Category Archives: Commercial Real Estate Finance

Small Biz Jobs Bill Approved! Will it help?

Finally, after months of discussion and debate, a new small business initiative was launched yesterday, as President Obama signed the Small Business Jobs Act of 2010 into law!    The bill has several major components, including the creation of a “small business lending fund”, SBA loan program changes to both the 7(a) and 504 loan programs, temporary tax breaks for small business investments and more favorable tax treatment of certain business expenses.    But what will the net effect be to small businesses that need money, especially those that own or want to own commercial real estate?

Small Business Lending Fund – First, let’s address this new pot of money available to small banks.  Under this program, banks with assets under $10 billion will be able to obtain very attractive additional funds from the U.S. Treasury.     To qualify, banks will have to submit a ‘small business lending plan’ to Treasury.   This truly should stimulate some additional small business lending by smaller, capital-constrained banks.    Unfortunately, it does not appear the Treasury will be able to require that certain lending targets be met by banks, so there is a risk that the capital will be borrowed by banks but (much like with some TARP funds) not re-deployed to borrowers/businesses.   However, from initial feedback in the marketplace, some banks are in fact putting plans together to immediately ramp up lending once they receive these new Treasury funds.    Will they be a little less conservative in their underwriting, though?    Will more businesses qualify for financing?    Unfortunately, this is not at all certain.     

Increased Loan Guaranties – Also impacting the banks and potentially their willingness to lend is the increase in the percentage of the government’s guarantee on SBA loans, from 75% to 90%.    This is meaningful to banks but is only being offered per the bill until the end of 2010.     So, while it could help push banks to be a tad more aggressive in their lending standards, in reality there is no time for it to have any real effect.  

SBA Loan Limit Increases – The bill makes some temporary and some permanent changes to the most popular SBA loan programs – the 7(a) and 504 programs.    The biggest news is the permanent change to the maximum loan sizes allowed under each program.  The 7(a) program will now allow loans up to $5 million, and the 504 program will now also allow loans to $5 million (but given the structure of 504 loans, that translates into development projects or purchases of $12.5 million potentially now qualifying.)    These loan limit increases will definitely benefit small businesses refinancing or acquiring commercial real estate, some of whom had needs for higher dollar amount that the SBA programs could historically accommodate.    

SBA 504 Loans for Refinances – Also benefitting businesses owners that own their real estate, the 504 program will for two years be available for use in refinancing commercial mortgages that meet certain somewhat strict criteria.   Though only a small % of businesses will be eligible, the main benefit of using the 504 program for refinances is in providing small businesses with fixed-rate loans at record low interest rates (recently under 5% fixed for 20 years.)     Although temporary and narrow in eligibility, count this as a small win for small businesses with commercial real estate.

Elimination of SBA Loan Fees – Another notable element of the bill is the temporary elimination, yet again, of the loan fees associated with SBA loans.     These fees, up to 3% of the total financing, will be waived but only through the end of 2010.      This means that applicants only have a couple of months to start the loan application process if they want to benefit from these reduced fees.     This is a great benefit for businesses, especially those borrowing larger amounts (loan fees on a $2 million loan would otherwise be over $50,000), but the short-lived nature of the provision is a frustrating déjà vu from earlier bills waiving these fees only for short periods.

Bottom line?   The bill should provide some stimulus to small business lending, with some banks putting their toe back in the lending water, more businesses becoming eligible for financing, and more financing requests becoming eligible for approval.   However, in counterbalance, some very helpful features will be short-lived, and there is not significant emphasis placed on incenting banks to expand qualification criteria for businesses or find opportunities to qualify more borrowers than they do today.


Fear Gives Way to Greed

By Joe Caton

Scarce capital no longer to blame for investors’ indecision

Not only have signs of life returned to commercial real estate finance, but there are also signs that the capital markets are on the mend. As 2010 began, analysts called for about $20 billion in new issuance of commercial mortgage-backed securities (CMBS). But by the beginning of the second quarter, those estimates rose to $25 billion, and may rise even further.

CMBS issuance is a major barometer of real estate finance because it is one of the most orderly and low-cost funding sources available. With the winding down of the Term Asset-Backed Loan Facility over the next two months, investors are looking to CMBS for stable government-free opportunities.

[BLOGGER COMMENT: As liquidity and leverage return to commercial real estate – now the question will be: “Who will blink first… Sellers? or the Opportunity Fund buyers that have raised trillions and deployed a small fraction of their allotted capital?]


Concern Aired Over Banks’ Real Estate Loans

A New York Times article from Feb 11th has an interesting title and the typical mainstream media focus on the glass being half full… buried in the story is the ray of light investors have been looking for:

Mr. Fine said he thought that more than 90 percent of an estimated 8,000 community banks “are strong, stable and growing.”

