Commercial Lending Capital

The road block could be thought of as having a flashing signs reading “Values Suck” or “Your property is NOT worth what you think it is”.

My name is Christopher Ware; I work in the Investor Relations department here at Commercial Lending Capital. My experience for the past 20 years has been as an underwriter for commercial real estate lending. This experience has included portfolio, CMBS and FNMA. I have also worked as a Real Estate Appraiser in the single family lending realm and as an underwriter for both FNMA and portfolio single family lending.

In my position in the Investment Relations department I am charged with matching underwriting standards and products with our clients needs. Needless to say these have been both trying and exciting times. As the CMBS market has dried up along with the well known issues at FNMA and with assorted accounting methodology changes, Lenders willing to execute new commercial loans have been more and more difficult to locate. This reluctance has been exacerbated by commercial real estate Brokers living in 2006 and Lenders living in the 1950’s; after all it is the Lender’s money and they can do what they want. What I mean by this is Brokers have not been realistic in their expectations of pricing and (LTV’s), while Lenders have been cautious in value appreciation and the ability of commercial properties to service debt. In other words we are back to the adage that “believe nothing what you hear and half of what you see”.

We all know that real estate has devalued. Nobody doubts that it has NOT hit bottom yet; so what is your property worth? Nobody really knows until the knowledge professional (appraiser) is standing in front of the collateral and has done their research. What we DO know is that perhaps 75% of all values given by Brokers as fair market estimates have been off the mark by as much as 75% (not a typo). The most dreaded call that CLC can make is to a Broker or Client with this information that their property has devalued. Sometimes this devaluation kills the loan dead in its tracks and most of the time it means adjusting the scenario to the discovered ratios and values. All I can say is don’t shoot the messenger.

As credit has tightened interest rates have climbed and so have LTV’s been reduced; a property that a year ago Lenders would have been willing to loan up to 75% sometimes 80% of value have been affected by lower and declining values and as such are showing an unwillingness to lend higher than 65% of the current value. The LTV reduction is heightened by hyper awareness of declining values. The lower values for commercial properties are a direct result of lease rates (drastically) decreasing, climbing vacancies, and higher Capitalization (“Cap”) rates. Cap rate is a measure of the ratio between the net operating income produced by an asset (usually real estate) and its capital cost (the original price paid to buy the asset) or alternatively, its current market value. As income has decreased on commercial real estate, Cap rates have risen, reducing the market value of commercial real estate properties. Because of the uncertainty of values, Lenders have been unwilling to loan with LTV’s higher than 65%. More to the point is that historically Investors have been able to use investment properties as ATM’s, and tap into the increased value to get working capital, or just capital period. Lenders are unwilling to give cash out “for the wrong reasons” in the recent months, which has further tightened the ability to refinance commercial real estate. Cash out requests will require a logical and business minded explanation in scenario stage.

The good news is that President Obama is passing capital into the secondary credit market for commercial asset backed securities. What this means to those of us in the trenches is that there will be more entities available, with capital, that can go into the secondary market and purchase the loans that we are originating. This is outstanding news for those of us that have been used to operating in the secondary market and as well the CMBS market. This process is the equivalent of receiving cardio shock therapy during a heart attack. Hopefully Obama employs some great paramedics.