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Tower Capital Arranges $28M in Financing for Days Inn in AZ

Day’s Inn Hotel – Scottsdale, AZ

PHOENIX—Tower Capital, a locally based commercial real estate structured finance firm, arranged $28 million in acquisition and renovation financing for the 218-room Days Inn hotel, located in Scottsdale, AZ.

Principals Kyle McDonough and Adam Finkel CCIM led the transaction, which includes an extensive $12-million renovation budget that will reposition the asset into an independent boutique concept.

The property is situated on approximately 4.5 acres of Scottsdale Rd. frontage, north of downtown’s entertainment district. Los Angeles-based ESI Ventures, a real estate investment and development company, acquired the property. HRI Lodging will be in charge of operations at the full-service hotel. Local restaurateur Ryan Jocque will act as consultant for F&B at the new boutique hotel.

Tower Capital secured the non-recourse, interest-only bridge loan through a Connecticut-based real estate investment manager. The $28-million loan amount is inclusive of both acquisition and renovation costs, and represents 70% of the total project budget.

“Our client managed to negotiate a purchase of both the underlying ground lease, along with the existing structure,” said McDonough. “Where many others had failed, they managed to piece together a fee simple deal that maximizes the value of this A+ location.”

-by Hotel Business

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About Tower Capital:
We are a Commercial Real Estate Finance firm specializing in debt and equity placement on behalf of commercial real estate investors throughout the country. We offer borrowers short term bridge solutions through our in-house private money platform, as well effectuating conventional permanent financing through our commercial mortgage brokerage division.

Commercial real estate financing from Tower Capital provides competitive solutions for professional real estate investors seeking loans.

Commercial Real Estate Finance: Questions for Borrowers and Lenders

Commercial Real Estate Finance Phoenix

With the capital markets being so competitive in today’s finance environment, the highest degree of value a mortgage broker or banker can offer their client is surety of execution. Any experienced investor or intermediary knows that there are a number of issues that can arise to make a deal go sideways. Fortunately, solutions can be discovered and time, energy and money saved, by asking a few questions from the start – to both the borrower and the lender.

There are a number of basic, but very important, questions that should be asked by one’s mortgage broker during their initial conversation with their client in order to evaluate the requirement and ascertain the best capital source to meet the borrower’s investment goals and objectives. Borrowers should be weary if their intermediary is not asking the necessary questions up front since lack of information could lead to some very unwelcome surprises down the road.

1. What is the ownership structure and who comprises the borrowing entity?
Having an understanding of the ownership structure is of paramount importance because it is a lead-time item that will often dictate much of the lender due diligence items to follow. An organizational chart is the most effective way to illustrate the ownership structure and shows the ownership percentages of all key principals and sub-entities. Typically, the lender will want financials on any person or sub-entity that owns greater than 20% of the borrowing entity. Many times this can be side-stepped if whoever is signing the loan has a balance sheet strong enough to meet the lender’s minimum net worth and liquidity requirements, either on their own or in combination with the other sponsors in the deal. This leads us to our next question…

2. What is the net worth and liquidity of the sponsorship?
Whether it’s a recourse or non-recourse loan, acquisition, refinance, or new development, the sponsor signing the loan must meet minimum net worth and liquidity requirements set forth by the lender. These minimum requirements will vary by lender and transaction specifics, and can usually be met by one sponsor or a combination of whoever is signing on the loan documents. Lenders typically want to see a net worth equal to or greater than the loan amount and liquidity (cash, stocks, bonds, marketable securities) of at least 10% of the loan amount AFTER the down payment has been made. Construction lenders will often have higher liquidity requirements due to the likelihood of cost overruns that can arise during the construction process.

3. Is the borrower willing to sign personal recourse on the loan?
Many borrowers prefer not to provide personal guarantees if they don’t have to. However, despite the seemingly abundance of non-recourse debt available today, however this preference may limit the lender pool or amount of loan dollars the lender is willing to provide on a specific transaction. The most common source of non-recourse financing is CMBS, HUD, Fannie Mae, Freddie Mac, and debt funds. Banks, credit unions, and life insurance companies can also offer non-recourse financing but typically at lower leverage – anywhere from 50% to 65% loan-to-value.

4. What is the borrower’s investment time horizon for the asset?
With interest rates currently at all-time lows, many borrowers are opting to lock in long term fixed rates. If you are a long term investor then this may be the best strategy for you, however, if this is a shorter term investment, such as a value-add reposition, or if you want to leave the option open to sell in the future, then locking in long term fixed rate debt might not be the best solution since it usually comes with stiffer prepayment penalties and may not be assumable by a future buyer. I discuss this more at length in my previous blog titled: The Trap of Low Interest Rates: Ensuring Financing is in Line with an Investor’s Goals & Objectives, which I encourage you to read.

5. What are the Borrower’s hot buttons?
This question might seem like the most obvious but many mortgage brokers do not ask because they think they know the answer through conversation with the borrower. This may be true, however, the answer is not always evident. That is why I very directly ask, “So what is most important to you? What are your hot buttons?” Is it the lowest interest rate? Highest amount of loan dollars? Prepayment flexibility? Term length? Non-recourse? Speed? Or perhaps it is a combination of these or none of these.

The next set of questions relate to the lenders. If a mortgage broker or borrower has not worked with a particular lender in the past then these questions are crucial to ensuring a smooth and successful financing process.

