The Real Estate Capital Scoreboard® – March, 2010

RECI, 02 March 2010, No comments
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Chicago, Illinois, March 2, 2010 – A painfully slow rebound ignites mild excitement in select sectors of the income-property realty markets.  Sparks of hope kindle the industrial and housing sectors as most investors sense the bottom is near, or within the near horizon.  Choice retail properties also suggest a recovery as consumers cautiously return to stores.  Office and lodging assets are bombarded with oversupply linked to shrinking demand, corporate cost-cutting and rising operating costs.

Rising defaults plaque legacy mortgage portfolios and many lenders still choice to stay on the sidelines to workout their portfolios.  Banks are starting to liquidate non-performing assets.  The Agencies are tightening underwriting standards across the board using more conservative income and expenses, lower leverage, high debt service coverage.  Yet hope springs eternal.

Recovering from near-collapse within the past 18 months, the capital markets are ahead of overall real estate fundamentals.  The most important concern?  More money than funding opportunities.  Will the markets return to more liberal conditions?  Probably not very soon, but some positive signs surface: 

 

Jeanne Peck, of The Real Estate Capital Institute’s Advisory Board, states “Denial is now being replaced with Decision.  Legacy funding sources and owners are starting to either restructure with fresh equity or liquidate.   2010 looks more like a year of action.”  She predicts, “We should have a very good feel of momentum by mid-year.”

Realty Capital Markets State of the Union

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Las Vegas, NV – February 6, 2010 – According to industry leaders gathering in Las Vegas this week, debt capital is readily available for 2010.  Optimism is in the air and the mortgage lenders are starting to offer more generous terms and conditions. 

In summary, timing is excellent for select borrowers in securing debt based on the following conditions:  (1) Recovering economy, (2) Ample supply of capital and (3) Limited supply of financeable real estate assets. 

The following highlights summarize the 2010 state of the realty capital markets including an overall outlook and overall funding program offerings: 

Back to Basics:

Underwriting Dynamics: 

As has been the case last year, high-quality projects in major markets backed by excellent sponsorship and cash flow characteristics are most desired—especially based on low leverage of 65% of value. 

Location/Property Types:

Pricing (Permanent Fixed-Rate Loan):

 Leverage:

Real Estate Capital Market Leaders Cautiously Optimistic

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Categories: News|Views

Las Vegas, NV – February 4, 2010 – As lenders gathered here this week to discuss income-property financing programs, nervous optimism filled the air.   The overall forecast is mildly positive — particularly as compared to 2009.   Funding sources were battling liquidity in 2008; rebuilding balance sheets in 2009; and are now earning profits in 2010 which means mortgage investing is back in vogue again. 

However, lenders fear more uncertainty as the capital markets are imbalanced with relationship to income-property supply & demand fundamentals.  Based on key opinions of various lenders an economic outlook relating to realty capital markets is summarized as follows: 

In summary, industry experts agree that these and other factors will assure that mortgage capital will be readily available in the foreseeable future.  The realty capital markets should continue on a path of greater liquidity.  Yet the biggest trick will be finding suitable real estate investments as the property markets are recovering slower than the capital markets.

The Real Estate Capital Scoreboard® – February, 2010

RECI, 01 February 2010, No comments
Categories: Scoreboard

Modest job growth combined with controlled government spending discussions directly affect the current economic recovery, which is slowly trickling into the real estate capital markets. Policymakers are also helping by holding interest rates low at levels favorable for real estate markets. Funding activity is scant, but signs of new hope are emerging. During the month, some lenders slightly dropped mortgage spreads by at 10 to 25 basis points. Short-term loans remain relatively unchanged, while permanent loans now start at about 5.5% for multifamily assets and 6% for commercial properties.

As lenders workout of their legacy problems, new funding goals surface which are moderately more ambitious than 2009. As has been the case last year, high-quality projects in major markets backed by excellent sponsorship and cash flow characteristics are most desired — especially based on low leverage of 65% of value. Since rates remain low and funds are scarce, lenders resort to more creative solutions to capture such limited opportunities, including offering mezz debt and applying net worth covenants.

A renewed interest is arising in mezzanine programs, particularly for multifamily fundings. On a selective basis, funding sources can dip below the standard 125%-debt-service-coverage threshold for loans already on the lender’s balance sheet. Payment formats based on self-liquidating amortization schedules of 5 to 10 years and a maximum leverage is 80%.

Net worth covenants are required on a selective basis to help protect lenders against problems associated with sponsorship vs. the actual asset. For instance, the sponsorship should maintain a minimum net worth equal to the loan amount of which 10% or more is liquid. Noncompliance results in a loan default which is curable by principal paydown or additional credit support (e.g. letter of credit). This structure is more difficult to enforce for partnerships with different principals, as well as larger institutional-grade transactions.

Welcome to the Institute’s Updated Website

RECI, 17 January 2010, No comments
Categories: The Institute

During the past two years the Institute has been updating the website. Our website continues to change and improve based on your comments.

Thank you for your patience and please feel free to add any suggestions.

The Real Estate Capital Scoreboard® – January 2010

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Chicago, Illinois, January 11, 2010 – The start of a new decade adds fresh hopes and fears in the realty capital markets.  The Fed’s persistence in supporting lower rates is helping to avert more financial suffering from increased cost of capital.  Investors are encouraged to gravitate from low-yielding governmental debt.  Dual-personality investing prevails as many of these same investors seek relief on legacy assets, while trolling for fresh new assets based on more attractively reset prices. 

How are capital markets positioned for this new decade and what are the key trends starting off the year? 

 

The Institute’s Advisory Board Member, John Oharenko believes, “We’re bouncing along the market bottom as values continue to slide, but a less dramatic levels.”  He suggests, “Some of the greatest investment opportunities lie ahead, especially for those buyers willing to sacrifice current return and relying upon overall market momentum to improve during the next three to five years.”

# # #

The Real Estate Capital Scoreboard® – December 2009

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Chicago, Illinois, December 1, 2009 – Substantially discounted senior loan levels combined with eroding property values force legacy funding sources into difficult decisions in managing technical defaults, monetary defaults and loan maturities.   The stage is clearly set for workouts and recapitalizations well into next year, while new lenders are seeking high-yield opportunities with fresh capital for workouts/restructures, partner buy-outs, loan purchases and property acquisitions.

Multifamily and senior housing properties continue attracting low-priced/high-leverage funds via the Triple F’s (FNMA, Freddie and FHA).  Otherwise, commercial properties attract capital with mixed results. 

For instance, partially leased, Class-B office ventures are considered only if located in Class-A locations.  Discounted-cash-flow underwriting for such fundings include trended economic vacancy is trended towards historical norms, often below actual figures as investors brace for more economic storms.

In today’s tight credit market, important metrics for any financing ventures include:

In summary, overall market sentiment focuses on avoiding liquefying legacy projects unless absolutely mandatory.

Mark Hayton, an Advisory Board Member of the Real Estate Capital Institute notes, “Credit-tenant commercial properties remain financeable, although strict underwriting standards are necessary.”

Fairly Negotiating Real Estate Placement Fee Splits

realtycapital, 15 November 2009, No comments
Categories: Education

INTRODUCTION

Within the real estate capital industry, deciding equitable fee sharing arrangements is often one of the more debated issues between various professionals involved in structuring a specific transaction.  Not to be confused with overall fee structuring, this discussion is completely separate from the actual negotiations with the property owner (e.g., exclusive vs non-exclusive and pricing).  Otherwise known as “fee distribution”, “splits” or “co-brokerage” agreements, fee sharing arrangements cover all types of real estate capital activities including consulting, sales, financings, partial-equity and joint venture assignments.

Fee sharing discussions don’t apply to certain situations, including smaller fees and individual assignments.  Although no fee is too insignificant, for smaller fee assignments that are typically $25,000 or less, fee sharing arrangements are more casual as the depth and scope of such assignments seldom require multiple disciplines.  These fee sharing arrangements are usually more standardized.  Also, capital transactions limited to single individuals and organizations may be irrelevant or subject to internal compensation policies.

