Last March, during the depths of the current recession, The Inlander reported that the New Madison and the Otis — two apartment buildings from which 146 low-income tenants had been evicted — had sat empty for more than a year.

A year after that, there’s good news and bad. The good news: People started moving into the renovated Madison in October. While much of the retail section remains empty, the residential units — a mixed-income layout that includes 20 affordable housing units — are already 90 percent full. According to Steve Elliot of Monroe Madison Management, some former tenants of the old building have returned home after two years.

The bad news: The Otis, still brimming with mildew and rot, sits untouched. The remodeling would be expensive, says Elliot, who acts as managing partner for Monroe Madison. The way the building is laid out may require major, extensive renovations — and the problem is financing.

“We’re going to get it, but it’s very difficult. The banks have virtually no appetite for that type of product,” Elliot says.

Two years ago, banks needed only 20 percent equity (a 20 percent down payment, essentially) and a debt-service coverage ratio — the ratio of cash a building generates to its debt payments— of 1.2. But these days, Elliot says, they’re demanding 40 percent equity and a debt service of 1.4.

To get a large amount of money, in other words, you already need to have a large amount of money.

When the economy went into a skid — driven in large part by risky and irresponsible lending practices — regulators slammed on the brakes. They started requiring lenders to have a far greater capital reserves to lent-out-money ratio.

Chris Bell, associate broker at NAI Black, says banks are getting mixed signals — the Treasury’s bailout funds say lend, but the regulators say build up capital.

“There are many, many horror stories,” Bell says. “The local community banks are there to solve problems for those in Spokane, but they’re hamstrung from the regulators.” It’s a complaint Treasury Secretary Timothy Geithner made in February.

But Brad Williamson, director of banks for the Washington State Department of Financial Institutions, notes that the regulations have been in place since the early 2000s. It’s just that the property collateral banks used are worth a whole lot less.

“To be frank, right now one of the worst asset classes… is construction and commercial real estate,” Williamson says. “If there were no regulations, there would still not be much lending being done. The economy simply doesn’t justify it.”

There’s a Catch-22, explains Paul Merski, chief economist of Independent Community Bankers of America. Banks can loan out large amounts by using property as collateral. But property values are down because the economy sucks, so they can’t lend much. So it’s going to take time for the economy to escape that cycle, Merski predicts.

That problem hits small businesses too. Kimberly Carpenter and her husband, for example, bought a spa franchise — but by the time they were ready to purchase a building, standards had changed. Their plan to take out a home equity loan was a bust — banks wanted cash up front. They both have jobs and excellent credit, Carpenter says, but bank after bank — nearly 20 so far — refused to loan them the necessary funds.

Lately, however, there have been a few positive signs. To the north, Greenstone has begun developing Kendall Yards. And to the east, the BR3 development group has announced the development of a public market — a Spokane version of Seattle’s Pike Place — on Second Avenue.

But overall, Elliot says, it’s a difficult time. In 2006, developer Rob Brewster proposed the Vox — a $40 million, 32-story tower that would have been the largest in Spokane. Four years later, he’s returned to the project — considering, carefully, whether now is the time to take advantage of great interest rates. But the lack of lending banks is a major sticking point.

“In the construction/real estate/finance industry, we’re absolutely in a depression,” Brewster says.

Still, Elliot has his sight set on the Otis. He’d like to see it turn into another mixed-income apartment complex, with a grocery store on the ground floor.

“We would like to begin the planning process in the next three months,” Elliot says. “Start work within the end of the year would be the goal.”