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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.

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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.