Browse Tag: Loan

The REO Schedule: Too Much Information Is Never Enough

Finance

The underwriting of commercial real estate loans is part art and part science. When approaching the bank for the capital your transaction needs, it’s important to be able to see the process from all sides. Underwriters will tell you: what gets the benefit of the doubt in underwriting decisions is detail – the more you provide to the lender, the happier and more agreeable that lender will likely be.

The borrower’s property portfolio — the list of property owned by a borrowing entity, also known as a REO schedule, is the “other half” of the one-two punch along with the balance sheet/personal financial statement. These deliverables are the minimum a loan discussion requires. But what belongs on the REO schedule?

[DISCLAIMER: Never, ever take anything you read here at The Source as legal or fiduciary advice.  Always retain qualified counsel!]

An experienced underwriter will be able to tell at a glance of the REO schedule what he or she is dealing with: is the borrowing entity a big corporate firm?  An individual?  A majority partnership LLC held n a minority partnership LLC all in turn held by a full corporation?  What the balance sheet doesn’t tell by itself the REO schedule will address and fill in the gaps.

Typically an REO schedule contains property facts and figures and the lender will have a form available.  But the fact is that many forms can be inadequate for the task at hand: demonstrating what the balance sheet and personal financial statement alone can’t.  Since a borrower isn’t there just to fill out forms, but instead to have a discussion about a financing, it’s essential to pay attention to what is and isn’t on the given form, and to make every effort to put what should reasonably be on that form into the hands of the lender.

The basics – property name, address, type, today’s loan balance, market value, monthly expenses and monthly income – are the bare minimum and space for these are found on REO schedule forms almost every time.  But this isn’t a detail level that gives the underwriter what is needed.    Consider adding more in the form of monthly operating expenses, the borrowing entity’s date of acquisition and percentage of ownership, names of existing lenders and other critical information.

Format For The Win

Make sure there are sufficient columns and that column headings are well-defined, leaving no chance to confuse monthly averages vs. annual totals.  Aiming to include 10-12 properties on a legal-sized sheet is a good benchmark when working in Excel, so set your type size to 11 points, limit your columns to A through Q and set a page scale of around 70%.

Photo credit: Hard Hat Stickers

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LIBOR: How You Probably Got Burned

Interest Rates
Interest Rates (Photo credit: 401(K) 2012)

So did any of the commercial property deals you touched in the past five years or longer use financing?  Let me guess: the answer is yes, of course.  Developers acquiring or improving commercial assets such as land or buildings tend not to self-finance. They often turn instead to our pinstriped friends at the banks for adjustable-rate loans – adjustable, more or less because long-term fixed-rate commercial loans are offered less and less by banks.

Enjoy Your Uncertainty

Why is fixed-rate financing out of favor?  “Too much risk,” mumble our pinstriped friends. That they complain about risk while having recently presided over a disaster of sub-prime, liars loans and the like, well, never mind.

What do the loan terms do to the performance of commercial property? Quite a bit.

Service to these floating-rate loans to a great degree constrains what a commercial space broker can do in terms of flexibility on a lease.  The way a landlord financed an improvement speaks volumes to what a broker or rep can expect to see out of the property even when perfectly matched with ideal tenants.

To put it another way: we on the leasing side of the proposition could do our jobs perfectly, but if the loans up the line are riding an adjustable interest rate — and these days, most are — the perfect tenant and the perfect space far too often have to miss each other because cash flow and debt service raise their heads to address the uncertainty. Uncertainty we didn’t always have to deal with before, but do now.

That’s the role of the banks: to provide capital at interest rates that reflect the market for capital. But as with so many things our pinstriped friends are supposed to be doing, the reality turns out to be very different.

Gosh, This Thing We Sold You Looks Risky: Good Thing We Sell Protection From It, Too

Most variable-rate loans get the varying rate from one of the numbers published daily as LIBOR – the London Interbank Offered Rate. The problem with variable-rate loans, of course, is that they tend to make it impossible to know the total borrowing cost. Which is why our pinstriped friends offer the chance to exchange, at some point down the road, the variable-rate with a fixed-rate that’s higher.  This is called the swap.  It, too, is keyed off of LIBOR.

So the banks, rather than accept the uncertainty of a fixed-rate long term loan, pass along to our industry the uncertainty of floating interest rates, then sell us the protection against floating interest rates.

That’s a lot of dependence on LIBOR.

Wouldn’t it be incredible if it turned out that the constantly-adjusting interest rates our pinstriped friends used to sell us the capital we need, then sell us the protection against the uncertainty of constantly-adjusting rates…were fixed?

By “fixed” I don’t mean “not floating”.  In this case, I mean “fixed” as in a “fixed fight” — a corruption, a cheat, a scam. Rigged. A fraud.

