The Real Estate Capital Scoreboard® – September 2009
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:
- Other than senior housing in select markets, few properties see any rental growth; protecting existing cash flow remains a top priority in contrast to any increases.
- Pro forma projections are reviewed downward, as owners expect stable or declining rents/occupancies. For instance, multifamily properties with rental decreases of 3% or more are underwritten and trended downward vs. trailing operating history figures.
- Markets are strained with a special emphasis providing some form of debt relief in key markets (e.g., Florida, the Inland Empire, Phoenix, Austin, Las Vegas, Atlanta, the Upper Midwest).
- Voluntary conversion of debt to partial equity is offered as an additional solution to eroding debt balances, increasing 2% or more on vacancy rates for apartments.
- Roll-in of the prepayment penalty deemed to be a cash-out – defined as an optional cost to “better” their financing – hard line by FNMA – small penalty (e.g., 2%) not a big issue if a couple of 2% on LTV but NOT 75% to 80% jump, for instance.
- Standard provisions include lengthening amortization schedules and loan term, offering interest-only payments, reducing (or removing) non-monetary default provisions such as debt service coverage and loan-to-value covenants and partial forgiveness of debt.
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.”