Fee sharing discussions are usually structured based upon rules of thumb.  Brokers, investment analysts, administrative personnel, closing professionals and others within an organization — as well as outside parties involved in a transaction — will each have individually-biased views on fee distributions. Such discussions typically lead to heated debates on “fairness”, “reasonable”, “standard”, “market rate”, “customary” and “typical” as defined by each party.   Of course, everyone normally believes that their position is “right.”

THE FAIRNESS DOCTRINE

Rather than debating about right or wrong, or what is considered fair, fee sharing discussions need to center around facts and circumstances.  To avoid conflicts, each party should agree beforehand about the “fairness” of the fee sharing allocations based on determining responsibilities and dedicated resources.  

Needless to say, defining “fairness” in fee sharing arrangements is both an art and science.   The science identifies specific variables in the fee split equation; the art applies the importance of the variables using weighted averages.  For instance, how much importance does experience and market knowledge factor into calculating an individual’s contribution to the transaction?

More often than not, fee sharing agreements are blended with management policies, experience and instinct — normally resulting in “fair” distributions. In most instances whereby fee split allocations are not deemed fair by all parties, conflicts will develop. Therefore, the goal of fee sharing arrangements, like any other business ventures, is based on an equitable “win-win” outcome.

For all parties to view the process as completely fair and unbiased, experience and instinct should be supported by applying clearly defined criteria measuring personnel contributions to the entire real estate capital placement process.  Control and Placement are the two such components forming the basis of measuring time and resource allocations in this process.


CONTROL AND PLACEMENT – THE FOUNDATION OF FEE SHARING DISCUSSIONS

Fee sharing based on fairness guidelines are rooted in Control and Placement.  These two components equally form the balancing point of fee distribution. Control focuses on capturing a real estate capital placement opportunity such as a project sale, mortgage origination or joint venture.   Placement forms the counterweight for successfully completing a funding assignment.  Said another way, Control represents the capturing the opportunity and Placement converts the opportunity into a successful transaction.

Understanding Control and Placement is relatively simple. However, identifying the various components and subcomponents can become a daunting task.  And more often than not, Control and Placement will be interrelated as elements within each of these components mesh together to make the process successful in totality rather than piecemeal.

Control and Placement discussions assume all parties involved in fee sharing discussions are professionally qualified and licensed.  For example, an individual with accounting and real estate analysis software training should be responsible for project cash flow analysis.  Before any sharing arrangements occur, parties must be properly licensed to conduct business and collect fees in the various States where projects exist.  Typical licensing requirements include sales brokerage, appraisal and loan origination.  Otherwise, any agreements are not legally enforceable, regardless of professional qualifications and Control/Placement responsibilities.

In addition to the qualifications and licensing requirements, three other factors to consider in formulating Control and Placement responsibilities to additional professionals while insuring that the client’s best interests are served include:

 

While few professionals actually break down fee arrangements using such components, more disciplined approaches to these decisions rely upon identifying various subcomponents and applying formulas for calculating contribution/compensation levels apportioned to all parties involved in the transaction. The CAP Fee Sharing Model is one such tool used for identifying and quantifying contributions with the goal of computing fee split allocations to all parties involved in the transaction.


FEE SHARING CALCULATIONS

Realty professionals will certainly have different definitions of how to identify and weight Control and Placement, or other variations of these components.  As a result, The Real Estate Capital Institute interviewed a wide spectrum of industry leaders in the debt and equity capital markets including investment sales specialists, consultants, mortgage bankers and other brokers for the purpose of creating a fee distribution model that reasonably and accurately reflects Control and Placement measurements, resulting in the CAP Fee Sharing Model.

The CAP Fee Sharing Model demystifies the process of systematically computing equitable fee splits.  As mentioned earlier, this model centers on Control and Placement for quantifying fee sharing arrangements.  The goal of this model is to generate interactive fee sharing calculations based on “Win- Win” objectives for all parties.  The calculations require applying weighted-averages to important tasks within the process.

The Model divides Control and Placement on a 50/50 basis, further subdividing these components into subcomponents along with assigning weighted averages.  Control/Placement is a straightforward computation since both components carry equal weight.  Measuring subcomponents is a more challenging task as their respective values are more subjectively analyzed.  Regardless, the modeling formulates a basis for further discussion of the value of services provided by the various parties in the capital placement process. 

The Control variable is subdivided into three components: Referral/Generating Leads, Handling Client Communications and Procurement of Exclusive Agreement — accounting for half of the total fees.  Placement, the other half of the fee split calculation, includes Underwriting, Marketing and Closing subcategories.  Each of these major components and their respective subcomponents are further outlined below, including definitions and weighted average values in relationship to the entire fee.

CONTROL

Control is defined as the ability to secure a transaction for capital placement including sale, refinancing, joint venture, etc. The control results collected efforts in negotiating the agreement (mortgage banking application, exclusive sale agreement).  Control is not necessarily limited to a single individual or organization and often involves multiple groups of professionals, depending upon the scope of the capital placement assignment. 

The key subcategories of Control include: Generating Leads, Handling Client Communication and Procuring an Exclusive. These Control subcomponents are presented in sequence of a typical transaction beginning with identifying the project through obtaining an exclusive.

Referral/Generating Lead (10% of Total Fee):  Generating leads and mining for new client relationships is the initial step necessary in initiating a transaction. Cold-calling is the most common method of finding leads. Attending various real estate seminars and conventions, actively participating in professional organizations and other more effective methods of meeting clients also produce effective results. Regular follow-up based on additional meetings, phone calls, e-mailing campaigns provide continuous links of communication. In some cases this process may take days, months or even years. This activity has a value of about 10% of the entire transaction, and is typically known as a “referral fee” if no other action is taken by the broker involved in the process.

Handling Client Communications (10% of Total Fee):  Naturally speaking, client communications on an ongoing level take the referral process to the next level.  More frequent communications help to establish stronger links with the client, requiring more time and energy, as well as information gathering and analysis work to secure project control. As with the referral process, client communications can be an ongoing situation spanning a long time period. Handling communications is typically interwoven with the referral process and accounts for a total of at least 20% of the fee. 

Procuring the Exclusive (5% of Total Fee): Procuring the exclusive is the final step in successfully establishing project control.  Securing the exclusive, whether a loan application or a listing agreement, indicates that the referral process and client communications have culminated to a fruitful conclusion. Most professionals will agree that tying up an exclusive clearly indicates that half of the fee has been earned. Without this last step, the parties involved in securing the fee are working under more challenging conditions as other non-exclusive brokers may also be competing for the transaction.


PLACEMENT

Upon securing Control, Placement completes the process of successfully marrying capital with a project. Placement subcomponents include Underwriting, Marketing and last but not least, Closing — all discussed as follows:

Underwriting (20% of Total Fee):  As part of securing control and processing the transaction, underwriting bridges the gap between securing and funding the transaction. The key ingredients for underwriting — which accounts for 20% of the fee — include analysis, review of various documents and preparing a complete and detailed offering memorandum for sale, refinancing or other realty capital structure. Each of these components is described as follows:

 

Marketing (20% of Total Fee):  Marketing is the third component in sequential order, also representing a weighted average of 20% of the total fee. After the project has been secured for Placement and the information has been processed into a detailed offering memorandum, the marketing process begins. The goal of the marketing process is to deliver the optimal capital placement source for the project based upon contacting qualified capital sources, negotiating and filtering offers and conducting tours.


Closing (10% of Total Fee):  Without a doubt, the closing must be handled with the same amount of importance as all other elements of the fee placement process. Too many things can go wrong if all parties assume that the transaction is on track by simply passing the closing process to the attorneys, title company and others. However, the transaction team should not provide legal advice unless properly staffed and authorized by the client to do so.  Instead, the responsibility lies in following through on any paperwork flow relating to the key business terms of the transaction based on the following:

 

 

 

OBSERVATIONS

 

A host of other factors need to be considered when discussing fee sharing arrangements among real estate professionals including teamwork, sliding scales and  of course, qualifications.

