Tag Archives: CRE

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.

Year of Reckoning for Commercial-Property Lenders?

Today the Wall Street Journal has an article that is a must read for anyone in the commercial real estate industry.

The gist of the article is that this may be the year that banks, “begin biting the bullet and accepting losses to get distressed commercial real-estate assets off their books.” Past blogs have discussed the trillions of dollars raised by Opportunistic investors that are sitting on the sidelines. This may be the year that they get to deploy their capital. In the last month I’ve met with private equity investors that have $350million, $400million and $500million war chest brimming with cash. These three investors have a combined $1.25billion to invest. In 2009 they invested less than $100million. This may be the year they get to acquire real estate and loans for a fraction of what they feel is the true intrinsic value. I’m looking to be part of it.

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Congress is voting on a bill to destroy the investment real estate industry

BLOGGER COMMENT: Immediate action is required. This Bill has already been passed by the House. Our only chance to stop it is in the Senate.

This week Congress will be considering legislation that will impose the most sweeping and potentially most disruptive new tax on real estate since the Tax Reform Act of 1986, which contributed unmistakably to the recession of the late 1980s and early 1990s. The current tough economic environment is already stalling new real estate projects, but this increase, if enacted, will significantly dampen future investment.

The proposal being considered this week will increase the taxation of carried interest (also known as “the promote” or “the sponsor’s share”) from the current and more favorable capital gain rate of 15% to the higher ordinary income tax rate of 35%. This increase will dramatically change the way real estate partnerships have operated for more than 50 years, as most real estate ventures are organized as limited partnerships or LLCs. While the original stated intent of this proposal is to address the perceived tax rate inequity applied to private equity and hedge fund managers, it will disproportionately impact the real estate industry.

Unlike private equity firms, the carried interest for the general partner in a real estate partnership is not compensation for services rendered and it is not guaranteed income. Most real estate partnerships must exceed numerous hurdles, which result in the limited partner realizing a return on investment before the general partner sees the first dollar of gain. Moreover, the general partner often experiences a significant “hold” time before seeing that gain.

By treating the general partner’s interest in a partnership as compensation for services, the risk that the general partner undertakes on behalf of the partnership is not recognized. The direct risks include all partnership liabilities for environmental concerns, lawsuits, loan guaranties and carve-outs. Furthermore, the general partner is currently required to pay ordinary income taxes on the fees received from the partnership for standard services such as leasing or construction management.

With the commercial real estate industry under serious strain due to the current credit crisis, raising this anti-investment tax on real estate will not only threaten economic development projects and related jobs, but is will also hit small and medium sized developers the hardest.

A carried interest tax increase comes with serious economic consequences and disproportionately affects the shopping center/real estate sector.

Betsy Laird
ICSC Senior Vice President of Global Public Policy

Write your Senator

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