Sales Velocity Increases While Lending Standards Loosen

By Marcelo Bermudez, President of Figueroa Capital Group, a subsidiary of Charles Dunn Co.

Regional brokerage firms like the Charles Dunn Co. continue to experience growth in personnel and actual deals closed within their investment sales and leasing teams. Along with it has been an increasing interest in various credit products to leverage the asset and improve returns.  CMBS and traditional bank resources are allowing loan-to-value ratios to climb higher and will consider more “story” to be attached to the request. “Story” refers to potential challenges or assumptions being made to attain certain occupancy or net operating income goals in order to obtain a loan approval.

While loan-to-value is a good primary gauge, debt service coverage ratios provide lenders and investors with a dashboard to understand the property’s capacity to support a loan and generate actual returns. With rates at historic lows compared to 2005 levels, the capitalization rates being used to figure out loan-to-value are truly artificial. Investors and even owner-users leveraging an SBA 90 percent loan platform can get frustrated when they learn that what the market bears has nothing to do with the actual valuation that comes back from appraisal review at a bank. Consider the Los Angeles markets, where multi-family buildings will sell at 4 percent cap rates and lower. Fannie might offer 80 percent financing, but when the loan offer comes in at 60 to 70 percent with a reserve requirement because it’s overpriced, investors tend to scratch their heads. While your author thinks that multi-family is overpriced, the buying continues.

Refinancing risk will continue to build, particularly for multi-family, and especially for those beginning to use partial and full interest-only loans, which reduce or do not amortize the loan balance during the term. With clear signals from the Fed that quantitative easing is seeing its sunset, relying on income growth or some other good news event is a mediocre strategy, at best. Taking a look at other commercial real estate types and locations, especially industrial in secondary markets, could provide greater returns for the risk.