Teamwork:  In today’s marketplace, most success real estate capital placements involve integrated teamwork, often in the same office.  In addition, highly specialized disciplines such as hotel consultants and healthcare professionals are involved in packaging and marketing special-purpose assets.  Even more expertise is required when working with single-purpose financing sources such as FHA/HUD and when equipment leasing is included with the property.

Sliding Scales:  Upon completing an initial transaction, various parties may decide to change roles and become more, or less involved. Subsequent transactions involving the same client may have lower fees splits with parties that have already initiated a transaction, but only want to share in the referral process. Other parties would therefore have more responsibilities, and take larger percentages of the fees.

Qualifications:  The skill set and experience are tantamount variables for sizing fee splits.

PROS AND CONS 

The advantages of using the Chicago Fee Distribution Model are as follows:

 

Limitations include:

Measurements are only as good as inputs.

EXAMPLES

Traditional 50/50 Arrangement: The classical example of a fee sharing arrangement assumes two parties, the listing agent and the buyer’s representative, share fees on a 50/50 basis. In this example, the listing agent has Control and the buyer’s agent executes the Placement. Fee Placement modeling is hardly needed as the roles are clearly defined.

Intra-office Arrangement: Medium and larger real estate organizations offering full services such as appraisal, consulting, brokerage and management normally have fee sharing policies. Even so, disputes surface various professionals view their roles differently in fee sharing. For instance, an appraiser who has a long-standing relationship with a property owner can get control of an exclusive listing and performs a substantial amount of investment analysis. Under such a scenario the appraiser would most likely not have a broker’s license, as well as play a very limited role in marketing and processing the closing. 

These circumstances justify a fee split of as much as 40% of the total fee calculated as follows:

 

Structured Transaction Arrangement:  The more difficult and technical the realty capital placement assignment, the more scrutiny is required to determine equitable fee sharing arrangements. In the case of highly structured transactions such as joint ventures, land sale leasebacks, mezzanine loans, preferred equity deals and other hybrid debt/equity vehicles, multiple disciplines merge to complete the transaction.

The most common arrangement may include a combination of fee splits along with payments to outside vendors.   These outside vendors — including lawyers, accounting firms and financial consultants – will handle highly technical details relating to the marketing and structuring efforts of such transactions.  Fee sharing arrangements will often include flat-fee, hourly billing or other non-commission type payments.

In summary, structured-transaction fee sharing arrangements are difficult to illustrate.  Yet more often than not, highly sophisticated property owners work with equally sophisticated capital funding sources, demanding highly-professional, multi-level services.

 

 

CONCLUSIONS

The Real Estate Capital Placement Fee Split Model presents a clear and concise that of discussing the sharing of fees and distribution of responsibilities. In and of itself, this process is not a substitute for clear communications between all parties, a rather a guideline of how fees should be shared along with responsibilities.

The most important element within this process is open and honest dialogue. Also, should circumstances change, including allocation of time and resources, all parties need to be flexible on fee sharing modifications.

The Prepayment Fee – The Fine Line between Mortgage Maturities

RECI, 11 November 2009, No comments
Categories: Education

 

Prepayment penalties can be a substantial latent cost for borrowers, as well as attractive profit protection for lenders.  Borrowers require flexibility, while lenders seek yield preservation.   

Prepayment language is more important today, as the yield curve favors long-term debt with better pricing and terms than shorter maturities.  All things being equal other than term, the major difference between notes rests within the prepayment calculations. 

Nearly all short-term loans of five years or less have liberal prepayment penalties, and in some cases, none.  Long-term debt is often burdened by the prepayment penalties that can cost as much as 10% of the loan balance, depending on the formula used.

Some overall rules about prepayment penalties are as follows:

1)         Usually locked out from prepayment during first half of the term

2)         Negotiable if coupon rate is substantially below current market rate

3)         Minimum penalty typically at one percent

4)         Yield-maintenance formula works best for borrowers expecting lower rates later in the term

5)         Declining Balance formula provides calculated certainty in loan payoffs

6)         Defeasance formula requires costly processing and multiple approvals – more applicable for locked cash flow loans (e.g., long-term, net lease properties)

7)         Types of funding sources have a direct correlation on prepayment formulas (e.g., balance sheet lender has more flexibility than lender intending to sell the note)

The Real Estate Capital Scoreboard® – November 2009

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 Chicago, Illinois, November 2, 2009 – The recovering stock market is gradually translating to more favorable conditions in the realty capital markets. While the capital markets are relatively dormant as lenders seek to shore up the balance sheets, select life companies, banks and private funding sources continue conservatively funding transactions.

Furthermore, Mortgage REITs have reentered the market, seeking higher leverage loans, but at larger rate premiums. Greater competition from this sector will continue pressuring other lenders to offer better pricing.

Regardless of pricing, project quality and sponsorship remain tantamount as lenders stay defensive.  As such, current pricing trends include the following:

 

Aaron Gruen, an Advisory Board Member of the Real Estate Capital Institute notes, “The Great Recession has permanently altered consumer, investment, and governmental behavior.Both public and private sector interests which influence land use and economic development need to reset their models and practices to work out projects and plans affected by the Great Recession and to respond to the opportunities the economic recovery will present.”

The Real Estate Capital Scoreboard® – October 2009

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Chicago, Illinois, October 1, 2009 – The Fed announced that the recession is starting to fade away. The real estate capital markets remain in the doldrums, with more news of increasing delinquencies and foreclosures, looming loan maturities with limited refinancing prospects, declining occupancies, tenant bankruptcies, oversupply and contracting space demand well into the foreseeable future. 

Yet fresh transactions are trickling into the markets, filling value data points. As financial markets are recovering and lenders shore up their balance sheets, deals are repriced, sometimes at levels of 20% to 40% lower than the peak era of 2006-07.  This fall’s positive signs shining on the capital markets include the following:

Randal Dawson, a member of the Real Estate Capital Institute’s research notes, “Valuation driven by lower-leverage debt pricing and higher equity yields offers the most effective methodology for understanding values in today’s illiquid markets.”   Adding, “Equity yields continue climbing, as commercial property values show more signs of stress.”

The Real Estate Capital Scoreboard® – September 2009

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Chicago, Illinois, September 1, 2009 – Declining property values prices reset investment yield boundaries for all types of income-producing properties. No asset classes are immune – ranging the entire spectrum from institutional-quality, credit net lease deals to distress hotel ventures.  With limited exceptions, new construction developments grind to a halt as investors rethink risk/reward because of ever-eroding market fundamentals.

The “Defi Refi,” takes front stage among lenders with legacy loans, whereby debt terms are defensively renegotiated.  All parties try to avoid foreclosures as long as the collateral is reasonably maintained at occupancy levels within the given submarket.  Defi Refi loan sizing is further outlined as follows:

 

The Real Estate Capital Institute’s Advisory Board Member, Harold “Skip” Perry, laments, “The volume of foreclosures and restructuring leads me to believe the end is not in sight for at least one to perhaps two years.”   Skip suggests, “Defensive investment tactics are the norm rather than the exception until more trades occur and properties are marked-to-market based on current conditions.”

The Real Estate Capital Scoreboard® – August 2009

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Chicago, Illinois, August 3, 2009 – Mid-summer market madness clouds the real estate capital industry, yet bursts of hope glimmer as more properties are sold and investors are beginning to see a bottom.  As short term rates remain near the bottom, with LIBOR sinking to a record low, plenty of funds are available.  However, funds are sidelined in anticipation of even more favorable pricing in the coming months as distress deals are predicted to flood the market within the next two years.  Other market highlights include the following:

 

Gary Duff, an Advisory Board Member of the Real Estate Capital Institute, remarks that “More market clarity is expected in the fall when investors return from the summer holidays.  For now, most institutions consider asset management as their top priority.”  He suggests, “Many legacy owners are more concerned about losing income stream rather than capturing new opportunity plays.”

