Tuesday, March 24, 2009

New Central Illinois Business episode featuring Larry Kaufer & Jerry Regal

Central Illinois Business with Alex Ruggieri

Episode 36, March 21st   Featuring...
Larry Kaufer & Jerry Regal
Browse all episodes of One on One or Central Illinois Business

Tuesday, March 17, 2009

Market Report for Monday, March 16, 2009

Welcome to the inaugural issue (Volume 1, Issue 1) of the Sperry Van Ness | Better Capital Partners-Capital Market and Interest Rate Newsletter. Each week we will provide our readers with an overview of the following: National commercial real estate interest rates and underwriting for the major property types, marketplace conditions and how they affect various property types nationwide, insightful capital market analysis with a personal viewpoint and focused subject matter in every newsletter. You will notice that national interest rates located on page (1) of this newsletter are down into two categories (multi-family and commercial) and provide a sample of our national, regional and local commercial real estate financing programs. These rates are derived from portfolio lenders, life companies, credit unions, agency and exclusive national correspondent relationships. Many of our lenders and exclusive correspondent relationships have the ability to lower these interest rates by 15-30 basis points if a borrower is interested in establishing a business or personal banking relationship.

Let's begin by taking a closer look at the major commercial real estate property types: multi-family, office, industrial, and retail.

Major Property Types...

Multi-Family: Non-recourse adjustable financing programs are still aggressively priced starting at 4.34%. Loan-tovalues (LTV's) can underwrite as high as 80% and underwriting debt service coverage ratios (DSCR) can go as low as a 1.00 breakeven.

Non-recourse fixed 5, 7 and 10 year terms are starting at 5.22%. Loan-tovalues (LTV's) are as high as 80% and debt service coverage ratios (DSCR) are starting at 1.20 for our correspondent small loan permanent- programs and 1.25 for our regular permanent programs.

Please note that Sperry Van Ness | Better Capital Partners offers a Small Loan correspondent program with a fast track option. This program does not require tax returns and can close within 45 days. We also offer nonrecourse multi-family financing programs that do not have any origination fees other than third party expenses (appraisal, environmental etc.) and closing costs.

We are also seeing very aggressive permanent and development underwriting in the senior housing, independent and assisted living sectors. Nonrecourse construction lending for multifamily and healthcare construction with permanent take-out loans is available nationwide for qualified developers.

Be aware that lender underwriting exceptions used to be very common and are quickly disappearing unless a borrower is extremely strong, has a lot of experience owning and possibly managing this property type along with a verifiable historical track record.

Office: Office vacancies are increasing nationwide as large and small businesses shut down or scale back their operating expenses. However, we are starting to see increased acquisition and refinance activity for this property type. Multitenant office properties are the most appealing to lenders, as long as tenant profit and loss statements are available for review and the lease terms extend at least 2 years beyond the loan term for a permanent loan program.

Interest rates are ranging from a low of 5.75% to a high of 7% for a 10 year term. On average a 5 year fixed is around 6.25-6.50% and may be lower. National lenders are offering the lowest fixed, rates for shorter term loans. Two (2) and three (3) year fixed rates have become extremely popular onceagain. Please note that many of these short-term, fixed, low interest rate programs are swap programs that require full recourse with warm body guarantees. Additionally, many lenders are beginning to require borrowers to obtain some sort of rate protection such as a cap or collar, due to the market volatility.

Industrial: The industrial sector has seen tremendous growth over the last decade and lenders still feel it is a favored and stable product type, directly behind multi-family.

You should note that conventional loan-to-values (LTV's) can underwrite as high as 80% and Small Business Administration (SBA) programs can underwrite as high as 90%.

Nationwide, fixed 5, 7 and 10 year terms are starting at 5.75%-6% for permanent owner-user programs and 6.25% to 6.75% for investment properties with 25 and 30 year amortization.

