Banks may reassess US commercial property in 2011

* "Extend and pretend" likely to come to an end

* New investors in funds to be from abroad

By Ilaina Jonas

NEW YORK, Nov 18 (Reuters) - When it comes to U.S. commercial real estate loans, banks may get real next year.

The practice of extending maturing loans and pretending they are current when they cannot be refinanced may end next year, according to U.S. commercial real estate experts at the New York University annual Conference on Capital Markets in Real Estate in New York.

Since credit seized up about two years ago, banks and other lenders have been playing "extend and pretend" extending maturing loans instead of taking losses by foreclosing when a borrower cannot get a replacement loan.

But in the past year and a half, many banks have strengthen their own balance sheets and are better able to write down bad loans. U.S. commercial property values also have increased, so the loan or property can be sold at a higher price.

U.S. commercial real estate prices in October were up 30 percent from low in May last year, according to The Green Street Advisors Commercial Property Price Index.

In the next few years, over $1 trillion of U.S. commercial real estate loans may have trouble being refinanced. Lenders will be less willing to extend loan maturities.

"Why give someone a second or third extension if there's a liquid market out there?" Michael Higgins, head of CIBC World Markets Corp U.S. Real Estate Finance said at the conference.

Making matters worse, repeated loan extensions could harm property values as borrowers become less willing to invest more money for capital improvements, such as new roofs or a lobby upgrades.

"This is where restructuring starts," said Richard Saltzman, president of Colony Capital LLC.

That means equity investors are likely to find opportunities to step in and fill the gap left between the smaller new mortgage and the greater maturing one in exchange for an ownership stake.

"There's a great deal of deleveraging that has to take place that hasn't started yet," Kelvin Davis, senior partner at TPG Capital said.

Jonathan Gray, senior managing director and & co-head of Real Estate for Blackstone Real Estate Advisors, a division of Blackstone Group (BX.N) said deals will pick up because markets are improving. But many experts said they did not expect distressed real estate to pour onto the market.

"I don't think there's going to be a flood," Paul Galiano, co-head of acquisitions, dispositions, equity capital and joint-venture transactions for Tishman Speyer.

Nor will investors be able to pick up property for a song. The U.S. commercial real estate market has become divided between the high-quality, fully leased, stable properties that attract high prices and willing lenders and those that have high vacancy or are in weaker markets -- just about anywhere outside of New York or Washington D.C

But the weaker markets, such as Orange County, are providing opportunities for equity investing. Using a low amount of debt financing, investors can still see returns of 12 percent to 13 percent, even on a building that is 50 percent vacant, if leverage is kept low, Galiano said.

Much of the money to be raised for upcoming investment in U.S. commercial real estate is likely to come from abroad.

"There's less domestic money and more from Asia," Gray added. (Editing by Andre Grenon)