1. What is the lender’s approval process?
Having an understanding of the lender’s process is critical. Quite often lenders will issue loan quotes or term sheets that aren’t worth the paper they are written on. This can set the borrower up for what we in the industry commonly refer to as a re-trade (a reduction in loan dollars) down the road, or worse yet, a flat out denial of the loan altogether, leading to a lot of time, energy and money wasted. When an LOI or term sheet has been issued, has it been pre-vetted by credit or simply underwritten quickly by the banker or originator? At what point is a formal commitment or approval provided? Does this happen before third party reports are obtained or afterwards? How many people are involved in approving the loan? The more signatures required, the greater the possibility that one of the decision makers will not like something about the deal and reject it. I always ask if someone involved in the decision making process has seen the deal before terms are issued. Sometimes the loan committee is simply providing a rubber stamp by the time they see it, and sometimes they are being presented with all of the information for the first time.

2. How is the lender underwriting the transaction?
Knowing how the lender underwrites allows the mortgage broker to quickly vet which lenders will be viable options up front. Lenders will often increase historical expenses by some percentage, such as 3%, or may adjust expenses (either up or down) based upon industry standards when they underwrite and calculate Net Operating Income. They may also use a higher interest rate than the note or coupon rate being offered or utilize increased debt service coverage ratios for stress test purposes. The results can often negatively impact the amount of loan dollars offered.

3. What 3rd party reports does the lender require?
The most prevalent report for the vast majority of commercial real estate loans is the appraisal. Appraisals can be short or long form and are tailored to each lender’s particular parameters and requirements. A standard commercial appraisal will typically take 2 – 4 weeks to complete and can cost as little as a couple of thousand dollars or over $10,000 depending on the complexity of the transaction. Appraisers can provide “as is” values or “as stabilized / as complete” values if there is a renovation or stabilization component. The second most prevalent report is a Property Condition Report (PCR) provided by a structural engineer. The findings contained in a PCR can lead the lender to hold back loan dollars for repairs to the property which may or may not be in the borrower’s existing budget. This may cause the borrower to have to procure additional equity to close the transaction and may present a problem if those funds are unobtainable. A Phase I Environmental Report may be required, especially if the property is located near a gas station, laundry mat, waste disposal facility, or if a prior use of the property leads the lender to believe that there is a possibility of contamination at the site. Finally an ALTA Survey may be required by the lender or Title Company in order to provide proper title insurance.

4. What are the fees associated with the loan?
Typical fees include: origination, processing, underwriting, administrative, credit check, legal and application fees. All of these fees can add up quickly, especially lender legal. Sometimes lender legal and 3rd party costs are covered by the application fee but sometimes these costs are additional. Lender legal fees can be the biggest variable and it should always be known if this cost will be passed through to the borrower and what they typically run on an average transaction. Lender legal bills offer borrowers the most exposure to expenses that are completely out of their control and can add up to hundreds of thousands of dollars.

In conclusion, surety of execution for any commercial real estate loan can be increased drastically by asking the right questions at the beginning of the process to both the borrower, as well as the lender. By following the suggestions above, a lot of future pain can be avoided.

Written by: Adam S. Finkel, CCIM, Tower Capital


About Tower Capital:
We are a Commercial Real Estate Finance firm specializing in debt and equity placement on behalf of commercial real estate investors throughout the country. We offer borrowers short term bridge solutions through our in-house private money platform, as well effectuating conventional permanent financing through our commercial mortgage brokerage division.

Commercial real estate financing from Tower Capital provides competitive solutions for professional real estate investors seeking loans.

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Local Firm Tower Capital Off To a Successful Start Arranging $93 Million in CRE Financing

Commercial Real Estate Finance Phoenix

Last fall we featured Adam Finkel and Kyle McDonough in our Changing of the Guards story where we highlighted some of the valley’s most up and coming real estate professionals in brokerage, finance and development. In the beginning of 2015 Mr. Finkel and Mr. McDonough broke off from their respective firms to launch their new Phoenix-based structured finance company, Tower Capital. The firm specializes in debt and equity placement on behalf of commercial real estate investors throughout the country. They offer borrowers short term bridge solutions through their in-house private lending platform, as well as conventional financing through their commercial mortgage brokerage division.

First launched last February, the firm has completed close to $100 million in total loan originations in their first 12 months of operations, with multifamily representing 44% of total production volume, hospitality representing 41%, office comprising 14% and land at 1%. Commenting on their success, principal of the firm, Adam Finkel, said:

“We have found that hospitality has been a really underserved sector when it comes to commercial real estate mortgage banking and brokerage. There just aren’t that many people focusing on these properties when assets such as multifamily are much easier to finance given the amount of capital chasing those deals through the government sponsored entities like HUD, Fannie Mae, and Freddie Mac. In addition, we are experiencing banks, debt funds, and other lenders becoming full on hotel allocations given the amount of velocity in the marketplace over the past couple of years. The money is still out there if you know where to find it, it’s just getting more expensive.”

loan produ 

 

With over $38,000,000 in hotel loans over the past nine months alone the fledgling firm is quickly becoming one of the most active financiers in the hospitality sector in the state. They recently closed 869 keys across 6 properties, which included a Holiday Inn & Suites, two Comfort Inns, a Hawthorn Suites, Day’s Inn, and the Hotel Tucson City Center, an independent best known for the international gem show it plays host to annually.

 

Despite all of the hospitality activity, multifamily still remains a bread and butter asset class for the duo with 1,265 units financed in the past year.

The two principals of the firm, Adam Finkel and Kyle McDonough, had been close friends for the past 15 years prior to founding the company. Mr. Finkel previously held the position of Vice President at Johnson Capital, one of the largest independent commercial banking firms in the country before it was acquired in late 2014. Mr. McDonough was the director of a local bridge debt fund that placed private money loans for transitional assets during the Great Recession.