Although the industrial property sector is appealing, it is currently being scrutinized due to low port activity and current economic conditions. Additionally, the Q4 2008 Baird Industrial Distribution survey confirmed that the industrial sector is in a recession. Feedback from over 300 independent distributors confirmed this statement based on their own Q4 2008 financial statements. On a positive note, we are seeing capitalization rates (cap rates) adjust to marketplace conditions.

In summary, industrial properties still appear to be a solid investment vehicle, especially for owner-users. You should note that the new Obama economic bill may provide some Small Business Administration (SBA) lending relief. This would be accomplished by reducing the high fees charged by many of the current SBA programs.

Retail: Retail properties can still be aggressively financed. However, many lenders are beginning to scrutinize tenants and leases. Tenant sales are lagging, national chain stores are cutting expansion plans, shopping center owners are performing fewer transactions and retail developments are taking longer to obtain financing.

In general, it is becoming increasing difficult to fund due to the ever increasing retailer bankruptcy's (BK's) and the reduction in consumer spending. Some lenders are adding an additional 15- 25bps to retail interest rates, some are requiring lender origination fees, and some will not even consider financing retail at all. One of the most difficult properties to finance these days is the single tenant NNN restaurant. Some of the biggest lenders in the nation like GE are out of the market or are offering unfavorable interest rates, amortizations and terms.

Vacancies are increasing every week in the major metros and the burbs. It's not only the mom and pops that are getting hurt out there; it's the national credit tenants as well. Look for lenders to discount second floor retail space or use market rents to underwrite space containing tenants that are paying above market rents ex. Starbucks.

Interest rates for retail are still ranging in the 6% to 7% range with 25 and 30 year amortizations and debt service coverage ratios (DSCR's) in the 1.20- 1.35+ range.

Capital Markets National Lenders

In February 2009, Jones Lang LaSalle surveyed 50 national lenders during the Mortgage Bankers Association's Commercial Real Estate Finance/Multifamily Housing Convention and Expo in San Diego, California. The goal was to obtain a realistic overview on lender loan production figures for 2009. These national lenders included a mix of life insurance companies, commercial mortgage- backed securities dealers (CMBS), private lenders, commercial banks and government agencies. The published findings were very interesting. 53% expect loan production to increase in 2009 versus 2008. However, those who expected increased lending were private equity lenders and government agencies. These groups estimated that loan production would increase by as much as 20% (+/-). In a classic Catch 22, the surveyed banks and life companies all expected a volume decrease in 2009 ranging from 30 to 80 percent. Due to the state of the capital markets, the lack of Commercial Mortgage-Backed Securities (CMBS), and the lack of confidence, many lenders are unable to originate new loans.

Based on the survey results, 80% of the lenders predict that 40% of their loan allocations will be used to refinance maturing loans within their existing portfolios. Another 13 percent expect refinancing of maturities to make up to 80 or even 100 percent of their portfolios.

Although last year's survey predicted that the financial crisis would end or ease in 2009, most feel that 2011 is now the magic number. The lending community feels that financial institutions do currently have limited lending capabilities. However, to turn the financial crisis around some sort of securitized debt needs to re-emerge. Many question whether the government will step in to enable the second coming of the CMBS marketplace. According to the report, 67 percent of nationwide lenders to the commercial real estate sector expect some sort of securitized lending to return to the capital markets by 2011 or beyond. A further breakdown of those surveyed indicates 22 percent predict securitized lending to return to the markets in 2010, while an additional 11 percent said securitized lending will never return to the capital markets.

Lenders responding to this survey predict that when securitized lending appears on the horizon it will take a much different form with more traditional, conservative underwriting, fewer tranches, more disclosure and a structure where originators must hold the first loss piece. Respondents also commented that issuers retaining the b-piece may appear in the near future.

The Jones Lang LaSalle survey also indicated that, as borrowers seek to avoid default, 59 percent of all different lending types will provide forbearance from six to 12 months. A further 18 percent would extend between one and six months, and nearly a quarter (24 percent) would extend beyond a year. Those extensions will not come easily, as 79 percent of lenders will require different terms, such as principal pay-downs, to restructure maturing loans.

