Banks sharing the love?

Las Vegas business partners Michael Smoody and Bernie Chippoletti haven't found much compassion from Bank of America in their effort to hold onto Flamingo Professional Courtyard when tenant occupancy is at an all-time low.

They recently received a foreclosure notice after the principal balance on a $4.3 million loan for the commercial property at 3530 E. Flamingo Road came due and payable Feb. 1. An appraiser from the bank valued the building at $3.3 million.

Bank of America offered to extend the loan if Smoody and Chippoletti paid the $1 million difference between the loan amount and appraised value. They would also need to give Bank of America the sum of one year's interest payments on the new loan and agree to an increase of three points in the interest rate.

"We went in and met with them and they weren't very conducive to working with us," said Smoody, a general contractor in Las Vegas. "A few days later they sent us a default notice. We're just in a waiting game. We're doing the best we can to hold on to what we've got and get through this."

Banks are showing no more love for distressed commercial property owners than they are for homeowners facing foreclosure, said Phillip Aurbach, senior partner with Marquis & Aurbach, a law firm in Las Vegas.

Bank of America received billions of dollars in government bailout money from the $700 billion Troubled Asset Relief Program and paid it back so they could give bonuses to executives, he said.

Aurbach, whose firm set up the limited liability corporation for Flamingo Professional Courtyard, said this is not an isolated case.

"Bank of America is like, 'Screw you. Pay us.' That's after getting bailout money," Aurbach said. "Wasn't the TARP program supposed to -- at least in part -- help banks help their borrowers? That is not happening in Las Vegas."

Bank of America spokeswoman Shirley Norton said she could not comment on specific details of the loan. The bank filed for nonjudicial foreclosure in February, but will continue to try and work with the clients, she said.

"They're really caught in this economic downturn. It's just wrong times," Norton said from San Francisco.

Financial analysts have long predicted that a rising wave of commercial mortgage defaults would dwarf residential foreclosures and wipe out major banks. Whitney Tilson of New York-based T2 Partners investment firm told the Review-Journal last year that the largest losses among loans outside the housing sector were coming in the $3.5 trillion area of commercial real estate.

Morgan Stanley recently decided to stop paying on five office buildings in San Francisco after the value of those properties decreased significantly. Businesses regularly make calculated decisions to default on commercial properties that will never be worth their initial investment.

Commercial mortgage-backed securities continued to show signs of life, with issuance of around $2 billion in January, according to Commercial Mortgage Alert. That's up from $400 million in November and $1.7 billion in December. However, delinquency rates rose to 6.5 percent, the highest rate in the history of the commercial mortgage-backed securities industry.

Commercial foreclosures started to surge in early 2008 but tapered off in 2009 as banks negotiated loan workouts, said David Rifkind, principal of George Smith Partners, a Los Angeles-based real estate investment firm.

Rifkind said he's finding cooperation from special servicers, or companies that service bad debt, in accepting discounted payoffs to resolve defaults on commercial mortgage-backed securities. He has several assignments with portfolio lenders such as Bank of America and said he recently worked out a loan acquired by Bank of America from another institution.

"Their willingness to work out these loans is highly dependent on the specific situation," Rifkind said. "Vegas is problematic because national lenders look at the market as so depressed and values so low that they have a hard time believing in the viability of a modification offer from a borrower."

The owners of Flamingo Professional Courtyard have fallen behind with Bank of America because tenants either refused to pay rent or let their leases expire, Smoody said. Building occupancy dropped from 75 percent to 25 percent in a few months.

Chippoletti and Smoody paid more than $1 million to make up the deficiency between rent income and loan payments. They said they have no more money to put into the building.

"The banks get the benefit of the government's bailout, but they don't pass it along," Chippoletti said. "I gave Bank of America a workout proposal, but they just said, 'Screw you.' They don't care who they hurt along the way."

Commercial property value is directly related to net income, and tenants across the Las Vegas Valley have been negotiating rent reductions "because they can," Aurbach said.

"This is unique, this wave against commercial building owners," the attorney said. "It's affecting almost every single strip center. Look at Village Square (shopping center) in bankruptcy. So the wave that hit homeowners is now starting to squeeze commercial owners in the same way."

Aurbach said he's heard of banks being more lenient with other developers and giving them more time to repay their loans.

"Instead of foreclosing, they ought to give them a chance to turn around in a year or two," he said.

Contact reporter Hubble Smith at hsmith@reviewjournal.com or 702-383-0491.