Public Private Partnerships…What are They Good For?

By Duke Dennis Over its 25-year operating history, Metropolitan Capital Advisors (MCA) has worked on numerous Public Private Partnership (PPP) transaction financings. PPPs have increasingly Read more

The Power of RECA (Real Estate Capital Alliance)

By: Scott Lynn and Andrew Hanzl Metropolitan Capital Advisors (“MCA”) is a member of the Real Estate Capital Alliance ("RECA"), a professional association of 18 Read more

Getting Creative: HUD 221 (D) (4)

By: Andrew Hanzl Take notice! The landscape is shifting: In anticipation of a market slow-down, commercial real estate lenders are dialing back their leverage and Read more

Private Lenders: Filling the Void

by Roger Wyche There will be approximately $96 billion of CMBS loan expirations during 2017. CMBS lenders, therefore, have been counting on refinancing  Borrowers to Read more

A Bridge (Loan) to Everywhere

By Charley Babb Do you remember John McCain’s famous “Bridge to Nowhere” speech from 2005? As the Arizona Senator, and then later as the Republican Read more

Limited Service Hotels are, well…limited!

By Todd McNeill In recent times, the Limited Service Hotel sector’s reputation has steadily declined in the eyes of the finance industry. Once the darling Read more

TrumpCare and the Effect on Healthcare Commercial Real Estate Market

By Kevan McCormack Since Donald Trump has taken office as President of the United States, he has been very busy “making good” on his campaign Read more

What is the TRUMP Effect on Commercial Real Estate? 4 Key Points

— By Sunny Sajnani There is no doubt that Donald J. Trump in the White House is a game changer for the real estate industry. Read more

Whither CRE Construction Lending?

By: Justin Laub The mantra of commercial real estate developers around the country when speaking of the state of construction lending these days might be: Read more

The Good, the Bad, the Texas High-Speed Rail Line

By Duke Dennis Brady Redwine of Texas Central Partners (TCP) recently addressed a group of Texas A&M real estate professionals about the high-speed rail line Read more

UT Ranked #1 in Commercial Real Estate Yardage

-By Scott Lynn Every fall season, the University of Texas at Austin McCombs Real Estate Finance & Investment Center (REFIC) sponsors the National Real Estate Read more

2017: Not a Forecast (Just Some Thoughts to Ponder) for the CRE Market

By Brandon Wilhite Accurately forecasting the commercial real estate market’s performance is a nearly impossible task. There are far too many variables to assess and Read more

What is PACE Financing?

By Andrew Hanzl Global warming is now a widely accepted concern. As real estate professionals, what role can we play to ensure environmental sustainability? One 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 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

CMBS

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 in 2008. Amongst the attendees, there were conflicting opinions as to whether the hotel industry had a few good years left to run or whether the industry was on shaky ground and headed for a downturn. It was interesting that the event was the first one since February 2008, which – as most would recognize – was the bottom of the 9th inning of the last real estate boom in the US. The Great Recession soon followed, with both the real estate markets and the global economy falling off the cliff. Was this year’s ULI hotel conference the canary in the coal mine signaling the peak of our current cycle, or is it a sign that the market is finally back on solid footing?

what inning is it in CMBS CRE

The prevailing concerns regarding hotels mirror much of the rest of the commercial real estate industry: i) today’s pricing is above the previous cycle’s peak in most major markets, ii) there is a fairly significant pipeline of new supply in addition to what has been built over the past couple of years, iii) revenue growth has slowed from its torrid pace over the past few years, and iv) political and economic uncertainty in the US. These concerns have already manifested themselves in the market. The sales brokers at the ULI conference acknowledged that hotel pricing has come down and that for certain assets, namely full-service resorts, the sales market has almost completely dried up. On the capital markets side, CMBS lenders have dialed back their leverage on hotels, and banks and debt funds have done the same on ground-up development projects.

So what is there to be optimistic about in the current market? For starters, the trends in the capital markets noted above are likely a positive for the industry in both the near and long term. Debt fuels commercial real estate and the pullback in the lending markets is more precautionary than reactive. Contrary to the market environment during the real estate bubble 10 years ago, lenders today are showing restraint in the wake of softening performance in the hotel and broader commercial real estate markets. Secondly, while revenue growth in the hotel sector has slowed, RevPAR still grew at a healthy 3.3% YoY in June 2016, according to Smith Travel Research. Thirdly, when averaged over the past 10 years, new supply is still relatively conservative. Fourthly, consumer spending and corporate expenditures, both of which drive the hotel market, remain healthy. Retail spending was up 2.00% YoY (0.30% MoM) as of May 2016, summer travel is expected to reach an all-time high in the US this year, and corporate expenditures in 2016 are expected to stay on pace with 2015 expenditures.

