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 whenever and wherever you can, but it is equally gratifying to return the favor and give back.

REFIC LogoFor the last several years, I’ve been a member of The University of Texas at Austin McCombs Real Estate Finance & Investment Center (“REFIC”) with a stated purpose of “bringing together exceptional faculty and top industry professionals to cultivate cutting-edge research and curricula for undergraduate and graduate students. UT REFIC combines the disciplines of finance, real estate, law, design and planning, and is designed to place graduates with the nation’s leading real estate firms”.

This is a fantastic, purposeful and extremely talented organization that is a WIN/WIN/WIN for members, faculty and most importantly, the students. The center creates a variety of opportunities for students to gain real-world experiences through its membership knowledge base via mentoring, internships, project tours, case studies and group discussions that involve highly focused expertise.

Each fall, REFIC sponsors the National Real Estate Challenge, where graduate student teams from the top business schools come to Austin to compete in front of a panel of senior commercial real estate executives. The competition showcases some of the very best future real estate talent in action working as team to present and make recommendations on a complex commercial property situation. For the attendee, the experience is equivalent to watching the best athletes try out for a professional team. The recruitment, networking and schmoozing opportunities are boundless where the students really are the primary beneficiaries.

As a REFIC member, Metropolitan Capital Advisors has mentored, interned and recruited numerous UT (and non-UT) students with the ambition of entering commercial real estate as a career. And nothing makes us feel better than to learn a student we’ve been mentoring got picked for an internship or even better, one of our interns grows into a full-time position with our firm.

By the numbers, REFIC membership stands at 224, representing 38 cities and not all members are UT grads (just in case you’re interested in joining). UT grad or not, REFIC’s leadership is committed to making UT’s real estate program one of the best in the nation. To that end, REFIC successfully raised funds to capitalize a REIT fund that is managed by UT students. REFIC is now in the process of raising an additional fund that will make investments in private real estate deals, so that students can learn firsthand about the differentiation in public versus private investments. Now that’s an incredible educational experience!

To learn more about the McCombs Real Estate Finance and Investment Center go to

The author, Scott Lynn, is the Founding Principal of Metropolitan Capital Advisors.

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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.  According to Commercial Mortgage Alert, U.S. CMBS issuance has totaled up to $19.0B thru Q1 2016, which is a 30% decrease from issuance volume reported for the same period in 2015.  We are seeing signs that Q2 could be a different story.CMBS market 2016

Most originators in the securitized space thought 2016 and 2017 would bring significant profitable trades.  It seems that the need for new issuances in the CMBS market have been threatened by macro-economic factors, such as:

  • Low oil prices
  • Increasingly strict regulatory rules and high costs
  • Banks cutting ties with CMBS to reduce risk
  • Possibility of a second interest rate hike

“The outlook becomes slightly dubious for the more-than-$200 billion in non-defeased, non-deliquent loans coming due between now and the end of 2017,” notes Trepp, LLC.  It seems that uncertainties about the overall economy are hitting CMBS harder than some may have thought.

As global markets reacted to the Chinese slowdown early this year, spreads on CMBS widened as investors looked for a higher risk premium.  Compared to the middle of 2015, spreads moved up in Q1 2016 almost 100 basis points on AAA-rated tranches and even 200 to 300 basis points on BBB-minus rated tranches.  This has slowed down new issuance as it becomes more difficult for CMBS lenders to set interest rates on their loans.

Going into Q2 2016, the CMBS market seems to be on rebound with spreading compressing substantially.  AAA-class has tightened from the wide in February of 10yr Swaps plus 1.73% to the recent print of 10yr Swaps plus 1.25%.  BBB-class has tightened from the wide in February of 10yr Swaps plus 8.25% to the recent print of 10yr Swaps plus 6.60%.

What does this mean to the bottom line?  As a result, where loans were closing above 5% in February for 75% LTV loans, the same loan is now closing sub 4.70% and for 65% LTV the loan is 4.50% all in.

Although CMBS feels like it may be rebounding, the B-piece buyers are definitely keeping a close eye on underwriting.  B-piece buyers act as the adults in this business, and tend to keep things a bit more conservative and realistic for the entire industry.  Standards have, by no means, slipped to the levels of a decade ago, when underwriters would factor in future rents rather than in-place cash flow, but today’s underwriting is definitely more lax than at the beginning of the current recovery.  Volume will continue to stay “in bounds” as long as the B-piece buyers stay conservative as they have been the past quarter.

