Banks Reign in Leverage in Effort to Curb Apartment Construction

By Charley Babb My real estate career spans over three decades. Yet for the very first time, I have witnessed lenders exercise prudence and consequently Read more

Risk Retention in CMBS Starting to “Sink” in

By Todd McNeill The early signals of Risk Retention are reverberating through the commercial real estate capital markets.  Several conduit shops, including MC Five Mile Read more

Risk Retention, Risky Business?

By Scott Lynn Basel III, HVCRE…all these new lending regulations that mean lenders are loaning me less and charging me more. Good grief!!! And now, Read more

It’s Senior Living Not Senior Dying

By Kevan McCormack Everything in life and real estate evolves.  Static retail shopping centers evolved into vibrant entertainment venues where a family could spend an Read more

Metropolitan Capital Advisors Arranges $5,512,000 Acquisition Loan For A 9.77- Acre Lot In Frisco

Metropolitan Capital Advisors, Ltd. (“MCA”) has arranged a land acquisition loan for a 9.77-acre tract located in Frisco, Texas at the northeast corner of Read more

Metropolitan Capital Advisors Arranges A $4,700,000 Construction Loan For UC Health Emergency Room (Arvada)

Metropolitan Capital Advisors, Ltd. (“MCA”) has arranged a $4,700,000 construction loan for UC Health Emergency Room, located in Arvada, Colorado. The 0.69-acre site is Read more

Ground Leases-Friend or Foe?

On the surface, a ground lease seems like a simple concept: a landowner grants permission for a tenant to use their land in exchange Read more

What Do Baby Boomers and Millennials Have In Common & Why It's Important in Commercial Real Estate

By Charley Babb What do Baby Boomers and Millennials have in common? They both like to spend money. While they may spend their money on Read more

The Economic Benefits of Walkability

By: Brandon Wilhite Starting with the Federal-Aid Highway Act of 1956, the way cities were developed in the United States began changing. Although it was Read more

Brexit – Immediate Effect on Commercial Real Estate?

— By Sunny Sajnani In late June 2016, a historic referendum was voted on approving the British withdrawal from the European Union (EU).  The immediate Read more

Hotels: What Inning Are We In?

By: Justin Laub I recently returned from the Urban Land Institute’s national conference on hotels and resorts. The last time ULI held this event was Read more

Choppy CMBS Market Hoping For Resurgence

By Charley Babb CMBS issuance for the first quarter of 2016 was roughly half of the production for the same period in 2015. This has Read more

Predevelopment Risk, What Is It?

MCA was recently retained by a sophisticated client to arrange a construction loan and secure a joint-venture equity partner for a very large project Read more

Metropolitan Capital Advisors Arranges a $14,440,000 Fixed-Rate Permanent Loan

Metropolitan Capital Advisors has arranged a $14,440,000 fixed-rate permanent loan on a Portfolio of two office properties located in the Dallas Metroplex. The Portfolio Read more

UT Real Estate Finance & Investment Center; Long on Longhorns, Short on Bull

-By Scott Lynn Being involved in commercial real estate has always been a continuing educational experience. Not only is it gratifying to embrace these experiences Read more

Take a Ride on the CMBS Rollercoaster

— By Sunny Sajnani The Commercial Mortgage-Backed Securities (CMBS) market has experienced a series of ups and downs, creating a very uncertain start to 2016.  Read more

PRE-REVIEW…When the DUS Settles

By Duke Dennis If you are an apartment owner or buyer in Oklahoma, did you know that the Federal National Mortgage Association (also called “Fannie Read more

The Details of a $2,593,000 Interim Construction Loan for Roanoke Crossing

Metropolitan Capital Advisors has arranged a $2,593,000 construction loan for a to-be-built 24,000 s.f. retail center located within the Roanoke Crossing Power Center, which Read more

Home is Where the Heart is in the Hot Senior Real Estate Market

by Kevan McCormack Senior Living continues to be one of the hottest real estate “asset classes”.  Within the broad Senior Living classification, the industry is Read more

Wading Into the Waters of a Volatile CMBS Market

By Brandon Wilhite The CMBS market plays a vital role in commercial real estate by providing liquidity to the market. CMBS provides long-term debt financing, Read more

Condos: They’re Back

By: Justin Laub Remember when condos were getting built all around the country and we had overzealous banks, liar loans and no down payments? That Read more

The Power of RECA (Real Estate Capital Alliance) Rides Again

By Scott Lynn Metropolitan Capital Advisors is a member of the Real Estate Capital Alliance (RECA www.reca.us). RECA is a professional association of 18 independently owned Read more

5 Takeaways from 2016 Commercial Real Estate Finance Conference (MBA/CREF) In Orlando

By Todd McNeill The annual Mortgage Bankers Commercial Real Estate Finance (CREF) Conference held in Orlando last week does not need an introduction.  After three Read more

Who Says The Industrial Warehouse Real Estate Market Isn’t Sexy?

