The Changing Landscape of the Development Cycle in a Basel III World

By Brandon Wilhite Similar to virtually every other market, the commercial real estate market goes in cycles. Throughout much of the country, most product types Read more

Your Pad (Site) Or Mine?

By Charley Babb What once was an outlier real estate play has now become a significant commercial real estate asset class. Pad sites are much Read more

Cash Flow Management in Commercial Real Estate: CMBS Markets Post Great Recession

By: Josh Siegel The sub-prime mortgage crisis and recession of 2008 triggered a comprehensive restructure of the commercial mortgage-backed securities (CMBS) market. Between 2005 Read more

A Developer’s Best Friend: Tax Increment Financing (TIF)

By Duke Dennis Overview: What is a TIF? Tax Increment Financing (TIF) is a form of subsidy offered by municipalities to encourage and support private development Read more

Single Family Rentals: Commercial Real Estate’s Newest Frontier

By Justin Laub For those unaware, a new asset class has come into being in commercial real estate: single-family rentals.  Prior to the Great Recession, Read more

What is the Deal with FNMA and Freddie Mac??

By Todd McNeill There has been a lot of speculation going around on the current status of FNMA and Freddie Mac in the marketplace.  As Read more

RECON / ICSC 2015 Takeaway

By Scott Lynn What was the "MOOD" in Vegas this year? That is the #1 Question that colleagues and friends ask following the annual trek Read more

Retail Tenants in Mixed-Use and Lifestyle Developments: An Underwriting Paradox

By: Brandon Wilhite With the resurgence in interest in living in denser, urban walkable environments, development patterns across the country are shifting from single-use developments, Read more

The IRR Waterfall: Splitting Real Estate Profits - Lenders, Investors, and Developers

How can equity investors in commercial real estate transactions shield themselves from downside risk, provide enough incentive for the development partner, manage the upside, Read more

How to Turn a Dud into a Stud: Using Legislation to Reduce the Liability and Costs Associated With Groundwater Contamination

By Duke Dennis What do parties to a real estate transaction think when they hear that the property acquisition they have been working on has Read more

Mile High City’s Industrial Real Estate Hits New “High”

By Charley Babb The vacancy rate for commercial real estate industrial space in Denver is hovering at just over 4%, which is a historically low Read more

How Can MCA Make You a Better Sales Broker?

Here at Metropolitan Capital Advisors, we get asked all the time by our clients if we broker the sale of commercial property. The answer Read more

The Shifting Landscape of CMBS Power

By Todd McNeill The balance of power is moving around the CMBS playing field in 2015, and loan originators seem to find themselves with the Read more

Commercial Real Estate Capital Markets Are Liquid; Development Accelerates during 2014

By: Scott Lynn The recovery of the commercial real estate capital markets has gone full cycle since the depths of the Great Recession in 2008.  Read more

Borrowers Are Not A Commodity

By Kevan McCormack Commercial Real Estate development by all accounts is a simple business concept (over simplified below): 1)    Find a Location; 2)    Design a Building; 3)    Secure Read more

Metropolitan Capital Advisors Arranges $5,375,000 Equity JV & Interim Construction Financing For A Retail Shopping Center in Huntsville, Texas

DALLAS, DECEMBER 2014 — Dallas, Texas-based Metropolitan Capital Advisors (MCA), a financial intermediary specializing in the exclusive representation of investors, developers and property owners Read more

Is Blackstone Calling the Top Again?

by Charley Babb Blackstone Group, the private equity giant, appears to be revisiting its pre-recession game plan of acquiring undervalued real estate assets and then Read more

Commercial Real Estate Investments and Phantom Income: More Than You Bargained For

By Brandon Wilhite Any prudent commercial real estate investor will take into consideration the tax implications as an important part of his or her investment Read more

Is Now the Right Time to Invest in Real Estate?

