FINfacts Newsletter XIX-6

George Smith Partners was well represented at this year's Mortgage Bankers Association Commercial Real Estate Finance (MBA CREF) Conference in San Diego. We sent 15 production members, including all 4 principals. We broke up into various groups and held over 50 private meetings with lenders in addition to the presentations, receptions and parties. We found an abundance of lenders with record 2011 allocations and/or production goals. As Gary Mozer observed: "There's more capital competing for good deals than there are good deals!" Was it like "the old days"? No. We are seeing: (1) More careful underwriting (for now); (2) Stratification between core transactions and secondary markets/properties, lenders are not just bidding "on everything"; (3) CDO's (Collateralized Debt Obligations that commoditized massive amounts of floating rate/bridge lending) are not back in force; and (4) Construction lending is definitely "on a case by case basis and it better be a good case"

Permanent Loans: Life companies have their largest allocations in years. We heard loan officers talking about "portfolio runoff" ie they have to replace all the loans being paid off and do more production in order to grow their portfolio. Conservative leverage transactions in top markets will see spreads as low as 130 bps over Treasuries (and that is 30/360 pricing with no swap component). "We will compete on spread for transactions in our strike zone"   Strike zone: grocery anchored retail, "fortress" regional malls, large bulk warehouse complexes.  They also stressed that they service loans to maturity, ability to do unusual term/amort structures and to lock rate and price forward committments with no margin call provisions. CMBS 2.0 continues to mature, about 20 originators, lots of competition. Recent securitizations have been over-subscribed with AAA bonds selling at Swap + 105 to 120 (note that 2010 securitizations were in the mid-200's). B-piece buyers are accepting yields as low as 15% for the first loss, high risk piece. Look for this to widen as credit standards loosen up, we hear that more B piece buyers are needed for a fully functioning market. Lenders are lowering spreads to the Swap + 200 range and widening their deal metrics. Small CMBS loans are being quoted, down to $5,000,000 and lower. Also, we heard things like "We love hotels this year, we will lend on hospitality at the right leverage and spread" and "Self storage and apartments are great investments after the housing crisis, everyone needs places to live and put all their stuff" Agencies: Fannie and Freddie continue to do huge volume. Some lenders are starting bridge programs for apartments neeeding some lease up or improvement. The polictical climate may lead to changes. CMBS and Life Companies have huge appetite for apartments and would love to pick off some of that business. Who knows if it there is enough "private sector" capacity in the case of a major curbing of the programs by Congress. Other lenders such as opportunity funds, credit companies, and banks are looking to fund "quasi-stabilized" or near stabilized assets with short term perms up to 5 years fixed. Certain lenders are restarting (or starting) programs for specialty product types such as health care, single tenant, etc

Bridge Loans: Bridge lending is a key component of the "new basis" at this time in the cycle. The sector is rapidly morphing, we had multiple lenders ask GSP, "What are you seeing? What can we be focussing on to win business?" Rates are coming down, best quote from lender: "7% is the new 9%" It seems that the perm lending "machine" is ahead of the curve, and bridge lenders need to catch up in order to service the myriad properties out there that need capital to stabilize. Lenders for now are looking at the "low hanging fruit", ie larger transactions ($10,000,000 or $15,000,000 and up was a common refrain) in good markets. Lenders only have so much processing capability, bridge loans are labor intensive, so they prefer to work on larger ones. Of course, GSP told everyone that there is a vast underserved market for $5,000,000 and up bridge loans. A majority of these lenders are non-banks, non recourse. We also spoke to some commercial banks looking to do bridge loans and willing to go non-recourse, priced over LIBOR (about 400 to 600 bps over with low or no floors) This is a function of their balance sheets healing but credit officers are reluctant to jump into construction loans.

Mezzanine and Preferred Equity:  Opportunity funds are finding that with senior bridge loan rates dropping and competition from commercial banks, they need to lend higher up in the stack to hit their investors' yield targets. We met with lenders looking to provide mezz or preferred equity over Fannie and Freddie, over CMBS and even some that touted their relationships with life companies that rarely allow mezz. Rates range from 9% for "best in show" apartments to mid-teens for regular commercial properties. Senior lenders are at about 70-75% LTV max, with the mezz going to 75-80% or maybe a little higher. Structures and prepayments vary on a deal by deal basis.

High Yield Funds Some of the aforementioned funds (or high yield "pockets" of senior lenders) are looking for mid to high teens returns and will consider some "out of the box" transactions such as DPO's, borrowers buying their own notes, enitled land plays, condo inventory loans, busted condos, small SFR development equity and debt (in the right markets), etc. They also will look at properties with little or no cash flow with “the right story" ie good property with basis well below replacement cost with good sponsor.  

Bridge Financing for Apartments     This lender made a splash at MBA with a program for an underserved sector, unstabilized or nearly stabilized multifamily.    This is a bridge program designed to feed agency business.  Lender looking for Class "B" properties or better.  Loan size: $5,000,000 to $25,000,000; Term: 3 - 18 months; Rates: Floating, competitive; Non recourse; Interest only, Lender will go to 1.0 DCR.