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LIBOR-Priced Mortgages – Time for a Checkup

realtycapital, 15 September 2007, No comments
Categories: Education, News|Views

Chicago, Illinois, September 15, 2007 — During the “credit crunch” of the past two months, most of the focus remains on loan performance and treasury rates.  While these indices are accurate gauges of market conditions, a long-ignored index resurfaced on the watchlist — LIBOR ( London interbank offering rate).

While treasuries and other domestic rates continued declining, LIBOR climbed more than 50 basis points during this time.   Caught off-guard, realty borrowers quickly discovered this index moved in the opposite direction of Treasuries.  LIBOR increased based on a variety of factors, including:

 

LIBOR’s re-pricing forces borrowers to move from the floating-rate sidelines and reevaluate their capital needs/pricing using the following four guidelines:

  1. Optimum Index: If floating rate debt is needed regardless, immediately review other indices including Prime and other government/bank indices.  Should request the option to change indices during loan term. 
  2. Longer-Term Hold: A holding strategy will be more permanent (e.g. five years or more), redirecting financing towards fixed rate pricing.  Fixed-rate pricing is over 25 basis points  more price competitive than floating-rate debt given market conditions of mid-September.
  3. Debt Value Enhancement: Belief in rising rates prompts the decision to capture permanent debt as such funding would likely enhance property values with “below-market” debt at a future date.
  4. Project Dynamics: Floating-rate debt is required for repositioning selling assets.  If the timeframe is relatively short, borrower should look into purchasing interest rate hedges.   

 

According to John Oharenko, advisory board member of the Real Estate Capital Institute®, “Floating-rate debt based on LIBOR should be re-examined as a pricing index.”  He adds, “However, a financing decision should not solely drive property holding strategies, especially if sale or redevelopment is looming.”

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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.