The Real Estate Capital Scoreboard® – July 2009

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Chicago, Illinois, July 1, 2009 – While the Fed decides to keep interest rates steady, the capital markets reset property values and debt underwriting metrics to levels not seen in nearly a decade.  Meanwhile, lenders focus on recasting legacy deals with preferred borrowing relationships.  As expected, new funding opportunities are extremely limited based on highly conservative leverage of 60% or less for commercial properties with capitalization rates in the high single-digit range.

On other hand, apartment financing funds remain readily available via the Agencies at attractive spreads and leverage.  However, more submarkets are reviewed for possible downgrades as vacancies continue to rise throughout various parts of the country.

While the market activities are generally slow, especially in the mid-summer months, clear signs of readjusting capital markets are evident as noted by the following dynamics:

 

An advisory board member of the Real Estate Capital Institute, Jim Postweiler, notes that “Smaller properties below $25 million enjoy the most amount of acquisition activity.  Larger projects still create issues for attracting optimum leverage and sufficient funding sources.” Postweiler adds, “Foreign investors, mainly from Europe, are reemerging as buyers for prime investments in major CBD markets.”

The Real Estate Capital Scoreboard® – June 2009

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Chicago, Illinois, June 1, 2009 – Late spring realty capital markets are starting to show more signs of life, although caution is the word. The agencies continue to provide liquidity to the multifamily markets, while banks and life companies cherry-pick commercial property loans.

Focal market dynamics include the following:

 

According to Jeanne Peck, an advisory board member of the Real Estate Capital Institute, “sellers without a dire need to for immediate liquidity are taking a ‘wait and see’ position.  Today’s indecision could lead to tomorrow’s panic to sell against upcoming CMBS and bank loan maturities without refinancing options.”

What's wrong with a real estate correction?

realtycapital, 15 May 2009, No comments
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About a year ago, the real estate capital markets turned topsy-turvy.  Investors, lenders and real estate professionals alike panicked.  Debt and equity funds nearly evaporated based on false risk/reward expectations.  Nearly all capital markets reached “pricing nirvana,” leaving no room for error as prices peaked to unchartered levels.  Typical income-property loans often were priced within a percent of treasuries — well beyond any historical underwriting guidelines measuring debt coverage margins, leverage and valuations. 

Today, the opposite is true.  Over-reactive fear governs expectations.   The aftermath of the mortgage-backed securities re-pricing and fresh concerns about financial institutions’ real estate portfolios force investors to the sidelines.  Mortgage markets remain dislocated and more problems appear on the horizon.

Are real estate markets in a continuing downward spiral?  Not exactly, if history is any guide. 

Markets are reaching “correct” levels as measured by the past decade.   Many will argue the past five years’ realty capital market conditions were abnormal.  Investors scrabbled from the “tech wreck” in search of new profit frontiers; Wall Street greeted them offering lucrative yields blessed by the rating agencies.  The model worked as long as values continued climbing. 

The rating agencies claimed the new role as risk arbitrators of real estate capital – an untested valuation model for monitoring rapidly expanding mortgage securities market.  Wall Street became Main Street for policing realty supply-and-demand risk fundamentals as well as the traditional role of providing capital.  The judge and the jury.

By the end of 2006, overall commercial property pricing skyrocketed to unsustainable levels as values increased by as much as 40 to 50%, while rent levels remained flat — or even declined.  Investors justified such economics by accepting lower profit thresholds often based on optimistic cash flow projections.

In contrast, more “correct” market conditions existed during the late 1990s.  Project yields were more evenly matched to interest rate costs.  During this era and for most of the Twentieth Century, investment returns normally required positive leverage based on current cash flows, resulting in positive leverage. 

In conclusion, the correction will continue with prices trending downward until investors start capturing more sensible yields in to project and cash flow fundamentals.  The speculative premium needs to be removed from pricing expectations.  This re-pricing is a healthy side effect of excessive capital market behavior.  Measurable, risk-adjusted cash flow will dominate investor’s return expectations — back to basics!

The Real Estate Capital Scoreboard® – May 2009

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Chicago, Illinois, May 1, 2009 – Within the past month, rates have continually climbed for longer-term treasuries, nudging upward by more than a quarter point. In the meantime, the most active lenders in the marketplace — the Agencies (Freddie Mac, Fannie Mae and FHA/HUD) — correspondingly dropped mortgage spreads.

As a result, overall interest rates remain relatively competitive for multifamily properties, starting in the mid-five-percent range for ten-year debt.  Leverage levels of 75% of value are still available for this asset class.

In contrast, other income properties, including office, retail and industrial assets are underwritten to extremely stingy standards. Few lenders are actively seeking new origination funding opportunities as workouts and corporate viability issues overshadow mortgage lending goals. Commercial loans are generally funded at levels of 65% or less with overall interest rates starting in the higher-6% range and climbing into the mid-8% range.

Full leverage funding opportunities still exist for credit-anchored projects in all income-property categories, as long as BBB or better rated credit ratings are available with reasonable remaining lease terms.

Bright spots in the capital funding marketplace are also beginning to appear. More life companies, banks, pension funds and other sources not plagued with legacy deals are reemerging.  Initially, the pricing requirements are steep and leverage remains conservative, but some loosening is expected as these players start competing for transactions.

As far as specific benchmarks for any funding opportunities within today’s market, the following items are nearly universal minimum requirements:

 

Barry Moss, a Real Estate Capital Institute Advisory Board member, notes “Lenders, borrowers, investors, tenants, developers and nearly everyone in the real estate industry is in a defensive mode.”  He suggests, “As TARP/TALP funds trickle into the financial system and lenders mark down legacy assets to current metrics and sell those assets, more badly-needed liquidity will return to the industry and transaction activity will increase.”

The Real Estate Capital Scoreboard® – April 2009

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Chicago, Illinois, April 1, 2009 – Commercial and residential income-property values and mortgage underwriting continues readjusting to more conservative levels not seen in more than a decade.  While most buyers and sellers are tangled in a pricing stalemate, funding sources define debt and equity metrics based on refinancing and renegotiating terms.  However, such metrics substantially vary from the sizing dynamics that many investors have grown accustom to. 

Current underwriting realities mainly include stringent resizing of existing cash flows, higher capitalization rates and lower new-construction costs — all summarized as follows:

Cash Flows Readjustments:

Higher Capitalization Rates:

 

New Construction Realities:

 

According to Aaron Gruen, a member of the Real Estate Capital Institute Advisory Board, “While declining rents, rising capitalization rates, and challenging economic and financial conditions make for black moods for real estate investors and developers, this is a good time to prepare for the return of prosperity.” He adds, “From a longer term perspective, prices are more likely to be bargains, constructions costs are low, and loans are likely to be prudently made and taken.”

The Real Estate Capital Scoreboard® – March 2009

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Chicago, Illinois, March 2, 2009 – As the first quarter winds down, the real estate capital markets are filled with caution and anxiety as lenders crave for market stability.  Realty capital markets remain challenged with the following issues in the forefront of discussion:

 

Randal Dawson, a member of the Real Estate Capital Institute Advisory Board declares, “2009 looks to be a year of refinancing and with limited acquisition activity.” Dawson suggests, “Distressed deals will be the norm for most new acquisitions and investors will be overwhelmed with renegotiating overleveraged debt.”

Real Estate Capital Markets 2009 Outlook – More Questions than Answers

RECI, 11 February 2009, No comments
Categories: News|Views

 

San Diego, Ca. – February 11, 2009 – Lenders met this week to discuss funding goals and objectives for 2009.   The conference mood was filled with caution and anxiety as the industry craves for market stability in the midst of declining property values.  

Key highlights of changing realty funding dynamics are as follows: 

 General Observations: 

Similar to a decade ago, life companies, pension funds and select banks dominate the permanent funding arena.  Agencies remain the lifeline of multifamily lending.  Banks are most actively funding short-term loans of five years or less.  Life companies control longer-term funds. 

