Certainly, but I think the general consensus is that most of the damage is done and accounted for. I think the largest concern by property type is retail, office and industrial (lost some tenants due to bankruptcy, rent declines, concessions and costs required to keep old tenants and get new ones). Hotel is marked to market every day, and highly susceptible to continued pain. Multifamily: everyone needs a place to live. Population is still increasing and construction is slowed or stopped.
How is CMBS different today? Who are the "new" conduits?
As far as I’m concerned, it’s not different enough. The underwriting is better, leverage lower, based on in-place versus projected income – all indicating generally safer underlying bonds. But structurally, it’s still a mess. Servicing, ratings and other structural flaws remain and will have to be overhauled in order to regain the volume. And just as a general statement: I’m not comfortable buying anything in which the seller controls the valuation and ratings process. That needs to change.
Which properties/factors do bond buyers view more favorably in a CMBS package?
The buy side of CMBS is not really my expertise.
What is the most aggressive debt today for multifamily, core and special-purpose properties?
Depends on a lot of factors, but very few lenders will go over 70-75% LTV. What I see more competitive is pricing for clean, safe, core loans. Many lenders seem to have the same risk appetite (i.e. low) and the variable factor is pricing. I’ve seen some really safe loans on core properties close at about 4% rates, fixed for 10 years. But rarely do I see competition for the same deals for higher leverage. Interestingly, this is where Wrightwood likes to play. If we find a transaction we really like, we’ll offer more proceeds than most, price it accordingly, and do it non-recourse.
Is B piece debt available?
For Multifamily yes (Freddie and Fannie are selling pieces). I can’t say I’ve seen a lot of wholesale B piece buyers.
Is mezzanine financing available?
Absolutely, we have a subordinate capital fund for mezzanine, equity and B pieces, as do many others. But it’s for discrete investments, not blanket mezzanine behind a pool of first mortgages. Mezzanine ranges as to leverage, pricing and risk and seems to range from 11% to 18%.
Which properties or regions are not showing positive signs for lending post-crisis?
Gateway cities: New York, DC, Los Angeles, San Francisco are the core, plus Boston, Dallas, Houston and Chicago. Sun Belt states are generally still suffering from a lack of demand and investment metrics. And generally secondary and tertiary markets are having a very difficult time attracting capital.
Is construction lending coming around? What properties/factors do construction lenders view more favorably?
Not yet. Some low leverage loans in top locations with top sponsorship are closing through relationship banks. And some HUD deals too. Some money is also available for construction of build-to-suit’s for credit tenants (like Walgreens) but at much lower levels than historically. But in general, construction money is hard to find. Even renovation loans are conservatively underwritten. A big factor on leverage is land basis: new lenders mark the land value to market. The other issues include appropriate return metrics. For example, if a developer comes to a lender or investor with some land he bought in 2007 and is projecting a return on cost (stabilized NOI / total project cost) of 6%, he’ll not get much leverage. If it’s say a 10% return on cost and the project is well located in a primary city and the developer has a strong track record with decent financials – those deals get financed now, but they’ll still need a good broker to find the money.
What is basis investing and how is it viewed from a lender underwriting standpoint today?
Basis investing is happening a lot in New York, Manhattan in particular. The theory is that if historical prices are, say $400 PSF, and there is an opportunity to buy at $200 PSF, they buy. The issue is that even at the lower price, the returns or risk profile may indicate that it does not make current financial sense. Buyers cite they are making a long term play. I won’t argue the theory, but long term gains at the risk of short term underwriting metrics are an equity risk. Lenders typically are “protect the downside” driven, so don’t expect lenders to play in the long term upside game.
What is DPO?
Discounted pay off, of a loan. Typically, DPO’s are granted when the loan is more than the value of the property, and the lender has no interest or ability to take title. Other times, for various reasons, a lender may just want to get a problem loan off their books.
Is note purchase financing available?
Yes, but it depends on the business plan and whether the current borrower will play nicely with the new note buyer and lender. If there is a pre-packaged deed in lieu of foreclosure or a clear, short path for the note buyer to get direct ownership of the real estate, financing is available. Getting title in many jurisdictions is quick and easy. In New York, it’s a multi-year food fight in court. Not many will finance a long fight for title.
Has private money pricing changed for transitional properties?
I’d say mostly in quick opportunistic acquisitions, such as note purchases and DPO’s. Institutions typically don’t play in that space.
Any purchase agreement structuring tips in regards to financing?
If you need financing, the sponsor needs to put significant capital at risk, and they better have a well thought out business plan showing how the risks are being born by the sponsor and how the debt and/or investor investment is safe. The days of taking huge risks with other people’s money are over. And make sure you negotiate enough time to close a loan. Underwriting standards are back and diligence takes time.
Do you anticipate rates to go up? Should borrowers lock-in long term money today?
I think it is an absolute given that with the current administration’s deficits and borrowings, rates will have to go up. If anyone has the chance to lock in fixed rate money at today’s low rates, they should.
What kind of deals is Wrightwood Capital seeking? Do you have a sweet spot?
We have money to finance anywhere on the capital stack – from first mortgage debt to equity. We invest in primary cities (population over 1 million) with solid sponsors for properties with a believable and underwriteable business plan. Property types are multifamily, office, retail, industrial and student housing. Typically, properties have a cost or value of $10 to 75 million. First mortgage sizes from $10-50 million, subordinate capital (mezzanine, preferred equity or JV equity) investments range from $2.5 to $12.5 million. Right now, multifamily rental is our favorite and we are very active in the subordinate capital space for that product.
Dan Hartman may be reached at email@example.com