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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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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 entire day shopping, eating, and playing games or watching movies.  Multifamily evolved from the conventional three-story, garden style apartment buildings to the mixed-use wrap building with high-end apartments located over retail stores.

Senior Living facilities are evolving too.  No longer are senior living and assisted living facilities just providing the basic care needs of our elderly as they edge closer to death. Instead, a new concerted effort within the industry seems focused on not being satisfied with the status quo.  Owners and operators do not just want their facilities to be a place where residents go to live the last years of their life…they want their facility to be a place where a resident can thrive!

Senior Living Owners and Operators are evolving by integrating Wellness Programs and Occupational and Physical Therapy Programs into the daily routines of their residents.  They implement not only in the operational staffing and programs they put together but also in the overall design and circulation of a facility.  Recent market data indicates that including these programs improves function and promotes successful living among older adults.  For owners and operators, programs that extend the tenancy duration for your property is a mutually beneficial scenario.

What does it mean to integrate Wellness into your community?  It entails weaving Wellness activities into the daily lives and routines of the residents, sometimes without them even realizing.  There is a wide diversity of these programs, including daily walking programs; exercises focused on strength, balance and flexibility; fall prevention activities focused on balance; and safe driving classes.

Besides the Wellness aspects of daily living, Physical and Occupational Therapy programs are equally critical in contributing to a resident’s emotional and mental wellbeing.  By integrating programs such as tailored exercise classes / programs; intergenerational programs where residents share life experiences with the younger generation; gardening programs with raised garden beds for easy access; and learning programs with a cognitive therapy approach, a community will not only be helping residents improve their ability to function daily but also be increasing their personal sense of worth!

Communities that merge Wellness, PT and OT initiatives into their residents’ daily lives will be the facilities of the future.  We are already seeing this in action!  Those that resist this evolution will continue to be “behind the times”.

When developing your next Senior Living facility, it is helpful to have a finance partner that is well-versed and educated in all aspects of the Senior Living market.  MCA has been financing Senior Living and Healthcare facilities for 22 years.  To discuss the financing of your next senior living or healthcare project, contact Kevan McCormack at kmccormack@metcapital.com.

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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 Legacy Drive and Eldorado Parkway. The Property is located just a few miles north of the “$5 Billion Mile” in the heart of Frisco’s booming development market.

The Property is situated adjacent to an existing Market Street anchored shopping center and across the street from a Target anchored power center. Retail occupancies and rental rates remain healthy which continues to drive strong tenant demand for pad sites and inline retail space.

MCA Principal & Senior Director, Todd McNeill closed the $5,512,000 loan with a regional bank that provided a two year loan term with “interest only “payments while the developer plans to sell off pad sites and considers further development.

Since 1992, Metropolitan Capital Advisors has closed in excess of $12 billion of debt and equity transactions. National Real Estate Investor Magazine has consistently ranked MCA as one of the top CRE Financial Intermediaries in the US. MCA completed over $600,000,000 of commercial real estate financing during 2015.

For More Information Contact:

Todd McNeill

972.267.0600

www.metcapital.com

tmcneill@metcapital.com

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