By: Justin Laub I recently sat down with a friend in the oil and gas industry who asked me, “Is it a good time to Read more

The Non-Basic Food Groups in Commercial Real Estate

By Sunny Sajnani As a real estate professional, we always hear about the four basic food groups of commercial real estate: multi-family, office, retail and Read more

Off-Market or Selectively Marketed in CRE Deals

by Hook Harmeling As we emerged from the Great Recession, there were “deals” everywhere. Excellent locations, quality buildings, good tenants and, yes, even good sponsors Read more

Paradigm Shift or Lack of Financing in the Red-Hot Apartment Demand Surge?

By Todd McNeill While perusing recent press on the strength of the market for new apartment developments, the following thought occurred to me:  Is the Read more

Metropolitan Capital Advisors Arranges $5,800,000 Land Loan and Subdivision Development Financing for Prestonwood Polo Club in Oak Point, Texas

Dallas, November 2014 – Dallas-based Metropolitan Capital Advisors (MCA), a financial intermediary specializing in the exclusive representation of investors, developers and property owners in Read more

Could Downtown Apartment Development Max Out in North Texas and Other Major Markets?

As featured in the November Newsletter from There are 9,000 multifamily units in the pipeline in Downtown and Uptown, but skyrocketing land prices, rising Read more

Metropolitan Capital Advisors Closes A $10,950,000 Permanent Fixed Rate Mortgage For A Retail Shopping Center In Greeley, Colorado

Dallas, Texas-based Metropolitan Capital Advisors (MCA), a financial intermediary specializing in the exclusive representation of investors, developers and property owners in the commercial real Read more

The Changing Landscape of the Development Cycle in a Basel III World

By Brandon Wilhite

Similar to virtually every other market, the commercial real estate market goes in cycles. Throughout much of the country, most product types are in a development cycle, brought on by strong demand and occupancy rates. A development cycle brings on a slew of players chasing the fortunes to be made in the real estate development game. The development cycle is not for the weary and can be characterized by fast-rising land prices, soaring construction costs and market uncertainty – how well will all this newly developed space be absorbed?

basel IIIThe developers who are best fit to thrive in a development cycle are those who can meet the demand by delivering their space the fastest and at the most competitive rental rates relative to comparable assets. A developer who already owns the land has a significant piece of the puzzle solved by the time it makes sense for him to deliver new space to the market, thereby allowing him to move quickly (Objective #1). Additionally, the developer will likely own the land at a lower cost basis versus his competitors who are buying their land during the development cycle, thereby allowing him to deliver the space at more competitive rental rates (Objective #2).

A developer may speculatively purchases a piece of land before it is readily apparent to the rest of the market that it will make a great future development site. He may purchase the land for $2 per square foot and by the time it is ready for development, it has a market value $8, $10, $12 per square foot – a great investment by itself! Most real estate developers, however, having an entrepreneurial mindset and high risk tolerance, aren’t satisfied with the profit of the land investment alone and want to double down on that investment by developing property on top of it.

Historically, the developer will contribute the land at market value (subject to a third-party appraiser) as his equity investment, and take out a loan from the bank to construct, market and lease the property. The value of the land contributed as equity is typically enough that the necessary loan proceeds equate to only 60% to 75% Loan-to-Cost, or enough that the developer doesn’t have to invest additional cash in the project. However, due to recently enacted bank regulations contained in Basel III known as High Volatility Commercial Real Estate (“HVCRE”), banks can now only give the developer equity credit for their ORIGINAL cost in the land and none for the value appreciation of their land investment, thereby forcing developers to come up with cash – either from their own balance sheet or from a third-party investor.

The results of these constraints remain to be seen until this development cycle runs its course, but some of the effects of these new banking regulations seem fairly predictable. One result is that the developer stands to make less profit on his development if he has to put in additional cash of his own or split the profits with an investor. Less incentive for development could mean less development, which could translate into higher rental rates and occupancy costs for tenants.