On the other hand, securitization firms continue laying off staff, with the exception of critical support personnel.  Credit companies are also on the sidelines as redevelopment and new construction financing risks remain high based on depressed pricing of existing inventory.

The Real Estate Capital Scoreboard® – February 2009

realtycapital, 02 February 2009, No comments
Categories: Scoreboard

Chicago, Illinois, February 2, 2009 – The realty capital markets remain disruptive, raising stress levels for borrowers with pending maturities.  Meanwhile, sellers are unable to generate liquidity as pricing volatility prevails.  Smaller transactions are more fluid with recourse requirements much more common as borrowers weigh their options using shorter-term debt.  Industry leaders expect minimal positive changes in short-term market dynamics as the financial sector digests unsettling news.

Starting this year, evolving trends are as follows:

 

Jim Postweiler, advisory board member of the Real Estate Capital Institute, suggests, “Buyers and sellers are still reluctant to transact, mostly due to stingy debt markets.  However signs of improvement are emerging as buyers realize few opportunities for core properties are available.”

The Real Estate Capital Scoreboard® – January 2009

realtycapital, 02 January 2009, No comments
Categories: Scoreboard

Chicago, Illinois, January 2, 2009 – The last month of the year ended on a dramatic note as the Fed forced key short-term indices into record-low territory. Meanwhile, the ongoing shortage of real estate capital dampens any meaningful mortgage rate reductions.

Important market highlights and trends for 2009 are as follows:

* Funds Resurfacing:  Select life companies are cautiously returning — one of the bright spots in an otherwise bleak market. These institutions are primarily targeting highly conservative opportunities and lower-leverage acquisitions.

* Refinancing Reigns: Since the market remains illiquid with sellers and buyers quite far apart on bid-ask sale negotiations, refinancing is the only option for generating significant loan volume.  For example, borrowers with five and ten-year loans due this year should expect to see rates at about identical levels to the marketplace on ten-year maturities as compared to 1999.  Five-year maturities are about 150 basis points higher than in 2004.

* Absolute Rates:  Due to benchmark rate volatility, most lenders avoid pricing mortgage rates over spreads and instead offer absolute rates.

* Volatile Indices:  Overall mortgage rates drifted slightly upwards for shorter-term fixed-rate maturities (five years), as lenders demand a premium for locking into this highly desirable term.  In contrast, longer-term benchmark rates dropped by about 20 to 50 basis points, while lenders react cautiously to any corresponding mortgage-rate drops.

* Steep Yield Curve: The treasury curve remains steep with short-term yields approaching zero, indicating an extreme desire for safety void of any principal repayment risk. Shorter-term indices dramatically plunged by about 75 basis points or more, particularly LIBOR which dropped by nearly 150 basis points.

* Dominant Players:  The Agencies (FNMA and FreddieMac) overwhelmingly dominate the multifamily lending arena, which is the most active property-funding sector.  The Agencies offer below rates starting below 6% for shorter-term maturities and below 5% for floating-rate debt.  Life insurance companies and banks dominate all other income-property sectors with rates relatively unchanged from the previous month — hovering in the 6%-plus range for five-year term and 7% or more for longer-term loans.

According to Nat Zvislo, Research Director of the Real Estate Capital Institute, “2009 looks to be a year of refinancing and with limited acquisition activity.” Adding, “Distressed deals will be the norm for most new acquisitions and lenders will be overwhelmed with renegotiating overleveraged debt.”

How Long Will Mortgage Gridlock Paralyze Commercial Realty Markets?

realtycapital, 08 December 2008, No comments
Categories: News|Views

[SinglePic not found]Chicago, Illinois, December 9, 2008 –  As the year closes, the dramatic turn of recent events in the U.S. financial markets clearly redefines commercial mortgage metrics to conservative levels not seen in years.  Today, massive structural changes dictate mortgage underwriting based on highly conservative and transparent terms and conditions.  And in particular, with few exceptions lenders are unwilling to provide funds at acceptable leverage levels (e.g., 75%-80% loan-to-value) as compared to the any year within the past decade.   Under such circumstances very few loans are funded, resulting in mortgage market gridlock.

Investors are looking for clues as to how long the gridlock will last.   In other words, when will real estate capital markets return to a “normal” cycle?

According to discussions with advisory board members of the Real Estate Capital Institute, the general consensus regarding the overall direction of today’s realty capital cycle is outlined as follows:

 

Given this two-to-three-year outlook, the new real estate cycle slogan might sound like “Tow the line in 2009; If not then, try 2010.”  

Regardless of exactly how long the current malaise continues, everyone agrees the realty capital markets are in for a wild ride the next few years.

The Real Estate Capital Scoreboard® – December 2008

realtycapital, 01 December 2008, No comments
Categories: Scoreboard

 Chicago, Illinois, December 1, 2008 – The Fed’s aggressive action of pumping more liquidity into financial markets is starting to reinvigorate real estate lending.   Helped by TARP funds, select financial institutions are offering competitive short-term loans. Furthermore the Treasury yield curve moved downward by about a half percent during the past month, easing overall pricing.

Current income-property mortgage pricing and underwriting trends are outlined as follows:

 

The chart below summarizes overall debt rate ranges for various properties:

The Real Estate Capital Institute’s advisory board member, John Oharenko, comments “Pricing discussions are returning to absolute rates, rather than quoting spreads.”  He argues that the limited universe of active lenders fully dictate terms, including establishing minimum pricing thresholds which are not necessarily linked to specific indices such as Treasurys or LIBOR.  Oharenko adds, “Expect to see lower mortgage rates for 2009 as the Fed continues a monetary blitz of helping banks and other financial institutions return to the market to recreate more competition and liquidity.”

SPECIAL REPORT: MORTGAGE MARKETS IN TURMOIL

realtycapital, 21 November 2008, No comments
Categories: News|Views

001-0122193423-federal_reserve Chicago, Illinois, November 21, 2008 — The expanding financial crisis hitting global markets as a result of domestic housing continues to torpedo the income-property mortgage market.  Lenders and borrowers alike are frantically seeking answers to questions about where markets are heading including pricing, values and acceptable leverage levels.

People have more questions than answers including the following:

 

Regardless of these questions and many other concerns facing the industry, bricks-and-mortar are physically and economically here to stay. Food and shelter are basic necessities with the real estate industry providing shelter for businesses, manufacturing and housing for the general population. Fundamentally real estate is a sound investment and will rebound in tandem with many other sectors of the economy.

The cause for panic is not necessary as repricing to more historically “reasonable” levels sets the stage for tremendous investment opportunities for investors knowing how to use limited leverage and assuming acceptable risks with the following trends emerging relating to yields and pricing:

 

In conclusion, whether or not the markets have been re-priced to reflect current realities, opportunities should continue emerging as many investors look to liquefy their portfolios to maintain defensive ownership strategies in light of a cash-strapped economy.

Mining for Land Loans

RECI, 20 November 2008, No comments
Categories: Education, News|Views

 

Chicago, Illinois, November 20, 2008 – In today’s extremely difficult funding environment, financing even the most straightforward types of commercial real estate projects proves to be tricky.  In fact, commercial mortgage originations are nearly at a stand-still as lenders attempt to sort out financing dynamics in such an uncertain funding environment.

Of all realty asset classes seeking financing, land loans are the most difficult to entertain.  Any mention of land loans is the equivalent of discussing financial toxic waste.  The current lending and regulatory environment demands any real estate collateral by secured with proven cash flow and limited leverage – neither work well with land loans.  Under such conditions, land loans are limited to high-risk funding sources demanding extremely pricing premiums. 

The highest rewards (and risk) are available in the land acquisition and development arena.  For the most part, land is burdened with carry costs and seldom has any income.  Future use, including economic feasibility and zoning are yet to be identified.  Also, land is immediately impacted by economic cycles.

Land development and entitlement are exclusively focused on the preparation of site preparation for further development.  Locational, physical, legal, and financial elements are interwoven including typography, environmental standards, change of use (zoning) and community concerns.