MCA is constantly monitoring CMBS market conditions to maximize our clients’ financing in turbulent times like those we are experiencing now.  In order to get the best execution possible, please contact a Senior Director at MCA to discuss underwriting and placing a CMBS loan.

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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 Mae”) put Oklahoma City and Tulsa under “Pre-Review” status?  For the uninitiated, it begs the questions, what is “pre-review” and what are the implications?  Before I answer those questions, let me begin with some color on Fannie Mae’s background for the full picture.

Fannie Mae, founded in 1938, was created with multiple purposes, one of which was to increase liquidity in the financial markets in order to increase the number of loans given for housing.  By acquiring mortgages from financial institutions, Fannie Mae replaces mortgages on lenders’ books with new capital that can be injected into the markets in the form of new mortgages.

In the late 1980s, Fannie Mae created a program called DUS, which stands for delegated underwriting servicing.  At that time, Fannie Mae authorized, via licenses, 25 lenders to have the ability to underwrite, close, deliver and service loans using Fannie Mae-created and controlled guidelines.  In order to ensure DUS lenders are responsible in their lending practices, they must adhere to credit and underwriting standards set by Fannie Mae.  To further ensure responsible practices, DUS lenders are required to retain one-third of the risk on each loan they create.

Facts about the Fannie Mae DUS Program:

  • Since 1988, Fannie Mae and the DUS lenders have provided more than $270 billion in liquidity to finance more than 5.8 million units of multifamily housing.
  • With the DUS program, there is an alignment of interest between those who underwrite and issue a mortgage and those who eventually hold it.
  • DUS loan program is mainly used for the purchase and refinance of properties, including the following property types: apartments, affordable housing, senior housing, student housing, and manufactured housing in loan amounts greater than $750,000.

Although DUS lenders must undergo credit reviews, adhere to Fannie Mae underwriting guidelines, and retain a portion of the risk of their loans, Fannie Mae does not review most loans created by DUS lenders.  Pre-review, on the other hand, basically means Fannie Mae will review the loan with a fine-tooth comb, in the midst of the DUS lender’s underwriting process before the loan is approved.  Fannie Mae’s pre-review process can take up to two weeks and include stricter underwriting guidelines.  Ultimately, in pre-review markets, the decision as to whether a loan can be made lies with Fannie Mae.

A recent capital placement gave us the following insight as to how Oklahoma City’s pre-review status affected Fannie Mae’s ability to quote the loan.  A client of Metropolitan Capital Advisors was seeking a loan in Oklahoma City.  Under normal circumstances, the client’s property would have been subjected to Fannie Mae’s Tier 2 category for underwriting standards (see below), but because Oklahoma City is now under pre-review status, any and all properties being considered for a loan in a pre-review market are automatically put into the Tier 3 category for underwriting purposes.

DUS Settles

When comparing Tier 2 and Tier 3, it is easy to see that Tier 3 is much more conservative than a typical Fannie Mae loan.  First off, leverage for a Tier 3 underwriting is limited to maximum proceeds of 65%, loan-to-value or loan-to-cost, whereas a Tier 2 loan could get proceeds up to 80%.  Secondly, the debt service coverage ratio (net operating income/debt service) has been increased from 1.25x to 1.35x, meaning you must have more NOI relative to the amount of your debt service than before.  However, there is a silver lining with Tier 3, given the conservative leverage and debt service coverage ratio, Fannie Mae will lower their interest rate spread by 20 basis points for loans in Tier 3 pre-review markets versus what they would offer in a Tier 2 market.  The net result is a smaller loan with a lower interest rate; however, the loss in proceeds is not offset by the lower interest rate.

Oftentimes, clients seek the most aggressive financing available to increase their equity returns.  Simply put, Tier 3 financing is less aggressive and, in turn, less competitive than what a lot of other lenders are willing to do.  Thus, the implications of pre-review for borrowers seeking to finance a property in Oklahoma City is that they will likely consider more aggressive alternatives offered by local banks or conduit lenders.

To learn more about this topic, please contact the author, Duke Dennis, Senior Analyst with Metropolitan Capital Advisors. (972) 267-0600.

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