Sourcing Debt Today

Date: 04/27/2015

The lending landscape has certainly been altered by the past recession and new regulatory changes. The best financing sources for various types of properties has been a bit of a moving target. If you can access the most appropriate lenders for your particular property and situation, you can negotiate a better loan.

On a recent episode of the Commercial Real Estate Show, we talked with Steve Renna of the CRE Finance Council, a global trade association for commercial real estate finance. Their members include banks, private equity funds, CMBS lenders plus bond, debt and equity investors. Steve reported some surprising facts and shared some tips for navigating the new debt world.

On the Horizon                                                                                   

The biggest issue for CRE finance today is CMBS (Commercial Mortgage Backed Securities) maturity. Issuance peaked in 2005-2007 with over $230 billion in loans.

After the downturn CMBS lending virtually disappeared, but since 2008 it has recovered steadily. Four years ago saw $45 billion in CMBS lending, over $90 billion in 2014, and the forecast for this year is $110 billion.

We’ll see $100 billion in CMBS maturities this year. In 2016, another $110 billion, and $137 billion ripening in 2017.

“We’re ready for this,” reasoned Renna. “We have over 41 lenders ready to refinance. Borrowing costs are low, and properties have developed equity.”

But these properties were financed with peak prices. A high rate of defeasance and early refinancing have taken some better quality loans out of the pool.

Where property value has not sufficiently recovered, financing will present a challenge. But, the industry learned how to handle troubled assets in the recent past.

New Supply, New Financing

We’re in an era of constrained property supply: new commercial construction coming online is below 4%. This has curtailed new construction lending, resulting in suppressed loan originations overall, down 53% from their 2007 peak.

Financing for new supply used to come from banks, life insurance and CMBS, but non-bank lenders are now stepping up. Private equity is discovering commercial real estate as a stable and attractive asset, from both the debt and equity side.

In addition, two alternative financing sources are becoming serious players in the marketplace: EB5 financing and crowdfunding.

EBD5 Visa program

Already successfully deployed around the country, some very significant projects have used EBD5 funds, including the $600 million Hudson Yards. In exchange for an investment of $500,000 or more and providing a certain number of jobs, a foreign national can acquire a green card.

EBD5 is well suited to real estate development, since short-term jobs like construction count against the employment quota.  Up to $4 billion is expected from this program in 2015. To learn more about EBD5, work with an experienced law firm. It’s a complicated process, so you’ll need good legal guidance.

Crowdfunding

More than the ‘next new thing,’ crowdfunding is here to stay. Reputable, established Internet platforms are helping sponsors and developers quickly raise significant sums of money. It’s shaping as a serious source of efficient, low-cost financing, and investors are getting involved on the debt as well the equity side. Surprising to me, Steve reported that traditional lenders are looking hard at crowd funding right now.

What’s the Government Up to?

“Congress is not getting a lot done, but they seem to like it that way,” Renna sighed. “Discussions are ongoing about GSE reforms, and eventually there will be some action on Dodd-Frank, but these are long-range, slow moving conversations.

Fannie and Freddie did not have good years in 2013 and 2014. If they need credit, that may stimulate more attention from regulators.”

Opportunities for Lenders

“If you’re a lender chasing yield, you’ll find margins are thinner now,” Renna explained. “The current abundance of capital in the game means that yields are slim.” 

 “The finance market is highly competitive now,” he continued.  “So much capital is flooding into real estate because it’s a better value than corporate bonds.”

There will be some opportunity for experienced lenders as CMBS loans come due through 2018.

Borrowers Bonanza

“It’s a good time for borrowers,” said Tom Walsh, Senior VP at Grandbridge Real Estate Capital. “We have abundant sources of money today.”

Walsh noted that multifamily borrowers have the most options with access to Fannie and Freddie. They’ll finance 75% LTV on refinance and up to 80% on acquisitions.

New development and upscale multifamily deals will attract life insurance lenders, but those firms are cautious, reserving their best leverage for top-class product.

Higher leverage on lower quality assets is handled by CMBS. They fill in where the others don’t, including multifamily C class.

For single net lease situations like a drugstore, or a national tenant, CTL lenders may lend as much as 105% LTV.  That’s because Credit Tenant Lease lenders lend against the lease rather than the property. For multi-tenant centers, life insurance firms also lend, typically at around 75% LTV.

For business-owned property, lending is still largely done by the local banker, who provides other financial services. They are underwriting the company and the owners as much as the property, so relationships are key.

Rates are Excellent

On the multifamily side, loans are back to around 4.0%. CMBS is trending just a bit higher. As of April 2015, there’s a narrow range: from 3.80% –4.10%.

Life insurance companies will compete for the high-end deal, and they’ll go down into the threes.

Ten-year terms are the most common. Lower your rate with a 5.0 or 7.0-year term, more so with Fannie Freddie than CMBS. If you can do 3-5 years, you could get 3.5%.

For a multi-tenant commercial loan, retail, industrial or office, with lower leverage you can get low 4.0%s, maybe below 4.0%.  For 75% LTV expect around 4.25%.

In our historically low-rate environment, if you lock in long-term financing, it could add significant value. This could become an advantage later when you resale the property if your loan is assumable, since rates can hardly go anywhere but up.

Successful Strategies

“The most important issue today is accurate information,” advised Tom Walsh. “We do our underwriting on a trailing basis, looking back 12 to 18 months. Keep your numbers up to date, and as accurate as possible.”

Walsh also underscored the importance of full disclosure. Since the downturn almost everyone’s had some kind of issue. It’s critical to disclose up front, because the lender will find out.

If you’re shopping for dollars, Grandbridge Capital recommends choosing a firm that can find the best option for your situation. Know all your options, and work with someone you trust.

 “Our job is to know the borrower’s needs”, says Walsh. “If you’re buying to reposition, or to keep for prosperity, we can get you lending that best serves the goal.”

Rising Rates

I pushed Walsh for his view on rising interest rates. “We have no clue where rates are going,” Walsh acknowledged. “While there’s clearly momentum for rates to go up, a few weeks ago the Treasury Rate dropped twenty basis points.”

But both guests concur that slow change toward higher rates is likely, something like a quarter of a percentage point uptick, maybe in the third quarter and again in the first quarter next year. We’ll see what happens.