Real Insight. Real Estate.

Posts Tagged ‘bank’

Editor’s Note: With Valentine’s Day coming up this weekend (order your flowers ASAP!), we figured, why not start off the week with a Cupid-esque topic? We can’t wait to hear your feedback on this one….

When a joint venture partnership occurs in real estate, the term “getting into bed” is often tossed around. And despite the fact that real estate is an industry dominated by men (and therefore subject to more coarse, perverted analogies), this phrase is somewhat appropriate. When you sleep with someone, you want to make sure you are protected (from exactly what, I will leave to the reader’s imagination), right?  Well the same goes for your equity partner in a real estate transaction.  Yet, while all real estate transaction involve some form of due diligence, JV equity partnerships involve an entirely different level of due diligence.

Rather than scoping out the salient facts of the deal, examining the borrowers track record, and crossing all the “t’s” and dotting all the “i’s” of a particular transaction (like a bank might do), an equity partner has to get extremely comfortable with the sponsor’s style and personality in addition to the aforementioned due diligence.  For this reason vetting a JV equity partner has become a lot more like eHarmony than a one night stand. Read the rest of this entry »

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We’ve been hearing more and more stories about commercial real estate owners handing the keys back to the bank on properties that are under water.  We’ve heard even more stories about banks extending financings so that they don’t actually have to take those keys back.  The reason being that banks are not in the business of owning real estate, they are in the business of taking deposits and lending those deposits out to make interest revenue.  With the economy in the doldrums, this is happening not just in the real estate world, but the corporate world as well.  Many companies are giving up huge stakes in their business to their commercial lenders to alleviate indebtedness.  Wouldn’t banks like to take advantage of some of the opportunities that are falling into their laps?

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Imagine if you were looking to make an acquisition and you approached a bank for a $750,000 loan that is 80% LTV. The property that you are looking to acquire is covering just north of 1.10 DSCR and is throwing off an NOI margin that is 55% of lease revenues. No way that deal is getting done today, right? Well, deals like this were a piece of cake back in 2005-2006. Of course, the flip side of the coin is that deals that were done in 2005-2006 are performing so miserably that banks are having massive debt impairment issues. We hear about it in the press everyday—“such and such” bank needs to find a way to recapitalize or they will be forced to take a capital infusion from the federal government.

So we see it in the press, but what does the equity shortfall on a poorly performing property actually look like on the bank’s balance sheet? How badly is the bank undercapitalized? To try and answer these questions, we’ve drawn up the following example of a typical deal done back in 2006 to illustrate the impact an underperforming property has on a bank’s capitalization.

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