If you read this earlier and are just now scraping yourself off of the ceiling, I apologize making you go ballistic once more. The WSJ and others reported that the new beggar at the Treasury’s bailout window is the commercial real estate industry.

A recent letter sent to Treasury Secretary Henry Paulson, and signed by a dozen real-estate trade groups, painted a bleak scenario: “Right now, we believe there is insufficient systemic capacity to refinance expiring, performing commercial real-estate loans,” said the letter. “For many borrowers, [credit] simply is not available,” the letter noted.

To head off some of the impending pain, the industry is asking to be included in a new $200 billion loan program initially created by the government to salvage the market for car loans, student loans and credit-card debt. This money is intended to go directly to help investors finance purchases of securities backed by these assets. If commercial real estate is included, banks might have an incentive to make more loans to developers since they’d be able to repackage and sell them more easily to investors with the assurance of government backing.

As part of their lobbying efforts, some industry representatives have asked lawmakers to explore the idea of setting up a separate program aimed at boosting lending to commercial real estate only.

“We’ve been urging Washington to put this as one of the top priorities in dealing with the economy,” says Steven Spinola, president of the Real Estate Board of New York, underscoring the need for the government to help spur commercial property lending either directly or indirectly.

What we are really talking about here is bailing out a bunch of private money funds, developers and other assorted needy types that over paid for real estate during the boom, over borrowed on their purchases and now are being forced to face reality. The cry that there is no money to refinance their loans is bogus, what is true is that their is no money to refinance their loans at the inflated price they paid for the properties.

The article correctly points out that this year about $141 billion worth of commercial property loans came due. Most of those loans were refinanced by either new or existing lenders. Why were these loans rolled over? Quite simply because they were made some time ago at reasonable purchase prices. The debt on the properties is supported by the rent payments they generate, ergo it’s a money good loan.

The difference is that during the heady days the commercial types were buying properties at cap rates that didn’t make sense going out the door. Most were at best marginally cash flow positive from the outset and many required interest reserves to make them work at all. The only sense these loans ever made was on paper, in other words in the proforma projections that the promoters and lenders talked themselves into believing. In many respects these loans were the negative amortization and liar loans of the commercial sphere.

Yes, it’s true that the commercial mortgage backed securities market is moribund and the banks are reluctant to lend money, but the reality is that many of these loans are not bankable without a substantial equity infusion. Operating cash flow is simply insufficient to service the existing debt at an acceptable level. Properly structured these loans would find takers for refinancing but that’s the rub. The owners are strapped for cash. What they are looking for is someone to carry the projects in their current form in the hope that economic conditions will improve to the point that these projects make some semblance of sense.

This is one class of beggars that the government would do well to turn away. The banks have already been recapitalized in order to allow them to take write-downs on this sort of loan. If they need more cushion then give them some more capital. We learned through the RTC the best way to handle these sorts of commercial loan problems. What you don’t do is refi them in hopes of a turn in the cycle that never comes. What you do is take back the property and sell it for what it’s worth on the market now.