That’s exactly what it looks like today, as the lawsuits and criminal investigations pile up:

More at The Real News

It appears as if the LIBOR interest rate that governed your commercial property’s financing’s variable interest rate as well as the swap used to get a handle on borrowing costs was cooked for years to make member banks winners in their own derivatives trades.

To a broker or developer, this means you got left holding the bag and paid too much for capital.  To a tenant rep, this means you had to settle for less than the best match for space.  To a leasing agent or tenant, it means part of your rent calculations went not to either party but to cover our pinstriped friends.  And the list goes on and on.  It looks like the entirety of our industry — and every other that borrows, which is more of less all of them — has been once again punked by an out-of-control culture in banking.

Because keeping our pinstriped friends in pinstripes is apparently our responsibility, not theirs.

 

Mortgage Bankers Association: Strong Upticks In Most Commercial Sectors

U.S. Subprime lending expanded dramatically 20...
Different banking numbers; today’s are sunnier.

Our pinstriped friends over at the Mortgage Bankers Association released the 2Q 2012 Commercial/Multifamily Survey today, and announced a series of positive findings.

In second quarter 2012, MBA’s survey found:

  • Commercial plus multifamily lending was 25% higher  compared to the second quarter of 2011.
  • Commercial plus multifamily lending was 39% higher compared to the first quarter of 2012.
  • Dollar volume of loans for commercial bank portfolios went up over 58% from the second quarter of 2011.
  • A 50% rise in loan volumes for Government Sponsored Enterprises (i.e., Fannie Mae and Freddie Mac).

Additionally, loan dollar volume went up in 2Q 2012 for loans backing:

  • 56% – retail properties;
  • 22% – hotel properties;
  • 19% – multifamily apartment buildings; and
  • 15% – office buildings.

Report: Office loan originations up sharply at +66%

According to MBA’s numbers for loan originations nationaiwde for 2Q 2012, there was a 66% increase for office properties as well as a 47% percent increase for  industrial properties, a 33% percent increase for healthcare properties, a 29% percent  increase for retail properties and a 21%  percent increase for multifamily properties.

The good commercial RE news found its way around the pinstripe-prone community this morning, with coverage at AmericanBanker.com leading the way.

About The MBA

Headquartered in Washington, the Mortgage Bankers Association works to help their members conduct business of single and multifamily mortgage finance by promoting fair and ethical lending practices, fostering professional excellence through educational programs and publications, providing news and information, and holding conferences.

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Federal Reserve Updates On Commercial Real Estate: Two Stories At Once?

English: A map of the 12 districts of the Unit...
A map of the 12 districts of the United States Federal Reserve system. (Photo credit: Wikipedia)

The Federal Reserve has issued some changes concerning commercial real estate. One is a clear positive in its new Beige Book, or collection of economic conditions across the country, and another change is more ambiguous — a proposed update in the Fed’s capital requirements made of banks.

First, the good news:

The Beige Book: Demand Is Up For Commercial Property Loans

A piece in Credit Union Times tells the tale of the Fed’s new Beige Book, that report of nationwide economic conditions.  The new Beige Book contains reports from several districts across the Federal Reserve System that delinquencies on commercial loans are down, and that has fueled demand for more commercial property loans.

According to the Fed, the Atlanta district led the way with the greatest increase in demand for commercial loans:

A number of districts, including Cleveland, Atlanta, Chicago, Dallas, and San Francisco, said loan pricing remained quite competitive. Several districts noted increased demand for capital spending loans.

The Fed said lending standards were relatively unchanged to slightly easier across districts and loan types. Most district banks said loan delinquencies continued to decline as credit quality remained solid and loan quality improved.

 “Given the woes from the past couple of years, whether intellectually or emotionally perceived, the reports should be seen as good news for the industry,” according to Brian Turner, director and chief strategist at Catalyst Strategic Solutions, a subsidiary of Catalyst Corporate Federal Credit Union in Plano, Texas, in his latest analysis.

Second quarter data from the NCUA shows loan growth at an annualized pace of 0.4% so far this year as a 3.1% increase in vehicle loans and a 1.5% increase in real estate loans were offset by a 13.5% decline in unsecured credit cards, Turner said.

Still, weak consumer spending induced by job insecurity, falling values and volatile stock market performance have all contributed to modest loan growth, Turner noted, adding nationally, this has sent consumer spending growth down to 1.4%.

Prepared at the Federal Reserve Bank of Dallas and based on information collected on or before May 25, the Beige Book contains current economic conditions by district through reports from bank and branch directors and interviews with key business contacts, economists, market experts, and other sources, according to the Fed.

