We recently attended the Realshare National Investment & Finance conference at the Omni Hotel in in downtown Los Angeles. There were a number of topics covered including the current state of the capital markets, loan programs and underwriting standards for various types of capital sources, the overall economy in relation to commercial real estate, and where institutional investors are finding yield.
In today’s market capital is readily available and aggressively chasing deals and there is no shortage of options for borrowers. Understanding the investor’s goals and objectives is key to securing proper loan program with the right lender.
Four panel discussions in particular were of most interest to me, and which I would like to focus on in this blog.
The first was titled: Winning Deals: What’s New in the Capital Stack? The panel members included: Philip Block, SVP of RealtyMogul.com; Jeff Hudson, CEO of George Elkins Mortgage Banking Company; Alexa Mizrahi, Loan Originator at Lone Oak Fund; Jason Fritton, Co-Founder & CEO of Patch of Land; and Barbara Morrison, Founder and President of TMC Financing.
The main focus of the panel discussion centered around the nuances between Life Company execution versus CMBS, SBA parameters, and the growing presence of family offices in the capital markets.
For those investors looking to lock in long-term debt, both life insurance companies and the conduit (CMBS) market are extremely competitive options. CMBS is able to provide higher leverage, at around 70% to 80% LTV depending on the type of asset, and is open to financing properties in smaller and tertiary markets, as well as older or “C” class properties. They can offer interest only payments, sometimes for the entire life of the loan, and typically have a 30 year amortization schedule, providing maximum cash flow to the borrower. Life insurance companies are typically maxed out at 65% LTV, have shorter amortization periods (20 – 25 years) and prefer larger core markets and class “A” and “B+” assets. However, in today’s extremely competitive lending environment it was noted that life companies are not as core-oriented as they once were and are more open to listening to “stories” for properties that may have not traditionally fit within their credit box. Despite the lower leverage and additional asset and location fickleness, life companies do provide some advantages over CMBS. Life companies tend to price about 10 – 25% inside CMBS, they do not have the reserve holdback requirements found in CMBS loans, they offer greater prepayment flexibility with a Yield Maintenance or step-down structure versus the defeasance commonly found in CMBS, have less cumbersome loan documents, and there is no 3rd party loan servicer which can be a point of frustration for many CMBS borrowers.
Another popular source of capital is the Small Business Administration (SBA). The purpose of the SBA is to encourage job creation. It lends to owner-users who occupy at least 51% of their property, and can finance both new construction and existing properties. It allows borrowers the ability to obtain up to 90% LTV financing, along with offering longer term, fully amortizing loan programs. The SBA used to only lend to borrowers with a net worth less than $5 million but has recently removed that restriction, opening up this source of capital to a wider pool of borrowers. With a focus on owner-users, it is surprising that the SBA is also very active in the hospitality space. The caveat is that the hotel must be owner managed. Another fact that many people do not realize is that the SBA will only refinance short term debt of 3 years or less, so for borrowers facing a long term loan that is maturing, the SBA is not an option, even if they meet all the other criteria.
Life companies, CMBS, and the SBA have been active in the commercial real estate lending space for quite some time, however the newest and most dynamic source of capital are family offices. Family offices are sprouting up across the country and are typically created by high net worth individuals emanating from other businesses or industries who are looking to put their money to work through commercial real estate lending and investing. Family offices provide real estate owners and operators with both debt and equity for their projects. They are often much more creative and flexible than traditional sources of capital and can even offer credit enhancements to sponsors who lack balance sheet strength, usually in consideration for some degree of back-end profit participation. Tower Capital has built relationships with a number of family offices that have been able to provide capital to our clients where traditional lenders have either not found a way to get comfortable with the transaction or have not been a good fit given the intricacies of the deal.
The next panel of interest was Debt for Every Deal: Lessons in Lending. The panel was moderated by Robert Hodge, Senior Director for Marcus & Millichap and included Karine Clark, Senior Director of Lending at Bolour Associates; Eric Ealy, Western Regional Director for Freddie Mac; Adam Petriella, EVP at Coldwell Banker Comercial Alliance; Kevin Pleasant, Regional Manager for Comercial Mortgage Lending at Chase; Michael Sanchez, Vice President of Colony Capital; and Jeffrey Weidell, President of NorthMarq Capital.
Chase Bank’s commercial mortgage lending division is mostly active along the west coast, Chicago, and Boston. They are a high volume lender and I was surprised to learn that for such a large financial institution their average loan size is only about $2 million. If your deal fits within their credit box, they can be an extremely competitive source of very low interest rates. Mr. Pleasant noted that the low interest rate environment has created a lot of demand for early refinances and that he expects spreads to possibly tighten in 2016.
Given the amount of multifamily volume we transact at Tower Capital, I was extremely interested in the insights offered by Eric Ealy, Western Regional Director for Freddie Mac. As early as late April, there were concerns that both Fannie Mae and Freddie Mac, two of the main sources for multifamily financing in the U.S., were already approaching their annual lending quotas of $30 billion a piece. This lead to a substantial increase in spreads in order to slow down the pace of originations and got a lot of people nervous since both the agencies have been such an attractive source of low interest, non-recourse financing. Mr. Ealy assured the crowd that Freddie Mac “has plenty of money to lend.” To combat the quota problem Freddie Mac has adjusted what is now covered under the caps. Small balance loans under $5 million, affordable and manufactured housing, properties under 50 units, and legacy loans which are already in Freddie Mac’s portfolio will not count towards the $30 billion cap. In fact, at Tower Capital we are currently seeing very aggressive pricing for these categories; as much as 40 basis points below normal pricing. Mr. Ealy noted that Freddie is already at about $33 billion in total loan volume this year and he expects that number to reach upwards of $45 billion by December 31st.
With total market transactional velocity already reaching peak 2006 – 2007 levels, the agencies aren’t the only lenders who have been busy. Jeff Weidell of NorthMarq, stated that the life companies are already becoming constrained and anticipates many of them reaching their quotas well in advance of the year’s end.
The general census of the panel was that underwriting is still remaining fairly disciplined, and the influx of capital to the market will continue to put pressure on interest rate compression. The panel has also noticed more cash out requests by long term owners who are taking advantage of today’s still historically low interest rate environment.
Stay tuned for next week where we will cover the insights offered by Warren De Haan, Founder of ACORE Capital; Paul Feinstein, Managing Director of Wealth Management at UBS, Christopher Flick, SVP at PIMCO, and many more during panel discussions titled: Power Panel: Direct from the C-Suite and In Search of Yield: The Outlook for Investment.