“Tower Capital blends both of our backgrounds together nicely,” commented Mr. McDonough, “Ultimately our goal is to produce the most cost effective financing terms and structure that will meet our clients’ investment objectives, whether that’s through a bank, CMBS, life insurance company, debt fund, or our own private money platform.”

Kyle’s sentiments are proven by the numbers. Out of the 19 transactions closed during their first 12 months, 13 different lending sources were utilized, showing their capital relationships run deep across multiple asset classes.

capital sourc

The firm prides itself on being nimble, creative and relentlessly keeping up on the ever changing capital markets climate and knowing at all times who the most active lenders are.  Be on the lookout for this dynamic pair to continue carving out a place in the commercial real estate finance world.

[button size=”medium” color=”#ffffff” background=”#000000″ radius=”0px” type=”flat” link=”http://cem-az.com/local-firm-tower-capital-off-to-a-successful-start-arranging-93-million-in-cre-financing/” newwindow=”true” ]Click here to view entire article[/button]


About Tower Capital:
We are a Commercial Real Estate Finance firm specializing in debt and equity placement on behalf of commercial real estate investors throughout the country. We offer borrowers short term bridge solutions through our in-house private money platform, as well effectuating conventional permanent financing through our commercial mortgage brokerage division.

Commercial real estate financing from Tower Capital provides competitive solutions for professional real estate investors seeking loans.

[button size=”medium” color=”#ffffff” background=”#a61e22″ radius=”0px” type=”flat” link=”http://www.towercapllc.com/” newwindow=”false” ]View our Commercial Real Estate Finance[/button]

Lender survey: Confident but cautious outlook

Hawthorn Suites – Tempe, Arizona

A shift in lender expectations suggests that financiers of U.S. hotels expect the current period of growth in hotel asset values to peak within the next year, according to the year-end release of the “2015 Hotel lender survey.”

HENDERSONVILLE, Tennessee, and NEW YORK—A shift in lender expectations suggests that financiers of U.S. hotels expect the current period of growth in hotel asset values to peak within the next year, according to the year-end release of the 2015 Hotel Lender Survey.

The third annual survey, conducted by STR, Inc., Hotel News Now and RobertDouglas, includes responses from more than 40 senior balance sheet lenders, CMBS lenders and providers of subordinate debt financing. Together, the participating lenders represent the source of a majority of all hotel debt with loan balances in excess of $10 million that was originated in the U.S. in 2015.
Compared with 15% in 2014, 45% of total respondents indicated that the aforementioned peak will occur within the next year. However, there is as much or more debt financing capacity available to hotel owners as not one respondent anticipated decreased hotel lending volumes during the next 12 months.
Overall, the survey suggested a cautious outlook of stable asset values, increasing liquidity for hotel finance and a potential spreading of widening credit risk.

[button size=”medium” radius=”0px” type=”flat” link=”http://www.hotelnewsnow.com/Article/17496/Lender-survey-Confident-but-cautious-outlook#sthash.owffhNNX.dpuf” newwindow=”true” ]Click Here to Read Entire Article[/button]


About Tower Capital:
We are a Commercial Real Estate Finance firm specializing in debt and equity placement on behalf of commercial real estate investors throughout the country. We offer borrowers short term bridge solutions through our in-house private money platform, as well effectuating conventional permanent financing through our commercial mortgage brokerage division.

Commercial real estate financing from Tower Capital provides competitive solutions for professional real estate investors seeking loans.

[button size=”medium” color=”#ffffff” background=”#a61e22″ radius=”0px” type=”flat” link=”http://www.towercapllc.com/” newwindow=”false” ]View our Commercial Real Estate Finance[/button]

1031 Exchanges Explained

1031 Exchanges, Tower Capital

IRC Section 1031, also known as a 1031 exchange or a “like-kind” exchange, allows investors to defer tax on gains from the sale of an investment property if they reinvest the proceeds into a similar (like-kind) property. It was enacted by congress in 1921 to promote economic growth by encouraging reinvestment into the economy and to avoid harming investors through unfair taxation as they reinvest.

Although many associate this rule as a tactic used in commercial real estate, there are many other types of investments to which the rule can apply including: livestock, oil, gas, and mineral interests, gold, silver, and numismatic coins, water and ditch rights, and collectables such as antiques, cars, stamps, and gems. Those things not eligible include a primary residence, indebtedness, stocks, bonds, or notes, partnership interests, and inventory.

Five Important General Rules:

  1. Use of Intermediary
    The simplest form of exchange is when a buyer and seller swap properties simultaneously between each other. However, the vast majority of 1031 exchanges are known as delayed, three party, or Starker exchanges. In this type of exchange, an intermediary is needed to hold the cash from the sale of the first property until the investor identifies the new property and then the cash is used to close on the replacement.
  2. Same Taxpayer
    The tax return and name appearing on the title of the property that is sold must be the tax return and titleholder that purchases the replacement property. For example, if the first property is owned by the entity “ABC Partnership,” which is comprised of six total equity partners, then the titleholder for the replacement property must also be “ABC Partnership” comprised of the same six equity partners.
  3. Like-Kind
    Although we typically associate 1031 exchanges with commercial real estate, there are many other types of investments that can qualify. The “like-kind” terminology simply refers to swapping one type of investment with another (i.e. real estate with real estate or antique with antique). Fortunately for real estate investors, real estate covers a broad spectrum of assets so for instance, an investor could sell an apartment building and trade into a retail center, office building, another apartment project, or even land.
  4. Timing
    There are two time constraints to take into consideration when consummating a 1031 exchange. The first is that the investor has 45 days from the time the sale of their property closes to identify a new property to purchase. The second is that the investor must complete the purchase of their new asset no later than 180 following the close of their original asset. Please note that the total time frame to complete the 1031 exchange is 180 days, and not 45 days plus 180 days.
  5. Property Identification
    Within the first 45 days following the sale of the relinquished property, the investor can identify up to three replacement properties, regardless of value. These properties must be identified in writing by either a property address, legal description, or distinguishable name of the project. The investor must close on one of the three identified properties to qualify for the exchange.