Another potential result of the new banking regulations is the emergence of private, non-FDIC insured lenders into the construction lending markets. These so-called private lenders, who are not subject to many of the same regulations as their FDIC-insured counterparts, typically have a higher cost of capital and thus, generally lend at a higher interest rates. However, when evaluating their weighted-average cost of capital, those higher rates are often far more attractive to potential developers than borrowing at a lower leverage from their bank and investing additional equity. Depending on how much of this type of capital eventually makes its way into the market, traditional banks may risk losing significant market share on commercial real estate loans.

In an effort to make some commercial real estate loans safer for the banks, and thus the bank’s depositors, government regulations may end up simply pushing those loans from government-regulated banks to less traditional private lenders and possibly suppress development activity.

Over our firm’s 24-year history, Metropolitan Capital Advisors (“MCA”) has arranged billions of capital over several development cycles. For further information on how Metropolitan Advisors can assist you in arranging financing for your development, please contact Brandon Wilhite at or visit our website at

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Your Pad (Site) Or Mine?

By Charley Babb

What once was an outlier real estate play has now become a significant commercial real estate asset class. Pad sites are much in vogue, as national retailers line up to occupy single-tenant outparcels in retail centers of all types. Couple that with increased interest from triple-net investors and you have the recipe for a boom in this heretofore unfashionable development niche.

Once upon a time, outparcels, or pad sites, were considered fringe areas, leftovers. Today they are the hottest commodity in commercial retail development. No longer are pad sites reserved primarily for gas stations and quick-serve restaurant chains. Property owners, from small independent owners to giant real estate investment trusts (REITs), are finding untapped value in the “excess land” that they already own. In addition, land surrounding shopping malls is going for a premium thanks to this wave of demand from retailers coast to coast.

For example, Kimco, a national REIT, is marketing pad outparcels in 29 states as a key value-creation strategy. “From a development perspective, it enables us to reposition retail buildings that have been underutilized with a more vibrant and current tenant mix – such as Chipotle, Mod Pizza and urgent care centers,” says Kimco’s executive vice president of asset management, David Jamieson. Some developers have even demolished inline space in an effort to reconfigure their centers in this pad-happy environment.

Tenants like the characteristics of traffic-generating anchors, ideal sight lines, superior exposure, access and captive parking. As such, they are paying higher rents than ever before for these “prime” locations. Net-lease specialty firms are reporting robust transaction volumes. National Retail Properties, a REIT specializing in diverse freestanding retail and restaurant buildings across 47 states, is 98.8% leased across their portfolio. Convenience stores comprise the largest share of properties at 17.7%, followed by restaurants at 15.9% and auto-service stores at 7.2%. In addition, upscale retailers are growing in their demand for outparcels and are willing to pay the rents necessary to move to the front of the line in lease negotiations.

One need not be a REIT nor even a developer to get in on this craze. The simplicity of stand-alone properties has long been a staple for small-time investors who wanted to own one of the three major drug store chains without the hassles of typical real estate ownership. But today, properties with myriad users of all types are also selling briskly. Investment-grade restaurant buildings costing less than $5 million with corporate guarantees are emerging as favorites among buyers. With safe and stable returns, such retail properties have evolved into a highly popular asset class. Values of net-leased assets, including outparcels, have increased to all-time highs as a result of extremely aggressive cap rates. A high degree of liquidity in secondary markets is also emerging.

Triple-net investors continue to prefer retail properties over office and industrial ones. Some credit this to their familiarity with the tenants, typically long initial lease terms, passive structures and lower total price points. Private capital, including exchanges, now dominates the net-lease market. They accounted for 60% of it in 2014 and that is trending even higher in 2015. Many baby boomer investors are demonstrating a desire to own their own store as a viable strategy for a portion of their investment portfolios. With retailers lining up to lease these sites, they are perceived as relatively safe investments, even if the current tenant might fail. And even at low cap rates, the returns can be an improvement over alternative income-producing assets in their mix.

From supply to demand to capital liquidity, pad site popularity is likely here to stay for quite some time. So, shall we go to your pad or mine?

