By Todd McNeill
This time last year, experts were giving their predictions for CMBS lending originations to be at or around $38B for year-end 2012. A huge surge in CMBS originations during the 4th Quarter allowed the origination shops on Wall Street to beat the estimates and close $48.4B according to Commercial Mortgage Alert. Low interest rates and lack of places for bond buyers to secure yields fueled a spread compression and thirst for CMBS paper that helped the market absorb several securitizations in the 4th quarter, pushing the total volume well above the $38B prediction.
Expect 2013 to show another significant increase. Recent reports that we’ve seen the worst in Europe, the U.S. unemployment rate slowly dropping, and the resurging housing market all helped to reduce volatility in the market. Low interest rates continue to promote refinancing and fuel acquisitions for all property types. CMBS shops have also displayed a renewed level of predictability that is beginning to coax those Borrowers who have been hanging out with the Life Companies and Portfolio lenders the last three years.
Experts are now estimating a $65B issuance for 2013, with an estimated $19B already in the pipeline for the 1st Quarter of 2013. As many Borrowers utilize this long-term, fixed-rate lending platform, here are five items to consider when getting your loan quoted or when you’re headed to the closing table:
- Independent Directors – CMBS shops are still requiring Independent Directors be assigned to a loan that is $20mm or greater, with two independent directors for deals larger than $50mm. In addition, the lender may also require a non-consolidation opinion.
- Cash Management – CMBS shops are still requiring Cash Management Accounts to be set up. In addition, the Borrower will have to seek the services of a large bank that has been approved by the lender. Wells Fargo seems to be capturing much of this business. Be aware of the wire transfer fees that are incurred when moving money from the Cash Management account to the Borrower operating accounts. Not a huge amount of money but annoying nonetheless.
- Debt Yield – CMBS Shops are still underwriting to debt yields along with continuing to monitor DCR as well as LTV tests. While debt yields have continued to come down, they are still looked at for loan sizing. M/F still gets the lowest debt yield at around 7.0% for a solid multi-family property. Shopping centers and office buildings are more like 8% to 11% depending on tenant credit and leasing risk.
- Tenant Direction Letters – Not a huge deal but CMBS shops are requiring Borrowers to type letters addressed to each tenant on the rent roll of what to do and where to send their rent checks in the event of default and/or a Cash Management Event. These letters sit on “stand-by” and get released to the tenants if and when a Cash Management event is triggered. Under the mantra of “perception is reality” some Borrowers see this as a somewhat pre-packaged “receivership” of sorts.
- Legal Fees – With all of these changes and additions (some mentioned above), legal fees in most cases have doubled from the 1st generation “CMBS 1.0” transactions. Legal Fees for deals $15mm and up in most cases can be low six-figure numbers.
While CMBS is a great alternative when a long-term, fixed-rate, non-recourse with generous loan proceeds is the objective, it still has some annoying aspects that every Borrower must adhere to. With rates at all-time lows, now is the perfect time to refinance if you plan on owning the property long-term. At MCA, we have closed numerous and complex CMBS loans already in this cycle and can assist you in navigating through the landmines experienced during the application and closing process of a CMBS mortgage.