"The lending community doesn't want to inherit assets through foreclosure, as most lenders surveyed are willing to provide some form of forbearance, though the level varies case by case."

Sperry Van Ness | Better Capital Partners offer Sperry Van Ness advisors and their nationwide clients a full capital stack which includes debt, equity and joint ventures for all forms of commercial real estate properties nationwide. The firm's services include: Permanent, Bridge, Mezzanine, Construction, and customized financing for acquisition and refinance. For a soft or hard quote, or to refer a client, please visit our corporate website at or contact Eric Better for further information.

Monday, March 16, 2009

Troubled Assets Radar

Throughout 2008, the commercial real estate market deteriorated, but foreclosures were rare and distressed situations, while large and very public, were relatively few. As opportunistic funds proliferated, potential investors grew concerned that there would be too much capital competing for the small number of distressed situations that had emerged. Since September, though, a wave of defaults and foreclosures has hit the commercial property market and the magnitude of the situation is becoming clear; there is no lack of opportunities for the distressed property investors.

RCA has initiated a program to identify distressed and potentially troubled assets. The inventory already tops $106b and is growing rapidly. Truly distressed situations, where the mortgage is in default, the owner is bankrupt or the property has already been foreclosed, total approximately $25.7b, encompassing well over 1,000 significant assets. Of this total, approximately 200 properties valued at $4.5b have reverted back to the lender to become Real Estate Owned (REO). Thus, the majority of the distressed assets have only recently fallen into default and a foreclosure process commenced. The analysis also ignores approximately $11b of distressed situations that have emerged and already been resolved over the past year.

The volume of properties that are potentially troubled is even more significant totaling $80.9b in volume and 3,736 individual properties. Potentially Troubled assets are largely those with an upcoming mortgage maturity in 2009 or those where the owner is in some financial duress, often caused by maturing loans. In these situations, the properties involved may be free of problems or issues. However, certain property issues, such as a major tenant bankruptcy or a development that has stalled or failed to live up to expectations, will qualify it to fall into the Potentially Troubled category. Distressed and Potentially Troubled assets are distributed across virtually all markets and regions. The West has the largest value of both Distressed and Potentially Troubled properties. However, the Southeast contains the highest number of properties in these categories.

Trouble by Property Type

Distress exists across all property types due to maturing loans or financially challenged owners, although each sector faces specific issues as well. It is no surprise that trouble has emerged first and is currently the greatest for development projects, where an estimated $7b in construction financing is in default or already foreclosed. The quantity of potentially troubled developments currently identified is roughly $5b, a low estimate. The retail sector has the largest pipeline of potentially troubled properties, with many large retail owners such as Centro and General Growth facing significant financing hurdles plus a growing number of retail tenants filing for bankruptcy protection. The hotel sector, already seeing its fair share of distress, could see that grow sharply as both business and leisure travel have been severely curtailed in recent months. The apartment sector, which includes failed condo conversions, has the highest number of properties in peril. While this analysis includes only those property types that RCA traditionally tracks, information on other major commercial properties in distress is available online.

Types of Trouble

A vast array of troubles at the property, ownership, or financing level can cause a property to become distressed. RCA has grouped these factors in this fashion. Property issues can occur when a sole tenant goes bankrupt or a development or redevelopment falls behind, goes over budget, or fails to achieve leasing or sales goals. At the ownership level, bankruptcy of the general partner or other financial pressures of an over-levered owner often lead to distressed situations. Ownership may change as well if a mezzanine lender assumes control from equity providers, a sure sign of trouble. Financing issues occur when the mortgage is facing a near-term maturity or is already past maturity. In this tough credit environment, many borrowers are having difficulty refinancing their mortgages even though the mortgage may be current and the property has no problems. None of the property, ownership, or financing issues are mutually exclusive and often some combination of issues is present in a distressed situation.