On The Other Hand: Upped Capital Requirements for CRE Lenders Proposed

An interesting contrast to the Beige Book update as it affects commercial property is the nearly concurrent proposed  change made in the Fed’s capital requirement formulations for banks lending to/getting exposure from commercial real estate.  In short, banks are being told to increase their perception of risk when lending in support of commercial real estate:

The Federal Reserve on Thursday released a proposal that would implement a global agreement known as Basel III capital rules for banks, including a measure that would assign a higher risk weight to commercial real estate loans that are included in a calculation for how much capital an institution needs to hold as a buffer. The Fed assigns a higher 150% risk weight to exposures to commercial real estate loans, up from a current 100% risk weight. The Fed said these loans presented elevated risk over “several recent economic cycles.” Based on the proposal, which implements the international accord, banks will be required to hold the strictest form of common-equity capital of 7% of their risk-based assets, phased in between January 2013 and 2019.

While our pinstriped friends will no doubt point to this — or any intervention on the part of their regulators — as the convenient excuse for their current miserly credit posture to secondary-market-and-below commercial property deals, the fact is not much else can or should be expected in the wake of a financial crisis brought on in the first place by monumentally bad risk management on the part of banks.  The question is how many of us will end up dragged into the woodshed with them?

Commercial Real Estate Lender Ranking Puts Wells Fargo On Top

Finance
Finance (Photo credit: Tax Credits)

In spite of the banking industry’s central role in causing the 2008 meltdown, and its enduring role in prolonging the resulting credit crunch for so much of commercial real estate, new indicators show a market growing once again.  It’s important to understand what the cause and effect relationship is here.  It’s our role — as brokers, agents, investors and reps — to work to create the economic activity and financing demand that brings our bashful pinstriped friends out of their shells.  It falls to us to reintroduce them to their role: capital allocation. And we’ve been doing better.

So which of the banks have been setting aside excuses, getting back to basics and allocating capital to our industry by financing its deals? David Bodamer at National Real Estate Investor wrote a piece summarizing the NREI’s 21st Annual Top Lenders Survey that lines up the big guys and gals moving the billions and ranks them by commercial property portfolio.  That sound of horse hooves you hear is because, according to Bodamer, Wells Fargo tops the list:

Wells Fargo again tops the direct lender list by a wide margin. The firm financed $43.66 billion in commercial real estate loans in 2011—a nearly $7 billion increase over the $36.90 billion in activity it reported in 2010. PNC Real Estate jumped to the number two spot in our list with $11.01 billion in loans, barely edging MetLife’s $11.00 billion figure. The output was up from $4.40 billion for PNC and $8.40 billion for MetLife in 2010.

On the financial intermediary side, HFF more than doubled its volume from $11.90 billion in 2010 to $22.97 billion in 2011. Meridian Capital Group claimed the number two slot by arranging $17.25 billion, edging a trio of firms—Wells Fargo, Eastdil Secured and CBRE Group—that all arranged more than $16 billion in financing in 2011. In contrast, in 2010 only two firms—HFF and CBRE—topped $10 billion on the financial intermediary side.

You can check out NREI’s Top 25 Direct Lenders and Top 25 Financial Intermediaries here for a convenient summary of which banks are most following your lead in reconstituting the national commercial real estate industry.

 

Commercial Loans Up, Hotel Market Trending in Right Direction

W Hotel Times Square lobby
Image by marcus_jb1973 via Flickr

The latest bit of good news: according to data gathered from the Federal Reserve, the amount of commercial real estate loans ticked up in April 2011.

Even better, the number of delinquent commercial RE loans has gone down in the hotels and lodging sector.  The data comes from Trepp, LLC, a leading provider of CMBS and commercial mortgage information, analytics and technology to the global securities and investment management industries.   The decrease in delinquent loans found across the country came in at a whopping 52 basis points bringing it down to 15.45%.   You can find more evidence of this positive movement from Crain’s Chicago Business.

Also on the sunny side: Colliers International says industrial real estate is poised for a rebound.  The brokerage believes manufacturing is coming back with a vengeance in several primary markets such as Chicago, Dallas, New Jersey and a few more.

What are some strategies for brokers?  While we are waiting for many of these sectors to recover, we still have the lowest interest rates in history, so brokers should recognize it’s an ideal time for those businesses with solid cash flow and a great credit rating to take advantage of the market.  Since there are only a finite number of these type of clients, many commercial brokers have gotten creative and have taken to listing and leasing more properties than they have done in the past.  These type of deals are smaller in transaction number, but are more plentiful in today’s market.  Yes, it’s a lot more work for less money, but it’s a great way to push the market until things improve.  It’s also a great way to build relationships with those business owners who don’t have stellar credit, but do have a great product and decent cash flow,  who could turn into a loyal client because you were willing to work with them when they needed you the most.

Consider specialization – many brokers are now specializing in green buildings or industrial make-overs in up and coming areas in order to carve a niche out for themselves, too.   This is the type of market where there are opportunities to be had and relationships are waiting to be built to take you into the improving market conditions.