By Roger D. Wyche With all the attention being paid to CRE announcements such as those from Toyota, Liberty Mutual, the Dallas Cowboys, Charles Schwab, Read more

Commercial Real Estate Capital Markets are Liquid; Development Accelerates During 2015

By Scott Lynn Commercial real estate capital markets have gone full cycle since the depths of the Great Recession. Capital providers are now considering a Read more

Banks Reign in Leverage in Effort to Curb Apartment Construction

By Charley Babb

My real estate career spans over three decades. Yet for the very first time, I have witnessed lenders exercise prudence and consequently slow down new construction supply. As the majority of local and national multifamily investors have realized, Denver has been one of the most robust and successful national markets to emerge after the Great Recession. It appears that the experience of the lending community in Denver is typical of most major markets across the United States.

Apartment absorption is keeping pace with new supply delivery.  The Denver vacancy rate of 5 percent suggests a quite stable market. This market could potentially accommodate the additional supply needed to meet the strong demand for multifamily units in the metropolitan area. Coupled with the expected growth in jobs to forty three thousand per year and population growth of fifty two thousand people per year indicates that demand will remain strong. Rents will continue to grow, albeit at a slower pace year after year. However concessions are still largely non-existent.

apartment-construction

Yet despite these encouraging trends, lenders are cautiously considering whether to fund new multifamily construction loans. While the door isn’t completely shut, many banks are reserving their balance sheet for their most reliable customers. Others have reduced loans to no more than 60-65 percent of the total approved cost of the project. In addition, non-recourse for any portion of the loan has become extremely rare.

Construction costs are on a upward climb but at a stable, steady pace. A relaxation in the commodities markets has further abetted the situation. However labor shortages remain and they are a challenging component of the equation.

Without a commensurate reduction in land and constructions costs, the obvious (and likely intended) outcome is that the lower leverage places exert pressure on and therefore constrain equity returns. Thus, the risk-reward dynamics will be put out of equilibrium, slowing down development. The slowing development will give the market a fighting chance to absorb the delivery of new units in the existing pipeline. This will preferably reduce the potential over supply. These so-called “soft landing” reaps benefits for both developers and lenders alike. However these have rarely happened in our economic history. Rather, developers continue to take on debt as long as banks are willing provide it and thus all contribute to their own loss.

So this time around, as we approach the likely end of this expansion cycle, businesses will exercise more prudence. But what does one do if their project really should be built due to the submarket metrics? We have been able to assist our clients by procuring a tranche of preferred equity to offset the reduction of loan proceeds from construction lenders in the overall capital stack.

For example, we recently closed a transaction where the total project cost was $40 million. The senior construction loan was limited to sixty five percent of the cost or $26 million. The sponsor was able to replace the $4 million reduction from their proforma debt level with preferred equity that carried a 12% coupon that accrues throughout the construction period and is repaid upon refinancing at stabilization. While the weighted cost of debt is somewhat higher, the resulting leverage can provide for an economically viable project and garner acceptable returns for the equity investors.

For more information on how Metropolitan Capital Advisors can assist you with capitalizing your next development project or property acquisition, contact Charley Babb in our Denver office at 303.647.1122 or e-mail Charley at cbabb@metcapital.com .

The Author, Charley Babb, is a Senior Director and Principal in the Denver office of Metropolitan Capital Advisors

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Risk Retention in CMBS Starting to “Sink” in

By Todd McNeill

The early signals of Risk Retention are reverberating through the commercial real estate capital markets.  Several conduit shops, including MC Five Mile BNY Mellon, Redwood have exited the CMBS market. Other prominent shops include Freedom Commercial Real Estate, GE Capital, KGS-Alpha Real Estate and Liberty Island all of whom cited changing regulations and market volatility as the reason for their exit.  On Dec 24th, the Dodd-Frank Risk Retention Act will be in full effect. Every CMBS securitization shall now contain a 5% risk retention piece.  As is the norm on Wall Street, certain traders are attempting to make the best out of a turbulent situation.