Exchanger Beware! Three Points to Consider

There are few points to be aware of before entering into a 1031 exchange.

  1. Although taking advantage of this tax strategy can create savings for the investor, they must be careful not to overpay for the replacement property, especially in a tight market. Resulting future losses from overpaying could offset any current savings on taxes.
  2. In order to avoid paying taxes on the proceeds from a sale, the investor must make sure they are trading up: purchasing a replacement property that is at a higher value or cost basis than the relinquished property. Any leftover cash, or “boot,” from the sale will be taxed, typically as a capital gain.
  3. Make sure to use a qualified intermediary. There have been instances of exchange facilitators filing bankruptcy or being unable to meet their contractual obligations to their client. This can result in the investor not being able to meet the strict timelines set forth by the tax code, thereby disqualifying them from completing the 1031 exchange.

1031 Exchanges Explained
Written by Adam S. Finkel, CCIM
Tower Capital
Phoenix Arizona


About Tower Capital:
We are a Commercial Real Estate Finance firm specializing in debt and equity placement on behalf of commercial real estate investors throughout the country. We offer borrowers short term bridge solutions through our in-house private money platform, as well effectuating conventional permanent financing through our commercial mortgage brokerage division.

Commercial real estate financing from Tower Capital provides competitive solutions for professional real estate investors seeking loans.

[button size=”medium” color=”#ffffff” background=”#a61e22″ radius=”0px” type=”flat” link=”http://www.towercapllc.com/” newwindow=”false” ]View our Commercial Real Estate Finance[/button]

Multifamily Investment Sales Market

Multifamily Investment Sales Market

This bull market continues to charge ahead.

By all accounts, the multifamily investment sales market has been on a bull run in recent years. The fact that the sector was the leader in the real estate recovery and continues to produce solid occupancies and rent growth has caught and held investor interest. And despite stiff competition and record sale prices in many metros, buyers’ voracious appetite for apartments has not diminished.

“We are getting demand across the board whether it is a $4 million to $5 million deal or $20 million to $30 million. It is pretty much insatiable,” says Richard Knutson, CCIM, senior managing director at Newmark Cornish & Carey in Emeryville, Calif. For example, Knutson recently brokered the sale of a 2009-built institutional-quality apartment building in Oakland, Calif., that attracted 23 qualified bids before closing at $24.7 million. The 76-unit property sold for $325,921 per unit, which is more than triple the current national average.

Multifamily has been the flavor of the month among investors for the past three years, and there is still an incredible amount of capital chasing acquisitions in this sector. Although apartment sales slowed in July, the $47 billion in multifamily transactions recorded during the first seven months of 2015 is up 32 percent compared to the same period in 2014, according to Real Capital Analytics.

Key drivers behind that robust sales activity are strong demand and a positive outlook for the sector. Vacancies continue to hold steady at 4.2 percent, according to Reis. And despite a surge in construction activity, Reis is predicting only a modest uptick in vacancies over the next five years to 5.5 percent.

“We have a growing population; people will always need a place to live, and Amazon.com is not going to change that,” says Thomas McConnell, CCIM. “This is an asset class that cannot be replaced by technology.” A managing partner at Redwood Realty Advisors in Hasbrouck Heights, N.J., he adds that apartments sales remain “hot across the board” in New Jersey for all types of apartments. Nationally, buyers run the gamut from institutions and foreign capital to syndications and local investment groups.

One of the frustrations in multifamily is that the amount of available for-sale product can’t keep up with the buyer demand. “Unfortunately, there is a lot more demand in the market,” McConnell says. For example, Redwood Realty recently introduced a listing for a 40-unit apartment building in a high barrier-to-entry market in Morris County, N.J. The 1940s-built property generated 15 signed confidentiality agreements in the first day.

High Prices, Low, Low Cap Rates

Given the buyer demand that exists at all levels from class A trophy properties to value-add class B and C assets, it is no surprise that investors are paying a premium to win deals. Both multifamily rents and sale prices are in record territory across many metros. As of July, the average capitalization rate nationally on all apartment properties valued at $5 million and above was 6.1 percent, according to RCA.

In particular, prices have soared across primary markets such as New York City, San Francisco, and Chicago. Pricing for the six major metros is now 163 percent higher than the lows we saw in 2009 and just over 100 percent higher in garden style assets, says Reid Bennett, CCIM, senior vice president at Sperry Van Ness—Chicago Commercial and national SVN multifamily council chair. “There was a small blip in July in terms of pricing on a national level, but we’re still seeing prices for multifamily assets across the board pretty much 21 percent to 27 percent higher than the peak values in 2007,” he says.

Competition is especially heated for high-end class A properties. “Especially with the class A deals, we’re seeing 40 to 60 offers come in on a single asset,” Bennett says. “That leaves 39 to 59 buyers that didn’t acquire the deal looking for another opportunity and potentially stretching their acquisition criteria, perhaps dropping [to lower] asset classes.”

Steady economic growth, strong rental demand, and soaring rents are adding intensity to an already highly competitive investment market. “After 30 years in the business, even I have sticker shock at rents and sales values being achieved in the San Francisco East Bay area,” Knutson says. For stabilized class A buildings in that area, the going-in cap rate, which is based on existing rents, is at sub-4 percent, he says.