Most successful land development models are based on “wholesale” land acquisitions (unentitled, raw land) and “retail” dispositions to users, developers and investors. 

Typical formula or land development is based on purchasing an option for the land, the most profitable method.  The option money is used to explore various zoning and physical issues with the site.  Should the process successful, the developer can then use the remaining part of the option to purchase the land.  Alternatively, if the option is not available because of the land value, a developer needs to prequalify much of the main risk issues including zoning, entitlement, demographic: analysis and physical features such as environmental issues.

Under all of these scenarios, local presence in the market is crucial for success.  Some land deals may take three to five years before any results are shown.  Hence, many national firms use local development expertise to assemble and entitlement.

 Unanticipated problems (e.g., extremely costly environmental cleanup), unrecoverable expenses, cost overruns, illiquidity, lost time,  and damaged relationships with governmental local authorities/community groups are among the numerous issues influencing development yield profiles.  As a result, land development ventures often require overall returns of 25% or more.  Even at such yields, changing market conditions such as the current credit crunch and supply-and-demand dynamics make for highly elusive profits.

 While land investing is extremely challenging, financing is still available even in today’s restrictive lending environment.  In order of importance, current funding parameters are as follows: 

  1. Prime sponsorship required with proven track record strong financial statement well in substantially in excess of land value.
  2. Full Recourse required and additional collateral often necessary, including projects with current cash flow stream.
  3. Well below fifty percent or less of value based on recent valuations adjusted for currently depressed market conditions [e.g., 50% to 80% discount typical based on values of peak market cycle 2005-2007].  Lend in infill locations strongly preferred.
  4. Pricing reflects significant premiums as compared to any other real estate asset class.  Terms are similar to other business-lending parameters such as line-of-credit fundings.

  

According to the Real Estate Capital Institute’s Research Director, Nat Zvislo, “Land and development loans present the most challenging fundings.  However if conservatively underwritten, lenders see such loans as excellent opportunities for maintaining and building new client relationships during such difficult times.”

ABOUT US:

The Real Estate Capital Institute is a research organization staffed by industry volunteers who collect and track debt/equity rate data.  The Institute’s website provides daily and historical rates including treasuries and short-term rates.  The Real Estate Capital RateLine (773-227-4825) announces hourly rate updates throughout each business day.

Cash is King in the Real Estate Capital Kingdom

realtycapital, 12 November 2008, No comments
Categories: Education, News|Views

Chicago, Illinois, November 12, 2008 – The old cliché – “Cash Is King” is as true now as ever given the sparse availability of leverage.  Nearly all real estate financings, both acquisition and refinancing, are restricted to funding projects with existing, in-place cash flow.  Cash-flow projections, projects with value calculations based on appreciation (e.g., land) and other ventures lacking sufficient current income ventures are shunned.  Lending is severely restricted as the Real Estate Capital Institute® estimates over 80% of conventional funding sources are temporarily out of the market.

What should be expected when seeking financing today in such a constricted lending atmosphere?

 

 

 

The bottom line?

As the markets remain constrained in the foreseeable future, lenders active in the market are extremely selective.  Borrowers must prove themselves creditworthy, both at the project and sponsorship levels.  As such, loan deliverability is the most important variable in today’s real estate capital environment.

The Real Estate Capital Scoreboard® – November 2008

realtycapital, 01 November 2008, No comments
Categories: Scoreboard
Chicago, Illinois, November 1, 2008 — The commercial real estate capital markets are tightly strapped into the Wall Street roller coaster with rates jumping up and available funds tumbling down. During the past week mortgage pricing has been rapidly climbing based on spreads over comparable-term treasuries.  Key market highlights are as follows:

 

As a comparison, today’s commercial mortgage terms and conditions reflect pricing not seen since the beginning of the decade (See Historical Mortgage Rates posted since 1983: http://www.ratesdata.com).  However, leverage levels and funding availability are substantially less favorable than that time as owners must post at least 10 to 15% more equity.  

Is There Any Correlation between Capitalization Rates and Years?

realtycapital, 22 October 2008, No comments
Categories: Education, News|Views

Chicago, Illinois, October 22, 2008 — The start of the mortgage meltdown over a year ago continues wrecking havoc on the real estate capital markets.  In particular, accurate property valuation is nearly impossible as buyers and sellers are sidelined due to limited debt availability. 

Few properties are trading hands.  Most investors believe values are trending downward in response to economic malaise, oversupply and lack of affordable debt.  As such, experts are using higher cap rates for valuating assets for most types of commercial and income properties.  Lenders, in particular, are “creating” values by underwriting capitalization rates which may, or may not, reflect current market prices.  These cap rates are typically higher than many sellers are buyers expect, resulting in lower loan proceeds based on loan-to-value restrictions.  Yet, owners often refuse to sell or acknowledge asset values based on lenders’ higher cap rates, choosing to do nothing, instead.

In this stalemate, who’s right and where are cap rates heading? 

An amusing theory discussed by some experts as a humorous factoid suggests that current capitalization rates are directly correlated to the recent year numerical identity as indexed to the current real estate capital boom/bust cycle. Today’s market cycle peaked in 2007, with 2005 and 2006 ranking as the best years for very attractive valuations; in other words, low capitalization rates.

As for 2008, an 8% capitalization rate is the “strike price” for sellers motivated to liquidate properties.  While the markets are illiquid and few transactions leave any proof of value, an 8% capitalization rate reflects a weighted-average premium tied to the cost of capital for most types of income properties.  Applying the same logic in a downward market, 2009 should yield a 9% rate and a 10% cap rate would prevail in 2010.

Linking cap rates to year numerology is certainly an unrealistic discussion for measuring values in the currently volatile market.  Yet as investors search for answers in such uncertain times, numerology adds more theories to an already confusing time.

"Mission Money" Keeps Commercial Realty Markets Afloat

realtycapital, 08 October 2008, No comments
Categories: News|Views

Chicago, Illinois, October 8, 2008 – Swooning financial markets continue dislodging all sectors of real estate capital with a vengeance.  Funding sources retreat from income-property lending on a daily basis because of liquidity concerns, profitability, overexposure and a host of other factors plaguing this sector.  No conventional lenders are immune including banks, life insurance companies, savings institutions and private funding sources.

Yet a few bright stars shine in the otherwise pitch-dark capital markets.  These stars are lenders with funding goals and objectives that are not exclusively driven by profits.  The Real Estate Capital Institute identifies this group of funding sources as “Mission Money” who provide “Policy Proceeds.”  The four highlights of Mission Money are as follows:

1.    Purpose:  Mission fund objectives vary focusing on public policy (e.g., affordable housing, urban renewal), labor creation, specific geographic investing and property types to name a few.  Typical examples include generating jobs through union labor funds, constructing affordable apartments and reinvigorating economically deprived commercial areas.  Often times, many of these objectives are bundled – e.g., affordable housing with union labor in redeveloping urban “infill” areas endowed with heavy tax incentives.

2.    Property Types: Unlike pure non-profit funding sources, Mission Money exclusively targets income properties, namely commercial and multifamily properties. 

3.    Policy Proceeds:  Direct funding structures include construction, interim and permanent loans as well as equity contributions.  Popular indirect fundings include tax credits, tax breaks and rebates.

4.    Sources:  The lending arena includes federal governmental agencies (e.g. Freddie Mac, Fannie Mae, FHA and the Treasury) and local municipalities (tax increment districts), endowments, pension funds, life companies and private capital providing funds directly (construction and permanent funds) and indirectly (tax credits). 

According to John Oharenko, an industry veteran who serves on the advisory board of The Real Estate Capital Institute®, “In 2009 and 2010, Mission Funds will play an even more important role in supporting real estate capital markets as many conventional funds stay sidelined.”  He adds, ” Even as conventional markets recover, Mission Money will remain a reliable source of funds for developers, investors and others willing to learn about and implement these targeted programs.”