The first securitization that had a risk retention piece was in August 2016. It was well received by investors. Three banks, Wells Fargo, Bank of America and Morgan Stanley, chose to retain the risk piece in this offering.  The spreads on all classes of bonds in this securitization traded well below expectations compared to those securitizations that did not comply with risk retention rules.  It appears that CMBS participants with the largest balance sheets (or access to the largest balance sheets) will be the survivors of the new era.  According to Trepp, between November 2016 to June 2017, $12 billion of securitized mortgages will be coming due. If the CMBS lending sector faces a disruption during this period, the consequences could be immense.  The industry is keenly watching these securitizations and working on integrating “best practices” to maximize profits and ensure market stability.

risk-retention-in-cmbs

Large balance sheets isn’t all that the survivors of the Dodd-Frank Risk Retention Rules will possess.   They will also demonstrate the willingness and patience of investors and lenders as they will have to hold these risk retention strips for a minimum of 5 years with no hedging or ability to liquidate.  Currently, there are four different ways to satisfy the Risk Retention:

  1. a bank retains a vertical slice of the capital stack,
  2. a bank retains a horizontal slice of the debt,
  3. a L shaped slice where a bank takes a combined horizontal & vertical slice of the debt and,
  4. Sell to a B-piece investor that retains a horizontal slice.

A new question arises. Will there be a difference in credit quality of deals where risk retention is retained by a bank or sold to a third party B-piece investor? The general consensus is that banks may be more willing to retain risk retention on higher quality pools while selling the risk retention on lower quality pools.  This would be similar to the recent securities completed by Wells, B of A, and Morgan.

For the surviving players in the CMBS market, this may unfairly benefit the giants while harming the smaller contenders.  Walker & Dunlap, Ellington Management, Jefferies LoanCore, Ladder Capital, Rialto Capital and Starwood Mortgage are all exploring how to maximize the risk retention piece of the securitizations.  This gives us insight into who will be prominent entities in the CMBS market in the near future. By February 2017, we predict the market will have better understood who will emerge unscathed. Coincidentally, February 2017 will herald the Mortgage Bankers Association’s annual CREF (Commercial Real Estate Finance) conference. The conference in San Diego, has  traditionally been used to  announce new lending programs and production goals for the forthcoming year.  Till then, the end of the year 2016 has us holding our breath. What will the new year bring? That’s the question on our minds.

The author, Todd McNeill, is a Principal/Director at Metropolitan Capital Advisors in Dallas.  Todd can be reached at tmcneill@metcapital.com.

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Risk Retention, Risky Business?

By Scott Lynn

Basel III, HVCRE…all these new lending regulations that mean lenders are loaning me less and charging me more. Good grief!!! And now, Risk Retention Rules, well, what the heck is that?  Another new term you should be familiar with if you’re borrowing commercial real estate capital?  Indeed, the so-called “Risk Retention Rules” were adopted in late 2014, which will come into effect for CMBS and other asset-backed securities on December 24th, 2016. That is right around the corner, and the capital markets have been reacting.

risk-retention-commercial-real-estate

What is Risk Retention? Simply put, they are rules that require the issuer of CMBS securities to “retain risk in a bond offering significant enough to function as an incentive for the originator to monitor the quality of the loans being made”. The thesis is pretty simple; you’ll be darn careful about what you put into the sausage if you’re going to be required to buy and keep five slices of salami for every one hundred you sell.

Like all Rules, an EXEMPTION allows CMBS to pass off the risk retention piece (that is 5% of the salami) to an eligible third party, commonly known as the B Piece Buyer, who, by the way, must adhere to the risk retention rules, which means keeping the asset on their books and may even require the holder to post or pledge additional capital or reserves.

So, for now, Risk Retention has created two to CMBS players; Loan originators who intend to hold risk retention pieces and alternatively, those loan originators who plan to take advantage of the exemption and sell their risk retention pieces.

Adherence to and acceptance of the Risk Retention Rules has been the primary factor behind the recent CMBS market turbulence and pull back. CMBS origination volumes are down. Players are pricing the risk of keeping inventory on their books. The evolving pricing theme seems to be those that are keeping the risk are lending more conservatively, albeit at lower spreads. On the contrary, those selling off the risk might “stretch” for slightly more loan proceeds but will charge a spread that compensates for the extra risk on proceeds, as well as the risk associated with holding the investment on the books of the ultimate bond holder. No surprise; we’ve seen many of our friends on Wall Street and the CMBS world in motion lately as they are jumping ship to a platform that can buy their own B Pieces or they are out raising new FUNDS to buy the B Pieces or they have folded their tent altogether and exited the CMBS market because of the increasing regulation and low margins.

As the world turns, count on the CMBS world to do the same for the time being. Notwithstanding, CMBS remains a viable option for favorably priced, long-term, fixed rate debt, even with the market turbulence and changing regulatory environment.

Risky Business? Not so much, but risk retention is here to stay.

The Author, Scott Lynn, is the Founding Principal of Metropolitan Capital Advisors. Scott can be reached at slynn@metcapital.com

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