Big Banks Lead the Return of Key Funding Source for Commercial-Property Owners; Still, a Fraction of Precrash Levels

By: Lingling Wei in the Wall Street Journal

Even as woes mount in the commercial-real-estate market, a once-vital source of funding for commercial-property owners is showing signs of life.

Banks including J.P. Morgan Chase & Co., Goldman Sachs Group Inc. and Citigroup Inc. are expected to launch in the coming weeks two offerings of commercial-mortgage-backed securities, or CMBS, totaling $1.4 billion, according to people familiar with the matter. Representatives at the banks declined to comment.

J.P. Morgan is leading a $650 million offering backed by properties owned by real-estate investment trust Vornado Realty Trust, the people with knowledge of the situation said. Vornado, of Paramus, N.J., will use the proceeds to repay existing debt, these people said. A spokeswoman for the company declined to comment.


[BLOGGER COMMENT: The launch of CMBS 2.0 is still reserved for best in breed Sponsors with clean, low leverage, solidly cash flowing deals.  It is encouraging to know that capital is once again starting to flow into commercial real estate.]

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By Nancy Leinfuss

NEW YORK, April 9 (Reuters) – RBS Commercial Funding on Friday priced a $309.7 million commercial mortgage-backed securities offering backed by multiple loans, the first sale of its kind in nearly two years and a benchmark for the recovering market.

The so-called conduit deal is seen as a key gauge of risk appetite for securities tied to the troubled commercial real estate market, as well as investor confidence in better underwriting standards for loans.

[BLOGGER COMMENT: This non-TALF transaction is the sign the markets have been looking for to once again start lending on commercial real estate. The rules will be different than the easy money days of 2005-2006, but non-recourse senior debt will once again start flowing on well located income producing properties.]

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By Hal Reinauer

The lending world has turned a more watchful eye to property condition and begun to take notice of reduced capital improvement programs. This attention has made it more difficult for those properties with some issues to find a reasonable lending solution, even with stable cash flows supporting the loan request. Appraisers and Engineers, like banks and lenders, have also felt the pressure and they have reacted with greater scrutiny and increased attention to the ongoing maintenance schedule and immediate repairs. To prevent this from affecting your refinance there are a few critical steps you can take to ensure your property receives the credit it is due.

  1. Housekeeping. First, ensure that the grounds of the property are clean and free of any refuse, graffiti and tenant property that have overflowed into the common areas. The property inspector will be adversely impacted by the minor details that are his first impression of the property exterior and grounds so make sure that any obvious exterior damage, paint peeling, torn screens, broken windows, misaligned or missing gutters, broken parking lights and any other repair item that can be taken care of at minimal cost is addressed promptly and prior to the site inspection. The cleanliness of the property is extremely important in how your property will be viewed by the engineer and the lender. Have the maintenance staff pay special attention to these needs and the long term benefit will pay off with increased occupancy and greater financing potential. The site inspection will concentrate on housekeeping, site issues, parking areas, building exteriors, roof, foundations, HVAC, plumbing, electrical, fire and life safety, dwelling units and common areas, so you as the owner/operator should as well.
  1. Anticipate. Second, identify your major capital needs before the engineer does. Engineers are looking for the building systems that need replacement now and throughout the loan term so identifying those yourself and having your own schedule prepared with cost assumptions will save you in the long run. A good replacement schedule is a detailed one; make sure you cover as many building systems as you can and make reasonable assumptions as to their useful life, replacement cost and quantity. Having the information on the age and type of the building systems is also very important; windows, roofs, HVAC systems, water heaters, kitchen appliances, counters, cabinets, vanities and flooring are typical line items included in the schedule. Also try and take an assessment of your annual plumbing and electrical expenses as these assumptions will assist your lender in differentiating between one time capital expenses and actual ongoing needs.

It’s also a good idea to acquire actual bids for projects you wish to complete in the near future as there can be a wide range of prices associated with even the most basic of repairs. Having a good bid in hand will prevent any discrepancy with what you believe a project to cost and the engineer has estimated.

  1. Awareness. Third, be aware of the big issues. Pay particular attention to any issue that could cause water infiltration, mold, electrical issues (low amperage, aluminum wiring, etc), plumbing systems (polybutylene piping, galvanized piping, etc) and any life safety issue (fire systems, hand rails, deck structures, tripping hazards etc). Being aware of the major issues at your property and having a preventative maintenance plan or explanation of corrective measures already taken will assist the lender in mitigating the risk and speed the process along.

Finally, understanding your replacement reserve schedule and escrow is essential. Once the engineer and lender have completed their site inspection they will prepare a list of immediate needs and ongoing replacement reserves. This is where the owner prepared budget and bids will play a great role in balancing the interests of all parties. The Fannie Mae guide, as well as the other GSE’s and lending institutions, includes certain parameters for the collection of ongoing replacement reserves based on a scale of the property’s condition.

