought the ETF when everyone was saying banks would get crushed when the Fed started raising rates. And it pays a decent dividend.

 

[Non Sequitur]

They can't keep the blue sky in the books but I've been asked the question many times. Why would someone spend $700,000 on a small addition on an industrial building when it only adds $200,000 in value? I end up writing a brief explanation in the back of my report highlighting business value vs. real estate value. The book value should also be the appraised value the way I see it. If the bank asks me to appraise a $3,000,000 construction project and I come in at $2.5 Million then the loan is based on the appraised value.

Great explanation. It's out of my wheelhouse but the last bank I worked for (under$1B in assets) meetings included both sides and were mostly commercial oriented. Anyway, the way I remember it is pretty much the way you explained it, the commercial reports included different values but we could only lend on and book real property values. With that in mind, the list posted may not tell the full story and some banks may be in a better position than others. But even if the borrowers can continue to pay, how long can the banks extend prior terms of the notes? At some point extending COVID rate terms at current cost of money will just flat out eat the banks alive.

 

[Gobears81]

When looking at restaurants, you have to look at the construction value that also translates into business value. If I lose $500,000 in construction value but gain $1,000,000 in revenue, then I'm ahead.

Not necessarily, as it is ultimately about profits. Restaurants are a thin-margin business, so an additional $1,000,000 in revenue might translate to $50,000 in profit, if they are successful. Even the fast food restaurants are starting to run into trouble in passing along higher costs now. I know what you mean with the business decision vs real estate decision conundrum, though.

Not sure about other appraisers here, but I'm starting to see some very early cracks in the foundation. Maybe it is just in my area, but the industrial market is softening a bit, restaurant closures are accelerating. Values still seem to be holding up, but that seems to only be due to the low supply of available listings.

 

[WestMichiganCG]

Not necessarily, as it is ultimately about profits. Restaurants are a thin-margin business, so an additional $1,000,000 in revenue might translate to $50,000 in profit, if they are successful. Even the fast food restaurants are starting to run into trouble in passing along higher costs now. I know what you mean with the business decision vs real estate decision conundrum, though.

Not sure about other appraisers here, but I'm starting to see some very early cracks in the foundation. Maybe it is just in my area, but the industrial market is softening a bit, restaurant closures are accelerating. Values still seem to be holding up, but that seems to only be due to the low supply of available listings.

I don't disagree with you. If you see a lot of deferred maintenance in a restaurant, be suspicious.

 

[glenn walker]

What is causing multi-family issues?

Most have adjustable rate mortgages which gone up a lot over last 5 years. The net cash flows crushed.