This means the media’s focus on the negative ignores the fact that the great majority of our lenders are not in trouble. While many high profile loans are underwater the vast majority of commercial real estate loans were prudently underwritten and still provide substantial debt coverage.

New lenders are entering the market every day. Current underwriting standards change on a daily basis, but it is safe to say that strong Sponsors with A properties in A locations that do not require massive leverage will be pleased by the rates and terms available in the market.

Houston Distressed Sale a Pre-Cursor to 2010 Deal Pick-Up?

In December, a group of investors purchased the West Oaks Mall, a 40% vacant shopping mall in Houston, for $15 million – a long way from the $102 million paid for it in 2005.   The recent article Distress Watch: Real Estate Sell-Off Starts Small highlights the sale and suggests that while this does not likely portend a flood of distressed asset sales, hopefully it signals a “tide” of trading in these properties.   

It is always hard to call a trend from a single transaction, and especially one with the added dimension of the original owner/buyer being sentenced to 100 years in prison for defrauding clients of his 1031 advisory firm (he is appealing the sentence).   However, given the continued unwinding of the RE transactions from the heady days of 2004-2007, it seems inevitable that more notable distressed sales will follow throughout the year.

CMBS: Back in Business?

Investors Showing an Appetite for Bonds Backed Even by the Weakest Real Estate Sector and No Government Support

By Mark Heschmeyer in CoStar

The commercial mortgage bond securitization window that has been closed for nearly two years during this recession has reopened for business in the last few weeks and investors have lined up encouragingly to take advantage of a new round of CMBS offerings.

Several investment banks have announced that they are firing up their conduit lending programs and will begin to originate and warehouse loans for multi-borrower securitizations, said Chris Moyer, an associate with Cushman & Wakefield Sonnenblick-Goldman in New York.

At least three have publicly announced, or are actively discussing, such programs, while others, have brought on senior managers who have experience building conduit-lending platforms. The active banks are Goldman Sachs, Bank of America and JPMorgan. Word on the street is that RBS and Deutsche Bank are also ramping up securitization activity.

BLOGGER COMMENT: Be prepared for much more prudent underwriting with DCRs starting at 1.3x on the highest quality properties. Leverage will not come close to the 80-85-90% leverage of the glory days, but 60-75% leverage sounds pretty good compared to 0% leverage as we have seen for the past 2 years as CMBS securitizations plummeted by 99.99%.

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Where will cap rates be in 2010?

PricewaterhouseCoopers and the Urban Land Institute released their Emerging Trends in Real Estate 2010 this week. Here are the predicted cap rates for 2010…

Predicted cap rates for 2010

Predicted cap rates for 2010

Hotel term defaults push US CMBS delinquencies higher

NEW YORK (12 October 2009)–The reprieve is over for U.S. CMBS as delinquencies resumed their upward trajectory to end the month at 3.58 percent, according to the latest Loan Delinquency Index results from Fitch Ratings. The hotel sector now leads as the property type with the largest proportion of delinquencies at 5.83 percent.

“The recent surge in hotel defaults is consistent with Fitch’s view that hotel property values will decline by as much as 50 percent from peak levels,” said Managing Director and U.S. CMBS group head Susan Merrick. “While budget hotels have fared best during the downturn, continued pressure on the luxury, resort, and gaming sub-sectors will likely push lodging delinquencies to approximately double that of the other property types.”

BLOGGER COMMENT: The biggest problem facing commercial real estate is the capital markets’ lack of liquidity. CMBS issuance went from $230 billion in 2007 to $12 billion in 2008 to less than a billion dollars YTD in 2009.  Higher vacancies, higher operating costs and higher reserves can be built into financial models to determine an underwritten cash flow (UCF). We can apply a stressed interest rate and a higher than normal debt coverage ratio to the UCF to determine very conservative maximum loan proceeds. As delightful a geeky math exercise that might be… when there is no functioning capital market to provide liquidity, there are no transactions in some market segments especially hotels!

In the glory days construction loans on hotels were sized for a relatively easy takeout from a CMBS lender. What used to get easily financed by the voracious CMBS machine at 75-80% LTV/LTC now will only justify 40-65% LTC/LTV (lesser of) financing from long term investors such as insurance companies and pension funds based on the new ultra conservative underwriting standards. This makes commercial real estate a “rich man’s game” once again and will knock all the amateurs out of the business. For those with massive amounts of cash and a long time horizon this is the greatest opportunity to acquire multi-generational assets at a fraction of replacement cost. A stunning amount of assets will be lost by developers / investors that do not have the staying power to sustain losses (or have non-recourse debt and can painlessly give ’em back the keys).

View original article in Hotel News Now