Many investors are underwriting deals aggressively, anticipating higher rents. Investors look at the going-in cap rate, but what they are really buying is where they think the cap rate is going to be when they get rents to market levels, Knutson adds. For example, he brokered the sale of a 1950s-built apartment building in Oakland, Calif., in May that sold for $5 million or $147,059 per unit. The going-in cap rate was 3.7 percent, but with anticipated rent increases the cap rate will likely be closer to 5.5 percent. In addition, the buyer borrowed money at a rate of less than 4 percent, which will give him good cash flow on a nice asset, Knutson says.

“Cap rates have compressed. However, they do seem to have leveled off in the majority of markets that we are in,” McConnell says. In northern New Jersey, for example, class A cap rates have compressed approximately 100 basis points to 4.5 percent from the five-year average of 5.5 percent. Cap rates for class B and C properties in the area are hovering close to their five-year average at 7 percent, he says. Yet buyers are still willing to push cap rates lower for assets in extremely high barrier-to-entry locations. “There are many desirable submarkets in New Jersey in which a B or C asset can easily trade for a sub-5 cap rate,” McConnell says.

The Search for Higher Yields

Certainly, there is still plenty of money chasing the relative safe haven of well-located class A assets in major metros. However, buyers are increasingly looking for opportunities that offer higher returns, whether that is new development, renovations, or target markets in secondary and tertiary metros. “Buyers are looking elsewhere for opportunities in growing markets,” says Joe Rubin, CCIM, owner of JG Realty Advisors in West Palm Beach, Fla. “I am working with a ton of buyers who can’t pay the prices in Orlando or Tampa. So, they are looking at Sarasota, Fort Myers, or even Melbourne or Lakeland, which are all becoming very hot markets,” he says.

Rubin is also seeing more activity from investors buying 1980s- or 1990s-built properties. Investors upgrade interiors with more upscale finishes as well as modernize property amenities in order to push rents higher. For example, investors are re-doing pools to make them more resort style or converting existing tennis courts to multiuse sport courts.

Tertiary market Albuquerque, N.M., has seen a jump in sales activity in the past two years with more room for growth fueled by both local and outside investors. Albuquerque has an abundance of very small apartment properties; about 45 percent of its total inventory contains four units or less. As a result, the city mostly attracts small, “home-grown” investors from the local market, as well as investors from western markets, such as California or Las Vegas, that are looking for higher yields, according to Todd Clarke, CCIM, CEO of NM Apartment Advisors in Albuquerque.

Multifamily properties in Albuquerque are selling at about 6 percent cap rates with the potential for cap rates to drop even lower, Clarke says. A fair amount of that compression will be driven by the fact that investors are not so much cap rate buyers as value-add buyers, meaning that investors anticipate that they will be able to come in, make changes to the property or the management, and increase rents, he says.

One of the hot investment opportunities in Albuquerque is revamping existing housing properties to cater to millennial renters, Clarke says. “Our city has been very big on recruiting millennials and catering to them. So, for the first time since the 1980s, we have seen a lot of product coming online that is geared just to this one demographic.”

For example, Clarke recently sold a property to an out-of-state buyer that is getting the highest one-bedroom rents in the city at about $1,195 per month. It has no amenities — no swimming pool or clubhouse. “Those really aren’t the millennial amenities. The millennial amenity is location. They want restaurants, grocery stores, mass transit, and this property fits all of that,” he says. Some investors also are coming in and converting older properties to trendy condo-style units with a more artistic design aesthetic that appeals to young renters, he adds.

At $1.35 to $1.85 per square foot, rents in Albuquerque for those new millennial units are a far cry from the rents being charged in major metros. Rents that top the $2 psf mark would support a different construction type, such as mid-rise apartments. “There is a lot of enthusiasm in the marketplace for what may be coming, and I think we are right on the cusp of seeing more interesting product come into the market,” Clarke says.

Nationally, development is back in full force with an estimated 230,000 new units expected to come online this year, according to Reis. So far, absorption has been keeping pace with that new supply, which is a testament to the strong demand that exists in the market. Investors also are keeping a close eye on potential interest rate hikes and how that may impact underwriting and deal flow. But, for now, there doesn’t appear to be any major events on the horizon that could derail the current momentum.

“There is still so much capital in the market. I have five to six groups that call me weekly to ask for new deals, when typically I would be bugging them,” Bennett says. Investment groups that have raised capital are under pressure to deploy that money. “I don’t see an end to the buyer pool, and I don’t see interest rates doing much until after the election,” he says. The amount of capital in the market combined with strong fundamentals may mean that multifamily’ s bull run continues for at least another 18 months.

by Beth Mattson-Teig

[button size=”medium” color=”#ffffff” background=”#000000″ radius=”0px” type=”flat” link=”http://www.ccim.com/cire-magazine/articles/324045/2015/11/multifamily-investment#sthash.Oz1yaJLr.dpuf” newwindow=”true” ]Click here to view or download entire article here[/button]


About Tower Capital:
We are a Commercial Real Estate Finance firm specializing in debt and equity placement on behalf of commercial real estate investors throughout the country. We offer borrowers short term bridge solutions through our in-house private money platform, as well effectuating conventional permanent financing through our commercial mortgage brokerage division.

Commercial real estate financing from Tower Capital provides competitive solutions for professional real estate investors seeking loans.

