MIAMI—The commercial real estate capital markets are flush these days with CMBS, life insurance companies, the GSEs and banks all vying to underwrite the best deals. That doesn't mean borrowers can write their own tickets or be complacent about the limits of the market. In part 2 of this article, Shahram Siddiqui, a partner at Berger Singerman, gives GlobeSt.com readers the benefits and drawbacks of tapping two distinctly separate and different sources of capital: the CMBS market and shadow lending.

In part 1, he discusses banks and life insurance companies.

CMBS

In the current environment, Siddiqui says, there is great demand for CMBS bonds at all levels "so this is a frothy market."

"Due to competition, LTV's have increased dramatically," will LTVs going as high as 75%. In addition, some borrowers have been able to also obtain mezzanine financing rights, so overall leverage can go as high as 90%, he says.

Interestingly, ground lease deals and Op-Co/Prop-Co deals are returning, Siddiqui says, and so are transactions where there are significant amounts of up front interest reserves, and thus a bet on the ability to reposition an asset. "Underlying credit quality of the tenant is not so much an underwriting focus today; so long as the proposed payment fits within historical financials there is very little forward underwriting going on," he reports.

As an example, Siddiqui tells of a portfolio deal he worked on in which the sponsor is a REIT managed by an offshore investment fund. "The guarantor had limited US assets, the collateral is located in non-major markets, and the cash flow relies on local tenants with limited operating histories."

How lax is underwriting getting? Siddiqui reports there is a growing willingness to lend to borrowers and sponsors who previously went through the foreclosure process with a CMBS servicer.

Bottom Line: As usual this is the cheapest money available but only on highly structured terms. Fears expressed by some in the market that underwriting is getting lax may be on target.

Shadow Lending

Siddiqui describes this category as loan-to-own lenders. Here, "money is expensive but if you have a story for an asset that has potential value, these lenders will lend.

Borrowers who may lack the necessary building permits, require significant construction exposure, need zoning variances, or still need to assemble land will find an audience with this group.

Bottom line: Some of these players are yesterday's distressed asset lenders.