  • Limited Reserves – The Property has been exceptionally well maintained such that a minimal reserve estimate is adequate to cover emergency repair issues if they arise during the Mortgage Loan term.
  • Moderate Reserves – The Property is in adequate condition for its age and construction type and will require only typical repairs/replacements during the Mortgage Loan term
  • Substantive Reserves – The Property exhibits characteristics or construction quality that make more substantial replacement reserves necessary in order to mitigate certain risks inherent in the physical asset.

Replacement reserves are an operating cost, so remember that these funds are yours to spend and utilize for the ongoing maintenance of the property. The lender holds these funds to protect their investment in the property only, and will take into consideration the effect on cash flow when sizing your facility. If your previous reserve escrow was $0 and now it’s $200/per unit per annum that does not mean your total operating costs have risen by $200 per unit, but that the allocation of funds previously included in line items such as repairs and maintenance, supplies, and contractors will now be captured in a lender established reserve and reduced from the proforma projections. The net effect on ongoing cash flow for properties that have been well maintained should be negligible if you work with your lender to ensure the accuracy of your operating statements and maintenance budget.

Finally, remember that the lender and your interests are the same; we both want to see the asset be a long term viable investment.

I am back from moderating an all-star panel discussion at the Apartment Finance Today Conference in Fort Lauderdale, FL.

Our topic: “Small but Mighty: Finding the Best Small-Balance Apartment Loan” was well received by a full house of real estate investors and developers.  As sources of capital are becoming harder to find our panel of industry veterans provided input and guidance on why this is the greatest opportunity to acquire multi-family properties in a generation. Our panel focused on discussing the financing options for real estate investors that need up to $5 million to buy, build or renovate rental apartment properties.

We tackled the problems facing the industry head-on and shared ideas on how investors can find the best small loans at the most generous rates and terms. Underwriting criteria for portfolio lenders such as banks, insurance companies and private lenders was contrasted with Agency lenders such as Fannie, Freddie and FHA. Contrary to the myths perpetuated by the mass media there is still abundant capital available to owners, developers and investors focused on multi-family housing. This session hammered home the fact that long term, fixed rate loans with interest rates starting in the 4-5% range can still be achieved.

Panel included:

Jerry Anderson
Senior Vice President, Alliant Capital

Rick Wolf
Senior Managing Director, Greystone Servicing Corp

Charles Ostroff
Chief Underwriter, Arbor Commercial Mortgage

Michael McCleary
Associate Director, Marcus & Millichap Capital Corporation

Our presentation notes can be downloaded from the box.net widget on the right hand side of this screen or will be automatically e-mailed to you by sending a note to SmallButMighty5mm@gmail.com

Yesterday I spent an hour on a conference call with a national lender that is putting their money where there mouth is and has started to actively quote on income producing commercial real estate loans to be aggregated for a pool targeted to be securitized in Summer 2010.

Here are some of my notes on what Non-TALF CMBS will look like:

  • targeting stabilized assets in 5 major food groups
  • looking to keep things really clean (especially on the first securitization)
  • the loans will be primarily non-recourse
  • willing to get real creative for deals / sponsors they really like
  • been quoting deals from $5+ million
  • 5-10 year term
  • Amo: 25-30
  • Coupon: 6-6.5 for 5-years and 6.25-6.75 for 10-year money
  • lender is getting half point fee
  • sized to 11-12% debt yield
  • major markets with some secondary markets
  • non-recourse with some 25% recourse on special situations (large cash-out)

Also have a portfolio product:

  • portfolio 9-9.5% debt yield… might go to 9% if 20 year amo
  • Portfolio deals over $5mm
  • do credit check & litigation checks
  • want to understand the sponsor’s global real estate portfolio including debt maturities and cash flows
  • serious lenders with a balance sheet plan to retain the B-piece… market feedback is that there is no B-piece buyer support for loans under $10mm
  • Do bridge value add on multi-family because they can not compete with the Agencies (Fannie, Freddie & FHA)
  • Pre-payment penalty: they think defeasence with be the way it starts with possible yield maintenance option down the road
  • How do they work with brokers?: lender charges a half point when working with brokers – no more par loans
  • Lock box is likely required on $25mm and above not in the $5-20 mm range
  • Will do cash out deals for sponsors they like… if a lot of cash out will ask for partial recourse
  • Target initial pool to securitize is $400-500 mm
  • Will consider hospitality for clean, low leverage, good history properties

SBA has made some sweeping changes to their programs in an effort to stimulate lending to small business owners facing maturing commercial real estate loans and in need of working capital.

Please download a free six page guide titled “SBA_New lending initiative” from the box.net widget on this blog or by following this link.

Warren Buffet

Not really.

While there is frothy excitement in social media circles that Warren Buffet’s holding company, Berkshire Hathaway Inc., is mentioned in the same sentence as “distressed real estate” his firm is a special servicer, not a buyer of distressed real estate. One of his holdings, Berkadia, has a portfolio of $240 billion and is now the country’s third largest special servicer. They jumped up in the rankings with the purchase of Capmark Financial Group in December 2009. It will be interesting to see how they utilize this servicing platform and the AA credit rating of Berkshire Hathaway to add to his mid-11 digit personal fortune.

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