Cash is King in the Real Estate Capital Kingdom
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?
- Cash Flow: All in all, expect more conservative underwriting across the board when reviewing revenue streams. In addition to underwriting actual cash flow, lenders are providing further safety nets by including conservative occupancy calculations (using the lower of actual or market vacancy), higher management fees to reflect more hands-on operations, larger operating reserves and richer expenses including escalating property taxes and utilities costs.
- Sponsorship: More important then in any recent years, sponsorship financial net worth, experience and liquidity are tantamount. Even with nonrecourse loans, lenders need to be assured that borrowers have the ability to maintain projects running into operational difficulties. Borrower net worth should approximate loan amount and liquidity levels of about 25% are typical.
- Loan Terms: Lenders are competitive on rate, rather than leverage or other underwriting variables such as interest-only payments, property types or Earnout formulas. Only standard, income-producing properties such as apartments, shopping centers, office buildings and industrial properties are desirable as lenders have limited appetite for real estate debt in general. Expect 65% loan-to-value for all properties except apartments, which can reach closer to 75%. Overall rates are hovering in the 6% to 7.5%, including fixed and floating.
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.