Seven Percent – The New Mortgage Rate Benchmark for Income Properties

realtycapital, 06 October 2008, No comments
Categories: News|Views

Chicago, Illinois, October 6, 2008 — The commercial real estate capital markets are tightly strapped into the Wall Street roller coaster with rates jumping up and available funds tumbling down. During the past week mortgage pricing has been rapidly climbing based on spreads over comparable-term treasuries.  Key market highlights are as follows:

 

As a comparison, today’s commercial mortgage terms and conditions reflect pricing not seen since the beginning of the decade (See Historical Mortgage Rates posted since 1983: http://www.ratesdata.com).  However, leverage levels and funding availability are substantially less favorable than that time as owners must post at least 10 to 15% more equity.

The Real Estate Capital Scoreboard® – October 2008

realtycapital, 01 October 2008, No comments
Categories: Scoreboard

Chicago, Illinois, October 1, 2008 – It’s a good news/bad news real estate capital marketplace.  Mortgage markets are plagued by Wall Street market malaise and swooning prices, yet as far as commercial real estate debt is concerned, overall default rates and profit performance remain at historically favorable levels   Funding sources and borrowers alike are very selectively funding and acquiring projects as re-pricing opportunities emerge in the wake of one of the nation’s worst financial crisis.

Dramatic market volatility created by major financial institutions failing along with selective governmental bailouts, wrecks havoc with real estate capital markets with some key trends developing, including:

 

According to Jeff Davis, advisory board member of the Real Estate Capital Institute, “Except for select Agency programs such as FHA/HUD, most funding sources are waiting for more clear market signals for the remainder of the year.”  He adds, “Active lenders seem to have met their allocation goals as funds continue drying up within the securitized lending sector.”

The Real Estate Capital Scoreboard® – September 2008

realtycapital, 01 September 2008, No comments
Categories: Scoreboard

 Chicago, Illinois, September 1, 2008 – Throughout August financial markets digested news about problems in the financial services sector.  Real estate was no exception with Government Sponsored Agency woes capturing daily headlines.  And while unfavorable news dominates, capital continues flowing, although certainly with more caution.

Major realty finance market highlights today are as follows:

Advisory board member of the Real Estate Capital Institute, Skip Perry, notes “Low leverage begets low volume.”  Adding, “Until funding sources are more comfortable with financial market stability, debt and equity players will stay close to the sidelines.”

The Real Estate Capital Scoreboard® – August 2008

realtycapital, 01 August 2008, No comments
Categories: Scoreboard

 Chicago, Illinois, August 1, 2008 – The realty capital markets remain surprisingly steady despite volleys of negative news about financial institutions and government-sponsored enterprises. Mortgage spreads are higher, but stable, with funds available for quality loans.  Life companies and other balance-sheet lenders continue funding deals based on similar underwriting as seen most of the year. 

Mortgage benchmark indices are stable as well.  Treasuries are at nearly identical levels from a month ago, although notes and bonds bounced higher by about 30 to 40 basis points.  In other words, no major changes in the capital marketplace in either mortgage spreads or corresponding benchmark yields. 

Hopefully, the rate stability will set the stage for return of the CMBS lenders in a meaningful way.  Select Wall Street firms announced reentering the marketplace by targeting overlooked markets based on funding mortgages in secondary markets, as well as funding more entrepreneurial properties.

 

Overall rates remain similar to a year ago — albeit at substantially lower leverage levels.  However, more subtle overall trends are evident including the following:

 Jim Postweiler, advisory board member of the Real Estate Capital Institute, suggests “Buyers and sellers are still reluctant to transact, mostly due to stingy debt markets.  However signs of improvement are emerging as buyers realize few opportunities for core properties are available.”

Mortgage Lending Reaches Extremes

realtycapital, 15 July 2008, No comments
Categories: News|Views

Chicago, Illinois, July 15, 2008 — Commercial mortgage lenders are becoming more scarce as the second half of the year approaches. Lenders are reluctant to fund projects based on any “conventional” norms. Instead, funding sources reach for two different, and extreme, lending profiles: (1) Low-Leverage and (2) Opportunity financing. Each of these profiles are discussed as follows:

Lower-Leverage:

Even in today’s market, competitive mortgage pricing is selectively available to commercial property and multifamily property owners requiring lower leverage based on:

 

Opportunity Financing: 

Opportunity financing represents substantial yield premiums for projects that don’t fit into the “Lower-Leverage” category discussed above. For the most part, this financing format covers second-tier locations, leverage above 65%, older conventional properties and newer, non-conventional properties (e.g., special-purpose and lodging properties).  Pricing starts in the mid-teen-percent range.

The Real Estate Capital Scoreboard® – July 2008

realtycapital, 02 July 2008, No comments
Categories: Scoreboard

Chicago, Illinois, July 2, 2008 – Nearly a year ago, the capital markets imploded as Wall Street retreated on a massive scale from securitized debt investments.   By this time, most lenders were very closely pricing most types of income-property deal as banks, life companies and CMBS sources crowded the markets with surplus cash.  For a while mortgage spreads below 100 basis points over comparable-term treasuries were common, even for full-leverage loans.

For example in June, 2007, the rate range was extremely tight for most conventional property types.  Minor pricing differentiation existed among apartments, hospitality and commercial properties, even after factoring into account primary and secondary locations.  All in all, properties were financed in the 6%+ range and slightly lower for premium quality properties with conservative leverage — in the 5.8% range. 

While mortgage spreads doubled during the past year, overall “coupon” interest rates on five and ten-year maturities are relatively similar. Today, even after accounting for higher spreads of 200 basis points or more over comparable-term treasuries for permanent fixed-rate mortgages, rates start at about 6% and also may dip below this threshold level for extremely low-leverage funding situations. 

The following table illustrates today’s key market indices and overall rate ranges for income properties based on conventional leverage 75% or less:

Once again, the above fixed-rate mortgage spreads can be reduced by about 20 to 30 basis points for low leverage multifamily deals, particularly via the agencies.  And while the rate range is extremely wide, lenders will distinguish and competitively price “Core” funding opportunities in major markets much more so than a year ago.   Higher-leverage, secondary market properties are priced at the high-end of the rate curve, in line with “typical” market conditions reflecting risk/reward premiums.

Permanent loan term makes a difference, depending upon the lender.  Some lenders differentiate mortgage spreads between five and ten-year pricing, while others set base “floor” limits.  Five year allocations are rapidly depleting as this term is popular with borrowers seeking more flexibility in anticipation of improving capital market conditions in the near term future.

As for floating rate loans, banks continue quoting over Libor and swapping-out the loans for borrower preferring fixed-rate debt.  The best spreads using Libor start at about 180 bps.  In a nutshell, banks are often about 25 basis points inside other funding sources for short-term funds of five years or less.   For the most part, banks seldom offer 10-year fixed-rate loans.

Enclosed is the June 2007 Real Estate Capital Scoreboard which outlines rates from a year ago.  Probably the most significant change in the marketplace relates to leverage, not rates.  Today’s “full leverage” deal represents 65%, where as a year ago 75% to 80% was quite common.

According to Gary Duff, advisory board member of the Real Estate Capital Institute, “All in all, rates are still very attractive by historical standards; however, more equity is required to capture financing.”

The Real Estate Capital Scoreboard® – June 2008

realtycapital, 02 June 2008, No comments
Categories: Scoreboard

Chicago, Illinois, June 2, 2008 – Despite unprecedented measures by The Federal Reserve, the credit crunch continues to spread from the housing sector to the commercial real estate sector.  The volume of real estate transactions remains light and credit spreads have recently started to tighten while overall rates are rising — with a net effect of mortgage rates climbing about a quarter point.   Return requirements continue rising as do construction costs, greatly limiting new construction projects.�
As far as key developments during the month, the following are noteworthy:

Private Equity – Raising private equity in light of lower conventional leverage is a top priority among developers.  Most funds require at least 15% or more for value-add properties.

Deep discounts – Most sectors within the conventional income-property arena are fairing reasonably well in maintaining pricing with pricing off as much as 20% in some sectors.  However, vacant land values have plummeted as new-construction projects are nearly at a standstill.  Discounts of 50%+ are not uncommon for motivated sellers.

