LOS ANGELES—Commercial real estate investmentshave outperformed other investment classes since the “GreatRecession” on a risk-adjusted basis. The markets have deduced this,and debt and equity capital is flooding commercial real estatemarkets. Not only is there abundant supply of capital, but now ashortage of supply of assets needing financing. The result of thisincreased competition is lenders competing on pricing, proceeds,and structure. Some examples are:

  • Life insurance companies, who are notoriously conservativefixed-rate permanent lenders, have recently increased maximumleverage to 75% loan to value on selective assets. Additionally,they are providing more flexible prepayment options and the abilityto get incremental funds during the term of the loan as the netoperating income increases.
  • CMBS lenders have moved underwriting standards for loan sizingto 8.0% debt yields from 9.0% debt yields. For certain assets, CMBSlenders can be as tight as a 7.5% debt yield without anymezzanine/B-note proceeds putting all into the 1stmortgage; which can increase proceeds by over 10%.
  • Non-recourse bridge debt pricing is close to historic lows atLIBOR + 1.50%, or an all-in rate of approximately 1.65%.
  • Equity pricing has tightened as well. Cumulative preferredreturns have moved from 12% to 10% and 8% in some cases. This iswhile yield expectations have come in 2%-4%.

With lenders and investors unable to differentiate themselvesthrough quantitative measures such as pricing and proceeds, theyare instead using various loan structure options and incentives inorder to set themselves apart from the competition. Examples ofthese competitive loan structure offerings include:

  • Recourse. Non-recourse debt is now plentifulfor all types of debt including permanent, construction, andbridge. Additionally, lenders will now look to entities in lieu of“warm bodies” for recourse carveouts and completionguarantees.
  • Longer Interest-Only Periods. CMBS can go upto 10 years interest only, with five years interest only on a10-year term being typical. Even life insurance companies areoffering 2-3 years of interest only. Construction and bridgelenders are providing up to five years interest only; wherehistorically their loans began amortizing after a two-yearreposition or development period.
  • Capping Tenant Improvement, Leasing Commission, andReplacement Reserves. For CMBS, minimum reserves are beingcalculated, with most being capped.
  • Mezzanine Debt/Preferred Equity. Fixed orfloating mezzanine debt and/or preferred equity over the firstmortgage is now available up to 95% of the capital stack. Themezzanine debt and preferred equity is much more competitivelypriced ranging from 5% to 15% depending upon real estate and marketrisk, leverage, and sponsorship.
  • One-Stop Shopping for Bridge to Perm. Termlenders are willing to take construction, development, and lease-uprisk in order to get the permanent mortgages. They will lockrate on permanent and construction loans up to 24 months prior tostabilization. We are also seeing lenders provide bridge toperm for agency debt and CMBS.
  • Serving Tertiary Markets. Competition isfierce among lenders in core markets, so capital sources are nowservicing secondary and tertiary markets. This is to findbetter assets or higher yields on like property in coremarkets.

With the abundance of capital, the market is inefficient. Lenders and investors are being more subjective in pricing andstructure. Borrowers should first identify their specific needs(i.e. rate, proceeds, etc.); then test a broad sampling of lendersand investors to ensure they are securing the best deal.


Gary E. Mozer is principal and managing director of GeorgeSmith Partners. The views expressed in this column are the author'sown.

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