Commercial Real Estate Finance

Posts Tagged ‘LTV’

CMBS stands for commercial mortgage backed securities.  Of course, if you asked borrowers about 18 months ago (and many even today), you might have thought it stood for Commercial Mortgage Bull $hit.  When CMBS financing was introduced to the commercial real estate industry earlier in the decade, it was viewed as a Godsend.  This was because rates and terms were better than those being put out on term sheets from conventional banks.  The reason for this, of course was that the loan originators (often large banks) would not keep these loans on their balance sheets, but instead sell them off in tranches, with the help of investment banks, to individual investors who had a wider appetite for risk.  Rather than putting all of their eggs in one basket with one property, they technically owned pieces of multiple properties that were all pooled together.  On the surface this seemed like a great idea and a win-win for all involved.  Obviously, the lax underwriting standards for these loans did not (and maybe could not) have taken into account the tumultuous events of the credit crisis. Read the rest of this entry »

There was a very interesting article on Globest.com yesterday that caught my eye.  It was titled exactly the same as above, but without the questioning. A mortgage broker helped an owner/user acquire a small, 11,000 square foot vacant office building for $4.2M by obtaining financing on the buyer’s behalf for almost the entire purchase price.  Unfortunately, the writer of the article either didn’t ask how this was achieved, or the broker dodged such lines of questioning purposely.  Sometimes, appearing intelligent, or in this case as a miracle-worker, is in what you don’t say.  So let’s make some assumptions as to why, and or how, this deal possibly could have gotten done in today’s capital markets. Read the rest of this entry »

Want to refinance your home to take care of historically low interest rates?  Hold your horses. Read the rest of this entry »

An analysis of the housing crisis by Karl Case:

For the last few years, we have shed many tears
Living through a recession.
The economy’s broke and it’s not a joke,
When we talk of another depression.
Fifteen million without a job,
Foreclosures and banks that fail,
401K’s became 201K’s,
And everything’s up for sale.

Read the rest of this entry »

As we round out 2009, one of the most interesting top 10 lists we could conjure deals with all of the various changes in the capital markets as it pertains to the commercial real estate sector.  The availability of capital has diminished significantly, and for capital that remains available, return requirements, interest rates and loan terms have all changed substantially.  Let’s take a look at the top 10 changes:

10. Shorter amortization periods for fixed rate loans by 5-10 years - Many banks have cut back the amortization schedules on loans from 30 years to 25 years, and from 25 years to 20, or even 15 years in some asset classes. Shorter amortization periods means more expensive annual debt service payments.  This of course has a subsequent effect on cash flows as well as tradition debt service coverage ratios.

9. More equity deals being structured with debt-like components - Equity partners have shifted much of the weight of their return to their preferred position.  This, of course, means that they face losing significant upside on strong deals.  However, they seem to be happy to trade that upside return potential for greater security of their minimal required return.

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Everyone knows that asset values are falling in most, if not all, markets. But how can you measure the rate of descent for that falling knife?

“No one knows what loan-to- value [LTV] is because there are no sales comps,” says Will Baker, a vice president at Bethesda, Md.-based Walker and Dunlop. “The appraisers are pulling their hair out, trying to figure out what a cap rate is.”

In the past, lenders could turn to the acquisition market to get a current read on valuations. But since there are very few acquisitions this year, lenders have nothing to measure against: In the absence of a trade, there’s no market-determined value. But even if there was a recent transaction in a local market, it may not really be comparable. Today’s cap rates just can’t be trusted. “You have to really dive into cap rates and see why the sale happened,” Baker says. “Was it a distressed sale? Did they have to sell? Or was this a normal deal? You can’t just look at a cap rate anymore.” Read the rest of this entry »

Barry Gosin, CEO of Newmark Knight Frank, one of the world’s largest independent commercial real estate firms, discusses the state of commercial real estate.

The Week of June 20-26

- Commercial Real Estate mortgage debt stood relatively still at $3.48 billion in the first quarter of 2009.

- Are HARP LTV’s going higher?

- CNC Investments defaulted and could lose 1,272 units in Austin, TX to foreclosure.

- A Georgia bank is auctioning off $100 million worth of troubled assets.
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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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When I asked a colleague recently if he thought there was light at the end of the tunnel for this whole credit crisis debacle, he paused, looked at me calmly and replied, “Yeah, there’s a light at the end of the tunnel…and its coming from a train that’s about to run us over.”

Tongue-in-cheek? Yes.

Truthful?  Maybe.

Either way, it hasn’t stopped Boston Properties from doing something none of us thought was possible in the current environment last week.  Mort Zuckerman’s firm obtained a $215 million construction loan to complete a mixed use project currently underway in Boston called Russia Wharf.

Just as you might have suspected, there was no mysterious white elephant to be found, no secret source of capital that the rest of us did not know about.  In fact, it took the form of a much smaller deal, where community banks whose legal lending limits aren’t big enough to take down the entire loan might pool together and participate with several other financial institutions.

A group of five banks, in this case, led by New York Mellon Corp. provided the financing.  That being said, the terms of the loan are about as tough as they get. Read the rest of this entry »