Commercial Real Estate: Five Facts From a Broker
The current state of loans, lenders, and lurking opportunities for those with cash to spare.
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Today I met with my commercial mortgage broker (a partner in a national firm) to get a sense of the current appetite for office building loans, and I came away with some interesting nuggets:
- Spreads for "no-brainer"-type loans are much tighter than I'd have ever guessed (200-250 bps.), mostly because there's tremendous liquidity from insurance companies chasing these rare loans. What's a "no-brainer" loan? One where the amount of the loan sought is no more than nine to 11 times the building's current Net Operating Income, assuming a nice, even, rent rollover, and solid credit tenants. That's the end of the good news. Now for the bad news: Unless you fall into this rather narrow category, don't even bother looking.
- Since the number of "no-brainer" loans made over the last five years are...shall we say, "not many," according to my broker, a boatload of mortgages that began maturing last year have no chance of being refinanced, and were kicked into 2010 by lenders so that they wouldn't have to deal with them in their FY 2009 financials; hence, the second half of this year will mark the beginning of two-to-four-year-long foreclosure/workout fest;
- The lenders' "due diligence" has changed from "What's the building worth? $100 million? Okay here's a loan for $120 million," to "...and our 30-day ransacking of your offices by our team of forensic accountants, will conclude with a rectal exam of all the "C" level officers in your firm."
- Encouraging to those of us who are suffering through various forms of commercial real estate shorts were his comments that the fundamentals of even the best metropolitan markets (rental rates, tenant credits, tenant improvement allowances, etc.) aren't only heading south, but they're worsening at an accelerating rate; click here for some more gory details.
- Interesting opportunities lurking for those with cash to spare? "Discounted payoff loans," where a new lender steps in, pays the existing lender $0.40 to $0.60 on the dollar, the borrower puts in a fresh chunk of equity and the building is kept out of a messy bankruptcy/foreclosure. Interestingly, this was an area highlighted by CapitalSource (CSE) management on its earnings call, as the only type of real estate loan that CSE might consider going forward.
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