[button size=”medium” color=”#ffffff” background=”#a61e22″ radius=”0px” type=”flat” link=”http://www.towercapllc.com/” newwindow=”false” ]View our Commercial Real Estate Finance[/button]

Commercial Property Outlook in a Rising Rate Environment

commercial real estate values

With an anticipated federal funds rate hike on the horizon, how will commercial real estate values be affected?

As the Federal Reserve looks to normalize monetary policy after a sustained period of exceptionally low interest rates, some commercial real estate (CRE) investors, developers and lenders are worried that CRE values will be negatively affected under the assumption that when interest rates rise, CRE values will fall. This relationship seems intuitive at first — rising benchmark interest rates, like Treasuries, should cause all yield-oriented investments to be less attractive. On closer examination, however, the relationship between interest rates and CRE values is much more nuanced. The trajectory of capitalization rates (cap rates) and real estate values is also impacted by other significant drivers like, demand and supply changes, transaction activity and trends in the overall economy.

At the broadest level, an uptick in the federal funds rate may make it more expensive to develop new projects and refinance certain debt, and possibly engender a reactionary sell-off in publicly traded real estate investment trusts (REITs). And yet, as it stands now, relative to historical averages over the last 30 years, the spread between the 10-year Treasury and CRE yields appears to allow room for further compression, and this suggests that CRE values are not immediately threatened by rising interest rates. This seems especially so as other forces buttress real estate values, like record amounts of inbound capital, available private equity “dry powder,” a generally positive economic outlook (albeit with clear caveats) and strong CRE fundamentals.

[button size=”medium” color=”#ffffff” background=”#000000″ radius=”0px” type=”flat” link=”http://www.towercapllc.com/wp-content/uploads/2015/10/EY-Interest-Rate-Report-Sept-2015.pdf” newwindow=”true” ]Click here to view or download entire article here[/button]


About Tower Capital:
We are a Commercial Real Estate Finance firm specializing in debt and equity placement on behalf of commercial real estate investors throughout the country. We offer borrowers short term bridge solutions through our in-house private money platform, as well effectuating conventional permanent financing through our commercial mortgage brokerage division.

Commercial real estate financing from Tower Capital provides competitive solutions for professional real estate investors seeking loans.

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Commercial Real Estate Finance Phoenix

Commercial Real Estate Finance Phoenix

Commercial real estate (CRE) is income-producing real estate that is used solely for business purposes, such as retail centers, office complexes, hotels and apartments. Financing – including the acquisition, development and construction of these properties – is typically accomplished through commercial real estate loans: mortgage loans secured by liens on commercial, rather than residential, property.

Just as with residential loans, banks and independent lenders are actively involved in making loans on commercial real estate. In addition, insurance companies, pension funds, private investors and other capital sources, including the U.S. Small Business Administration’s 504 Loan program, make loans for commercial real estate.

Here, we take a look at commercial real estate loans: how they differ from residential loans, their characteristics and what lenders look for.

Individuals vs. Entities

While residential mortgages are typically made to individual borrowers, commercial real estate finance is often made to business entities (e.g., corporations, developers, partnerships, funds and trusts). These entities are often formed for the specific purpose of owning commercial real estate.

An entity may not have a financial track record or any credit history, in which case the lender may require the principals or owners of the entity to guarantee the loan. This provides the lender with an individual (or group of individuals) with a credit history and/or financial track record – and from whom they can recover in the event of loan default. If this type of guaranty is not required by the lender, and the property is the only means of recovery in the event of loan default, the loan is called a non-recourse loan, meaning that the lender has no recourse against anyone or anything other than the property.

Loan Repayment Schedules

A residential mortgage is a type of amortized loan in which the debt is repaid in regular installments over a period of time. The most popular residential mortgage product is the 30-year fixed-rate mortgage. Residential buyers have other options, as well, including 25-year and 15-year mortgages. Longer amortization periods typically involve smaller monthly payments and higher total interest costs over the life of the loan, while shorter amortization periods generally entail larger monthly payments and lower total interest costs. Residential loans are amortized over the life of the loan so that the loan is fully repaid at the end of the loan term. A borrower with a $200,000 30-year fixed-rate mortgage at 5%, for example, would make 360 monthly payments of $1,073.64, after which the loan would be fully repaid.

Unlike residential loans, the terms of commercial loans typically range from five years (or less) to 20 years, and the amortization period is often longer than the term of the loan. A lender, for example, might make a commercial loan for a term of seven years with an amortization period of 30 years. In this situation, the investor would make payments for seven years of an amount based on the loan being paid off over 30 years, followed by one final “balloon” payment of the entire remaining balance on the loan. For example, an investor with a $1 million commercial loan at 7% would make monthly payments of $6,653.02 for seven years, followed by a final balloon payment of $918,127.64 that would pay off the loan in full.

The length of the loan term and the amortization period will affect the rate the lender charges. Depending on the investor’s credit strength, these terms may be negotiable. In general, the longer the loan repayment schedule, the higher the interest rate.

Loan-to-Value Ratios

Another way that commercial and residential loans differ is in the loan-to-value ratio (LTV): a figure that measures the value of a loan against the value of the property. A lender calculates LTV by dividing the amount of the loan by the lesser of the property’s appraised value or purchase price. For example, the LTV for a $90,000 loan on a $100,000 property would be 90% ($90,000 ÷ $100,000 = 0.9, or 90%).

For both commercial and residential loans, borrowers with lower LTVs will generally qualify for more favorable financing rates than those with higher LTVs. The reason: They have more equity (or stake) in the property, which equals less risk in the eyes of the lender.

High LTVs are allowed for certain residential mortgages: Up to 100% LTV is allowed for VA and USDA loans; up to 96.5% for FHA loans (loans that are insured by the Federal Housing Administration); and up to 95% for conventional loans (those guaranteed by Fannie Mae or Freddie Mac).