Trouble by Metropolitan Market

In this downturn, no market is immune to troubled commercial property. At least 20 metropolitan areas in the US are facing $1b or more of distressed or potentially troubled commercial property. Metro New York and Los Angeles, the locations of many highly leveraged acquisitions in 2006 and 2007, account for $23b of possible and actual problem loans. Distress has also emerged first in the once high-flying development markets in South Florida and Las Vegas. Markets such as Phoenix, Houston and Atlanta have the most number of properties at risk although most are not yet formally classified as distressed. Chicago is another market to watch because of its concentration of properties and developments at risk.

Where the Trouble Lies

Distressed assets have already appeared in almost every significant commercial property market in the United States. The potentially Troubled map is a rude awakening of what to expect in 2009.

Troubled Asset Methodology

Real Capital Analytics has established methodology outlining the Troubled Assets Radar (TAR) which it will continually update and expand as this downturn evolves and new situations emerge. A complete version of the TAR methodology is available for download at and relevant portions are provided below.

RCA endeavors to maintain the most current tracking of distressed and potentially troubled properties as possible, and it is the largest compilation known to be available, but it is far from complete. In addition, RCA may not be aware of all the issues regarding a property or mortgage nor is it fully informed if a troubled situation is resolved.

TAR Value Estimates: RCA uses the mortgage balance, when known, or a conservative approximation of the property value based on recent sales or offering prices to assign a value to each property. These estimates are utilized for analysis and quantification of the data, but are not displayed on an individual asset basis.

TAR Sourcing: RCA uses existing public and proprietary sources thought to be reliable. A record is maintained for each property to log each source, its date and the nature of the information.

Property Types: This analysis includes only office, industrial, retail, apartment/condo, hotel, land and commercial developments generally valued $2.5 million or greater. However, the TAR program will track a broader array of commercial property types than most of RCA’s core products.

Distressed Asset Categories

Troubled: Includes mortgages that are in default or delinquent, usually evidenced by a recorded Notice of Default or the mortgage being assigned to special servicer. Also includes situations where a foreclosure notice has been filed or the property is placed in administration or receivership. Includes situations where the owning entity or general partner has filed bankruptcy or the sole tenant is in liquidation. Other indications of a troubled mortgage may be actions taken by the mezzanine lender to secure its position.

Lender REO: Signifies the completion of a foreclosure process where the ownership of the property transfers back to the lender. This can occur through a deed-in-lieu, action process, or court order.

Non-Distressed Asset Categories

Potentially Troubled: Includes properties where the ownership is known to be in financial distress although often, there is no direct knowledge of property level distress. Potentially Troubled also includes mortgage loans that are known to be facing maturity deadlines in 2009 or that have previously been extended on a short-term basis.

Delayed/Abandoned Developments: Although not included in this analysis, RCA offers information on commercial and residential development projects that have been deferred or abandoned which are often the source of troubled assets, but not all are or will ever be troubled. However, in a number of situations there is likely a development site no longer needed or land loan that could be at risk.

Troubled Asset Search

With this report, RCA announces another industry first: the largest compilation of commercial mortgages and properties that are troubled or likely to be. Subscribers to our online tools can search for investment opportunities, evaluate the volume of distressed assets in any market, view the sales and refinancing history of specific properties, and track new situations as they arise. RCA provides all the information needed to know, now that the boom has bust. RCA has synthesized data from a vast array of sources including our own transaction data, title records and CMBS files into a simple, but powerful online tool. The database has information on both securitized and non-securitized mortgages as well as additional property types that RCA has not traditionally tracked. In addition to this US data, RCA will be introducing distressed property and loan information for global markets in early 2009. For more information about Real Capital Analytics’ new Troubled Asset Search tool, visit

New Central Illinois Business episode featuring Jody Wesley, Sib Johnson, and Paul Farachi

Central Illinois Business with Alex Ruggieri

Episode 35, March 7th   Featuring...
Jody Wesley, Sib Johnson, and Paul Farachi
Browse all episodes of One on One or Central Illinois Business