Fund Supply – Given the vacuum left by CMBS lenders retreating from the capital markets, many life companies and banks expect limited fund allocations for the remainder of the year. 

Mortgage Rates – While mortgage spreads over treasuries decreased by about 10 basis points or more, higher benchmark treasuries absorbed any gains as rates remain relatively similar – starting at 5.75% for terms of 5 years and longer.  Libor-based funding is still available at lower levels, but reduced leverage and recourse tip the pricing scale.

The Real Estate Capital Institute’s Editorial Advisory Group’s member, Aaron Gruen, suggests, “The resulting reduction in new supply, continued export growth, and the Fed’s highly aggressive monetary policy/fiscal stimulus, should limit the scope and length of the effects of a [real estate] recession in many parts of the United States.”

New Daily Newscast Updated for Income-Property Capital Yields

RECI, 03 May 2008, No comments
Categories: News|Views, The Institute

 

Mobile realty professionals now are a phone call away from daily updates on mortgage and capitalization rates during after hours.  The Real Estate Capital Institute announces Real Estate Capital Market Day (“RECMD”) covering the day’s trading interest rates including final five, ten-year treasuries, 30-day LIBOR and Bank Prime.  Capitalization rates cover apartment, office, retail, industrial and lodging properties.

As well as broadcasting rates, movements are tracked for various indices based on different intervals.  Daily changes are posted for treasuries and LIBOR.  Bank Prime changes coincide with Fed announcements.  Capitalization rate changes move with overall market dynamics – generally on a quarterly basis, or sometimes less often. 

 The entire RECMD broadcast spans about three minutes, enough time to review overall rate statistics at the end of each day.  In comparison, the Institute’s regular hourly service — The Real Estate Capital Rateline — simply reviews key rates hourly, needing less than a minute.   Both broadcasts are aired using the same phone number of 7RE-CAPITAL (773-227-4825).

The Real Estate Capital Scoreboard® – May 2008

realtycapital, 01 May 2008, No comments
Categories: Scoreboard

Chicago, Illinois, May 1, 2008 – The realty capital markets still are dislocated as investors try guessing the direction of interest rates and namely, mortgage spreads.  While negative news abounds, the markets are actually showing signs of calmness as CMBS AAA securities and overall mortgage spreads continue narrowing.

Key market highlights include:

Rate Movements – During April any savings in mortgage spreads were absorbed by overall benchmark rate increases.  Bottom line?  Mortgage rates are about 25 basis points higher across the board.

Mortgage Spreads – As previously mentioned, spreads tightened permanent loans, resulting in 10-year mortgage pricing at nearly identical levels versus March.  However, many lenders retreated from providing competitive five-year loans by widening spreads as much as 50 basis points, resulting in minimal price savings between these two maturities.

The “E” Word – Lenders demand “equity” in nearly every income-producing funding opportunity.  Borrowers seeking maximum leverage are plagued with 65% loan-to-value restrictions and stringent debt service coverage minimums.  Alternatively, loan-to-cost and refinancing-of-existing-debt tests are added as extra performance thresholds.  In other words, equity requirements override pricing considerations and other underwriting terms.

Actual Cash Flow – Proforma income projections and other future-value economics are dramatically discounted as funding sources need to see actual cash flow.  As such, new construction projects require substantial preleasing (e.g. 60%+) and substantial equity, typically 30% on cost.  Lenders are seeking “flight to quality” transactions with established borrowers willing to provide necessary recourse and guarantees. 

Yields -  Now more than ever, investors expect to be paid for risk.  Although exceptions apply, overall capitalization rates and return-on-cost yields have widened by at least 50 basis points or more.  As for mezzanine and other higher-risk funding vehicles, double-digit yields are the norm.

John Oharenko, a member of the Real Estate Capital Institute’s Editorial Advisory Group, 

remarks, “Without question, the most profitable and illiquid component of the real estate capital stack is mezzanine debt.  In many cases, developers and property owners find it more attractive to lend mezzanine funds as opposed to directly purchasing properties.”  He adds, “This phenomenon is short-term as more liquidity will return to the marketplace in the near future.”

The Real Estate Capital Scoreboard® – April 2008

realtycapital, 01 April 2008, No comments
Categories: Scoreboard

Chicago, Illinois, April 1, 2008 – “March Madness” defines current realty capital markets.  While treasury rates barely changed (about 10 basis points), lenders exercise extreme caution in a fog of doubt. 

Even as rates remain near historical lows, borrowers are baffled by substantially less favorable lending programs including wider spreads, rate floors and overall lower leverage.  In particular, mortgage pricing is one of the key misunderstood variables for sizing loans today.  A brief review and update on mortgage pricing are as follows:

 

 

 

Several changes are on the horizon with respect to various pricing formats including:

 

More discipline will continue to drive debt pricing and capital market recovery.  Dr. Timothy Riddiough, an Editorial Advisory Group member of the Real Estate Capital Institute, suggests the long-term solution for improving capital market malise is “to educate and protect the demand side by encouraging moderation and safer practices.”

The Real Estate Capital Scoreboard® – March 2008

realtycapital, 03 March 2008, No comments
Categories: Scoreboard

Chicago, Illinois, March 3, 2008 – Availability of funds and correspondingly widening mortgage pricing dominate the real estate finance front.  While mortgage funds are available, many lenders retreat from direct originations, instead preferring to purchase attractively-priced, CMBS securities.  As such, mortgage pricing highlights are outlined as follows:

 

The Real Estate Capital Institute’s advisory board member, Barry Moss, notes “In many instances, current CMBS pricing reflects a discount for any security that is in a ‘structure’ and is not reflective of the underlying real estate.”  He adds, “The key is to do due diligence and understand the collateral, since depending on the quality of the underwriting and the specific vintage there can be issues.”

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Las Vegas, NV - February 6, 2010 - According to industry leaders gathering in Las Vegas this week, debt capital is readily available for 2010.  Optimism is in the air and the mortgage lenders are starting to offer more generous terms and conditions.  In summary, timing is excellent for select borrowers in securing debt based on the following conditions:  (1) Recovering economy, (2) Ample supply of capital and (3) Limited supply of financeable real estate assets.  The following highlights summarize the 2010 state of the realty capital markets including an overall outlook and overall funding program offerings:  Back to Basics:  As lenders workout of their legacy problems, new funding goals surface which are clearly more ambitious than 2009. Still underwriting of actual numbers w/o projections, yet inflation fears exist. Most lenders are Indifferent to spreads, but not competition. Valuing real estate properties in a declining market still a challenge. More allocation of funds available above target amounts if deal flow is of sufficient quality Underwriting Dynamics:  As has been the case last year, high-quality projects in major markets backed by excellent sponsorship and cash flow characteristics are most desired—especially based on low leverage of 65% of value.  Location/Property Types: Major MSAs strongly preferred for optional pricing and leverage.  Otherwise a substantially most costly financing with lower leverage. Preferred property types ranked in order:  (1) Multifamily, (2) Credit-Tenant lease of all property types, (3) Industrial, (4) Retail, (5) Office - however medical office ranks equal to Industrial and (5) Lodging. Pricing (Permanent Fixed-Rate Loan): Agency pricing for apartments starts in the low to mid-5% range for 5 year or greater term. Life company pricing starts mid-5% to 6% for 5 years or more term mostly targeted for commercial property pricing (agencies are more competitively priced) More entrepreneurial funds start at 7% or more targeting secondary markets, smaller fundings, older properties and lodging assets. Add a pricing premium of 25 to 50 basis points for loans below $5 million. Yield differential disappearing - typical ($5 to $50 million) vs. larger loans. Forward funds available up to a year based on 6 o 8 basis points premium per month.  Leverage: Above 65% LTV on a select basis combined with lower spreads. Values based on the lower of: (a) purchase price, (b) appraised value or (c) lender imposed capitalization rate.