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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With Little Quality Office Product in Play, Investors Vying Sharply for Low Hanging Fruit

By Mark Heschmeyer

Last year, capitalization rates on large office property sales rocketed from the mid-6 range to the mid-8 range. So far this year, cap rates have reversed course, falling back just as rapidly to mid-7 range. Under ‘normal’ conditions, this would imply that property values are increasing. So why isn’t the commercial real estate industry elated?

Cap rates are a benchmark determined by dividing income by property value. Increasing cap rates typically imply that property values are falling. Last year, no one in commercial real estate doubted that the rapid rise in cap rates reflected an equal rapid decline in property values.

[BLOGGER COMMENT: This is a bifurcated market. Class D&F assets are being sold at a dramatic discounts to replacement cost for cash since no financing is available for low quality assets. Class A&AA assets are receiving 20-30 bids when those assets come to market from investors that have raised trillions of equity capital and need to place it before their investors start asking for their money back. The trend toward low cap rates in investment grade assets will continue as the 10 year Treasury stays at such low levels (3.48% as of this writing) and positive leverage can be achieved.  I predict the return of transactions for Class B&C assets will only happen once CMBS 2.0 hits high gear in Q3 or Q4 of 2010.]


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.]


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 widget on the right hand side of this screen or will be automatically e-mailed to you by sending a note to

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

Earlier this year, commercial real estate had all the hallmarks of a distressed asset sale of the millennium. Across America, hundreds of billions of dollars’ worth of office buildings, hotels, apartment complexes and malls were tanked up with debt and rapidly tanking in value. They were so far under water, conventional wisdom had it, that there was no way they could be refinanced. Wholesale foreclosures would follow. Banks would be forced to unload properties at bargain-basement prices.

… [this blog only includes excerpts from article written by Matt Miller – please visit to read full article]

However, few properties have been foreclosed on — perhaps 10% of the defaulted loans, according to some estimates. Even fewer distressed sales have taken place. Distressed investors “thought it would be like shooting fish in a barrel,” says a lawyer who represents both financial institutions and real estate interests. “A year later, they can’t find the fish.”

BLOGGER COMMENT: Who will blink first, the private equity groups that have raised billions looking for IRRs of 15-30% or the financial institutions that control the REOs and mortgage debt on trillions of dollars of non-performing, sub-performing or defaulted commercial real estate loans?

D.C.-area developer Jeff Neal gives the Huffington Post Investigative Fund a tour of empty commercial properties just blocks from the Capitol. He says we were, “drunk on a binge of easy credit and the bartender (the market) took away the bottle (credit).”

BLOGGER COMMENT: Private equity groups are looking to double down. They are building massive cash war chests to acquire properties from banks and distressed sellers for a fraction of replacement cost. Should the government create a false bottom or allow the market to find the true bottom where transactions can take place to eliminate the “Zombie overhang” on the market?