Commercial loan LTVs, in contrast, generally fall into the 65% to 80% range. While some loans may be made at higher LTVs, they are less common. The specific LTV often depends on the loan category. For example, a maximum LTV of 65% may be allowed for raw land, while an LTV of up to 80% might be acceptable for a multifamily construction. There are no VA or FHA programs in commercial lending, and no private mortgage insurance. Therefore, lenders have no insurance to cover borrower default and must rely on the real property pledged as security.

Note: Private mortgage insurance (PMI) is a type of insurance policy that protects lenders from the risk of default and foreclosure, allowing buyers who are unable to make a significant down payment (or choose to not to) to obtain mortgage financing at affordable rates. If a borrower purchases a residential property and puts down less than 20%, the lender will minimize its risk by requiring the borrower to buy insurance from a PMI company. See How To Get Rid Of Private Mortgage Insurance.

Debt-Service Coverage Ratio

Commercial lenders also look at the debt-service coverage ratio (DSCR), which compares a property’s annual net operating income (NOI) to its annual mortgage debt service (including principal and interest), measuring the property’s ability to service its debt. It is calculated by dividing the NOI by the annual debt service. For example, a property with $140,000 in NOI and $100,000 in annual mortgage debt service would have a DSCR of 1.40 ($140,000 ÷ $100,000 = 1.4). The ratio helps lenders determine the maximum loan size based on the cash flow generated by the property.

A DSCR of less than 1 indicates a negative cash flow. For example, a DSCR of .92 means that there is only enough NOI to cover 92% of annual debt service. In general, commercial lenders look for DSCRs of at least 1.25 to ensure adequate cash flow. A lower DSCR may be acceptable for loans with shorter amortization periods and/or properties with stable cash flows. Higher ratios may be required for properties with volatile cash flows – for example, hotels, which lack the long-term (and therefore, more predictable) tenant leases common to other types of commercial real estate.

Interest Rates and Fees

Interest rates on commercial loans are generally higher than on residential loans. In addition, commercial real estate loans usually involve fees that add to the overall cost of the loan, including appraisal, legal, loan application, loan origination and/or survey fees. Some costs must be paid up front before the loan is approved (or rejected), while others apply annually. For example, a loan may have a one-time loan origination fee of 1%, due at the time of closing, and an annual fee of one quarter of one percent (0.25%) until the loan is fully paid. A $1 million loan, for example, might require a 1% loan origination fee equal to $10,000 to be paid up front, with a 0.25% fee of $2,500 paid annually (in addition to interest).

Prepayment

A commercial real estate finance may have restrictions on prepayment, designed to preserve the lender’s anticipated yield on a loan. If the investors settle a debt before the loan’s maturity date, they will likely have to pay prepayment penalties. There are four primary types of “exit” penalties for paying off a loan early:

  • Prepayment Penalty. This is the most basic prepayment penalty, calculated by multiplying the current outstanding balance by a specified prepayment penalty.
  • Interest Guarantee. The lender is entitled to a specified amount of interest, even if the loan is paid off early. For example, a loan may have a 10% interest rate guaranteed for 60 months, with a 5% exit fee after that.
  • Lockout. The borrower cannot pay off the loan before a specified period of time, such as a 5-year lockout.
  • Defeasance. A substitution of collateral. Instead of paying cash to the lender, the borrower exchanges new collateral (usually Treasury securities) for the original loan collateral. High penalties can be attached to this method of paying off a loan.

Prepayment terms are identified in the loan documents and can be negotiated along with other loan terms in commercial real estate loans. Options should be understood ahead of time and evaluated before paying off a loan early.

The Bottom Line

With commercial real estate finance, it is usually an investor (often a business entity) that purchases the property, leases out space and collects rent from the businesses that operate within the property: The investment is intended to be an income-producing property.

When evaluating commercial real estate loans, lenders consider the loan’s collateral; the creditworthiness of the entity (or principals/owners), including three to five years of financial statements and income tax returns; and financial ratios, such as the loan-to-value ratio and the debt-service coverage ratio. For more information, read 7 Steps To A Hot Commercial Real Estate Deal and Find Fortune In Commercial Real Estate.

By Jean Folger
View Full Article: Commercial Real Estate Loans http://www.investopedia.com/articles/personal-finance/100314/commercial-real-estate-loans.asp#ixzz3lPG1yvwo


About Tower Capital:
We are a Commercial Real Estate Finance firm specializing in debt and equity placement on behalf of commercial real estate investors throughout the country. We offer borrowers short term bridge solutions through our in-house private money platform, as well effectuating conventional permanent financing through our commercial mortgage brokerage division.

Commercial real estate financing from Tower Capital provides competitive solutions for professional real estate investors seeking loans.

[button size=”medium” color=”#ffffff” background=”#a61e22″ radius=”0px” type=”flat” link=”http://www.towercapllc.com/” newwindow=”false” ]View our Commercial Real Estate Finance[/button]

RealShare National Investment & Finance Conference – Part 2

RealShare National Investment & Finance Conference

The afternoon sessions focused largely on the state of the economy and the drivers affecting it.

The opening RealShare National Investment & Finance Conference session was titled Power Panel: Direct from the C-Suite and was moderated by Lew Horne, President of CBRE Greater LA/Orange County Region. Panelists included Warren De Haan, Founder & Managing Partner of ACORE Capital; Ken Perry, President & CEO of The Swig Company; Fred Schmidt, President & COO at Coldwell Banker Commercial; Lydia Tan, SVP at Bentall Kennedy; and Thomas Whitesell, Managing Director at Capital Source.

