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LOS ANGELES-Transwestern recently added a structured-finance group to its local office, part of a broad strategy to enhance its management-services, investment-sales and development business lines. With 14 years’ experience arranging some $4.4 billion in debt-and-equity finance, the firm’s SVP Steven Orchard has seen a huge shift in the financing of commercial real estate deals. GlobeSt.com chatted with Orchard about how “clean” deals involving debt on stable core assets have become increasingly rare and how players large and small are capitalizing deals with transitional leasing and too much leverage.
GlobeSt.com: Explain the role of “structured finance” in today’s commercial real estate landscape.
Steven Orchard: Structured finance is a third-party advisor to the deal. We are educating both lenders and borrowers about their environment, and we arrange real estate financing based on prevailing market conditions. As an intermediary, one is always concerned about shifting conditions diminishing that value proposition. For example, technology is connecting people in a way that seemingly threatens brokers. We used to get paid because we had the name and phone number of the right capital source. But now, technology is accelerating the pace of play, making possession of static data pretty irrelevant. We aren’t just running a switchboard anymore. Conditions are fluid, deals are tough, and everyone is buried in information. Our role is to cut through the noise, establish and defend market terms and keep the transaction transparent and current through an extremely rigorous due-diligence process.
GlobeSt.com: You mentioned “prevailing market conditions.” What are they?
S.O.: Capital is cheap, but the marketplace is inefficient. We just came back from the Mortgage Bankers Association conference, where we met with 30 or so lenders. Universally, allocations to real estate are up—in most cases, quite radically. Lenders are trying to be conservative, but we are clearly oversupplied with capital. 2013 promises the cheapest money I expect to see in my career. The problem is that we are just now climbing out of our storm shelters. Transactional velocity is still thin, platforms are evolving, and the rules of risk underwriting are fuzzy. So the market is choppy.”
GlobeSt.com: What are some examples of financing assignments you find these days?
S.O.: Over the last several years, we have managed to triage most of the severely distressed real estate. There’s not a lot of blood on the street anymore. However, we’re five to 10 years from 2003-2008—a period of prolific real estate deal-making. Five to 10 years is the average shelf-life of a lease or loan. So, leases that were set at a high-water mark rent are expiring, and loans that were funded at a time of unprecedented liquidity and leverage are maturing. Our day-to-day assignment is exactly what you would expect: recapping a good real estate asset with transitional leasing and too much debt.
GlobeSt.com: How do you solve those problems?
S.O.: Frankly, it’s nothing new. I grew up doing tough deals. There’s probably no shop in the western US better known for tough financing assignments than my alma mater, George Smith Partners. Even in the go-go days, I was engineering solutions to broken business plans, selling tough stories and underwriting vacating tenants, over-market rents and troubled borrowers. These deals take something of a street-fighter attitude. We battle for every yard—execute on the fundamentals, actively maintain trust in relationships and think strategically and creatively.
GlobeSt.com: Describe the role of large institutional owners in the process today.
S.O.: Transwestern’s historical client base is pretty institutional. Bet even the elite can’t duck problems today. They have tenant rollover and over-market rent. They have over-leveraged assets. Higher relative quality of properties and sponsorship is a distinct advantage, but structurally the deals are the same. My team gets to attack large, high-quality assets for first-class sponsors, applying the same aggressive and creative attitude that was so productive for us over the last 10 years.
GlobeSt.com: As the recession abates, what are some of the opportunities it has uncovered?
S.O.: Anyone who escaped the recession in good health has great potential now. Transwestern came out strong, well-capitalized, profitable and growing. So, we are carefully picking up talent to where other shops are struggling. The opportunity today is fortifying our brand and claiming market share for the next cycle.
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