The author, Charley Babb, is a Senior Director and Principal of MCA’s Denver office.  Charley can be reached at or 303-647-9032.

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Cash Flow Management in Commercial Real Estate: CMBS Markets Post Great Recession

By: Josh Siegel

shutterstock_173737961The sub-prime mortgage crisis and recession of 2008 triggered a comprehensive restructure of the commercial mortgage-backed securities (CMBS) market. Between 2005 and 2007, while underwriting standards were at their weakest, more than $300 Billion in maturing commercial real estate mortgages were originated. These underperforming securities will need to be refinanced between 2015 and 2017, which according to Trepp – the leading global provider of CMBS analytics – is more than 2.5 times the volume that matured between 2012 and 2014.

Prior to the credit crisis and corresponding downturn in the real estate finance market, cash management arrangements in CMBS loans that originated during or before 2008 gave borrowers significant control over cash flows from the property due to increasingly high levels of lender competition.

This increased competition was another significant reason lenders lost specific remedies designed to intervene in a situation where a borrower or security was underperforming. The market competition was extremely borrower-friendly, and routinely borrowers would choose lenders based on the borrower’s ability to retain cash flow control.

Cash flow management is a critical feature in commercial real estate loans, especially those intended on being securitized in the CMBS market. The primary focus of cash management structures in the securitized loan market appear in loan documents and will describe when, and to what degree, lenders will be able to control free cash flow from a property. Often, the cash management structure of a CMBS loan is highly negotiated and can be critical in determining the most effective strategy for closing, operating, restructuring, or exiting a commercial real estate asset.

Post-recession, with an influx of new regulations, including Dodd-Frank and Basal III, new capital requirements for banks in commercial real estate finance generally require stricter, more lender-friendly cash management protocols. Lenders attempt to ensure that monthly debt service on the loan, expenses, and certain reserves accounts are all paid in full before funds are returned to the borrower.

The most utilized mechanisms that lenders now have in the post-recession CMBS toolbox are Lockbox Accounts, which utilize Cash Flow Sweeps to further shield the loan from underperformance or default:

Lockbox Accounts: There are primarily three types of lockbox accounts: Hard, Soft, and Springing lockboxes. A Hard Lockbox account, in most circumstances, will require all rents and cash flows generated by a property to be directly deposited into the lockbox account controlled by the lender. This decreases the risk of the borrower misappropriating funds and provides the lender with immediate control over property revenues.

Much like hard lockboxes, Soft Lockboxes require the borrower to deposit revenues into the lockbox account, but they give the borrower a specified amount of time to make these deposits. Although the soft lockbox increases the risk of fund misappropriation, lenders can mitigate this risk with additional recourse liability to the loan guarantor.

The Springing Lockbox is an arrangement where the lockbox account is not established at the time the loan closes. Rather, the lockbox is only established once a triggering event has occurred. For example, the lockbox could “spring” into effect if a major tenant does not renew a lease, or in the case of default under the loan, or if the loan falls below its minimum Debt Service Coverage Ratio.

The Cash Flow Sweep is the process by which the lender appropriates net cash flow (beyond the borrower’s operating costs and debt service) into the appropriate account once the triggering event has occurred and a financial test, accompanied by a lockbox account, pursuant to language in the loan documents, has not been met.

The effects of 2008 are evident in the CMBS market today. Changes in underwriting quality could expose investors to more risk, especially as the volume of CMBS deals grow in 2015 and into the future. Whether or not the loosening of underwriting standards creates another significant wave of distress remains to be seen, but lenders now have more tools in their toolboxes to shield their risk and avoid default.

Metropolitan Capital Advisor’s Senior Directors have extensive experience in advising our clients on negotiating the terms of CMBS transactions and assisting them in crafting financing strategies specifically tailored to their unique situations.

Joshua Siegel is an associate analyst at Metropolitan Capital Advisors. He can be reached at or by calling our Dallas Office at (972) 267-0600.

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