Despite the geopolitical issues facing Europe, the Middle East, and Africa, the global markets have been strengthening overall. There was a 40% increase in investment activity from 2013 to 2014, with America responsible for about half the volume last year at $545 billion. The top 6 markets were London, Tokyo, San Francisco, Sydney, New York, and Dallas. The commercial real estate market in the US is benefitting largely from employment drivers in energy, education, medicine and technology.

Overall, most asset classes have seen gradual decreases in vacancy, however, each sector faces its own challenges. All time high stock market prices have helped the wealthy to become wealthier and at the same time the country’s poor are provided with greater subsidies, which puts additional squeeze on the middle class and is illustrated through consumer shopping habits. Both high-end retailers as well as discount brands have seen revenues pick up, while those catering to the middle classes struggle. The shift from brick and mortar to online shopping by consumers is a dynamic continuing to affect the retail industry, causing less demand for traditional retail space. Retailers are shifting their focus towards supply chain and how to best accomplish same day fulfilment to their customers. Consequently, the industrial sector has benefitted from increased demand for warehouse and fulfilment centers. The office sector is facing challenges of its own. While it seems that a strengthening economy has ushered in new job growth, the average square foot per employee has decreased to 175 square feet, which has minimized space absorption to some extent. In multifamily, millennials will continue to be a driving force for the next 20 years as developers and property owners cater to their specific tastes, which include smaller unit sizes but with nicer finishes and a greater number of property amenities.

Overall across all sectors the debt markets seem to be driving valuations. Lenders are dropping their minimum debt yield requirements to win deals, which lead to additional loan proceeds and higher prices. The debt markets are providing investors with strong risk adjusted returns in comparison to other alternatives, such as the bond market. With capital readily available and looking to be deployed, the frothiness experienced in today’s capital markets environment should continue for the foreseeable future. There was a consensus that some slowdown in capital might be healthy. The only reason why some deals are making sense for investors is because capital is so cheap and this causes inflated pricing. The last downturn was due in part to a lack of discipline by investors and there is a concern that the same mistakes are already being repeated.

The last panel of the day was In Search of Yield: The Outlook for Investment. The moderator was Michael Zietsman, Managing Director at JLL and the panel featured Geoff Davis, President of HREC Investment Advisors; Paul Feinstein, Managing Director of Wealth Management at UBS, Christopher Flick, SVP at PIMCO; and Lynn King-Tolliver, SVP at Heitman Capital Management.

Lynn King-Tolliver started the discussion by noting that the market overall is showing a healthy construction pipeline that seems to be in line with demand. She believes that the market has another 24 -36 months of growth before there is an adjustment, however it is uncertain what the trigger will be. Christopher Flick of PIMCO shared the sentiment that there is room to grow but is worried about the market’s reaction to an increase in interest rates. The panel showed some agreement that when the next downturn does arrive, it will not be as long or as deep as what was experienced during the Great Recession. It was difficult to form a consensus on exactly where we are in the current cycle but one thing was certain – the USA is well ahead of Europe.

It is no secret that US-based institutions have been facing tremendous competition from foreign investors looking for a safe haven to plant their money, contributing to cap rate compression and increased property values. However, unlike in the past, foreign capital is not just sticking to gateway markets. They too are beginning to chase yield in secondary markets. Foreign investors also tend to gravitate towards office and hotel assets and are less comfortable in the multifamily space, as evidenced by much less foreign capital in that sector.

Despite a smaller turnout than expected, the RealShare National Investment & Finance Conference was informative and provided some solid networking opportunities. For part 1 of this blog, please click here.


About Tower Capital:
We are a Commercial Real Estate Finance firm specializing in debt and equity placement on behalf of commercial real estate investors throughout the country. We offer borrowers short term bridge solutions through our in-house private money platform, as well effectuating conventional permanent financing through our commercial mortgage brokerage division.

[button size=”medium” color=”#ffffff” background=”#a61e22″ radius=”0px” type=”flat” link=”http://www.towercapllc.com/” newwindow=”false” ]View our Commercial Real Estate Finance[/button]

Commercial Real Estate Finance

Commercial Real Estate Finance Phoenix

Tower Capital is a Commercial Real Estate Finance firm specializing in debt and equity placement on behalf of commercial real estate investors throughout the country. We offer borrowers short term bridge solutions through our in-house private money platform, as well effectuating conventional permanent financing through our commercial mortgage brokerage division.

Tower Capital believes in forging strong relationships that long outlive single transactions. We connect our clients with the appropriate capital sources that will allow them to achieve their long term investment goals & objectives and ensure continued growth and success.

Tower Capital is truly a one stop shop for the entire capital stack, whether it is through our in-house private bridge lending platform, or utilizing our myriad of capital relationships for conventional bridge debt, mezzanine, equity, or permanent financing. Our funding sources include:

  • Government Sponsored Entities: Fannie Mae, Freddie Mac, HUD
  • Commercial Banks
  • CMBS
  • Bridge & Mezzanine Debt Funds
  • Private Equity
  • Life Insurance Companies

 


About Tower Capital:
We are a Commercial Real Estate Finance firm specializing in debt and equity placement on behalf of commercial real estate investors throughout the country. We offer borrowers short term bridge solutions through our in-house private money platform, as well effectuating conventional permanent financing through our commercial mortgage brokerage division.

[button size=”medium” color=”#ffffff” background=”#a61e22″ radius=”0px” type=”flat” link=”http://www.towercapllc.com/” newwindow=”false” ]View our Commercial Real Estate Finance[/button]