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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.

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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.

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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]