As a financier, it is my job to understand these broader market themes and how they affect my clients’ deals. The uncertainty and mixed feelings in the market right now certainly make capital raising for hotels a more challenging proposition, but by no means have the capital markets turned their back on the sector. The current market demands more creativity than in the past few years. More focus is being put on the sponsor, the market, the investment thesis, the capital structure and the like. When you can paint the right picture though, deals are just as financeable in today’s market as before. My $25 million ground-up hotel project that closed this month – for which I arranged the senior construction loan – is evidence of that. Not only was it an attractive bank loan, but it was also non-recourse. I thought that was particularly ironic in light of the consensus opinion amongst the capital markets panel at the ULI conference that non-recourse hotel construction loans are unavailable in the current market.

So, what inning are we in? Well, it depends on who you ask and how you interpret the market data. The correct answer is probably more nuanced, which is that it’s the 8th inning in some markets with extremely rich pricing and huge supply pipelines and the 5th inning in other markets with pent up demand and only moderate new supply over the past 8 years. The consensus sentiment in the capital markets right now is one of caution; however, it does not mean that all capital providers are of the same opinion about the hotel market’s durability. Some capital providers have pulled back, but many others are still out there looking to place money and generate yield. The data and the trends in the market right now are mixed. More than ever in the past few years, it takes a thorough marketing effort and a well-articulated investment thesis to find the right capital partners for hotel projects.

For strategic advice on your next hotel project, you can reach Justin Laub, Senior Director, at jlaub@metcapital.com. Or visit the Metropolitan Capital Advisors website at http://metcapital.com.

The author, Justin Laub, is a Senior Director in the Dallas office of Metropolitan Capital Advisors.

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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 been counter-intuitive for most of us in the commercial real estate lending community as reasonably positive US economic performance combined with significant CMBS legacy maturities should have resulted in 2016 outpacing last year’s production. Many experienced CMBS borrowers are asking “what is going on here?”

In contrast to the previous cycle when aggressive underwriting led to a “bubble”, this time around there are other factors contributing to the instability and uncertainty in the market that perplexes many of our clients. In December, we saw the culmination of fourth quarter spread widening to the point where various participants were unprofitable on their originations. This has led to a reduction in the number of CMBS lenders to under 30 at this point from over 45 at the peak in 2015. Mid-sized origination shops are being squeezed out by larger institutions that are securitizing more frequently.

CMBS bond buyers continue to impact pricing as they weigh the relative values of widened spreads on corporate bonds vis-à-vis CMBS issues. While senior tranches are pricing close to levels that were seen last August, bonds lower in the capital stack continue to lag and the credit curve remains steeper than last summer.

Further uncertainty on the part of issuers lies ahead as the environment becomes more regulated. Regulation AB, Basel III, Dodd-Frank and risk sharing rules will definitely impact the market. You say you don’t know what all of those are; simply read them as “more government regulations intended to ‘safeguard’ the consumer, but resulting in making it more expensive to borrow money.”

cmbs markets

As a result, borrowers who have traditionally looked to CMBS lenders to finance or refinance their properties have elected to look to other capital sources in the past six months. Re-trades on pricing and terms have led to a preference for certainty of execution over leverage. Life insurance companies, banks, and private lenders have provided debt in the Q1 2016 that would have been financed in the CMBS market during the same period last year. There is a catch, however. Some market observers have noted that these alternative sources to CMBS may reach their respective capacity for debt issuance by the end of the third quarter. This may set in motion a potential liquidity crunch late in the year.

Borrowers facing Q4 maturities may be forced to settle for a CMBS execution should lack of liquidity from other sources turn out to be a reality. This is likely good news for a lagging CMBS market as pricing should be higher leading to a return to profitability and hopefully more certainty of execution. That said, fewer options for borrowers will likely provide less favorable terms for them at that juncture.

In conclusion, if a borrower has flexibility in their timing, now might be a better time to access the capital markets rather than later in the year.

Metropolitan Capital Advisors seeks to assist their clients with their commercial real estate financing needs. We welcome the prospect to evaluate your new acquisitions and development opportunities.

The author, Charley Babb, is a Senior Director and Principal in the Denver office of Metropolitan Capital Advisors. Contact Charley Babb at cbabb@metcapital.com

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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 in North Texas.  The project cost exceeded $100,000,000 and the capital structure was complex, with multiple providers, including a public bond component.  The timing of the project required that the committed capital fund a portion of its investment before the majority of the predevelopment work was completed, with a ground breaking estimated to be 6 to 8 months after the committed capital “closed” on the project.

Predevelopment Risk

The Pre-Development Stage, or the early stage of a project, centers around due diligence, research, confirming entitlements and permitting.  As such, investing at this stage carries the greatest and most varied risks, because there are many unknowns.  Market analysis and feasibility studies can assist with potential project viability.  Other risks include site plans, development plans, and building plans, permitting, project costs and in rare cases, arranging construction financing.  It is not typical for a joint venture equity partner to close in advance of a construction loan commitment so that is why I slot construction financing as a rare instance.

Since the pre-development stage is the riskiest, pre-development costs are usually financed by the project sponsor or if the project is large enough, the joint-venture equity partner that might get taken out by the construction loan.  Investments made during this stage, therefore, provide for higher returns than those made during the later stages.   One important note for equity investors is that obtaining construction financing from a bank or other lender is a very rigorous process, and if a developer already has a construction loan arranged, it usually means that a number of major hurdles have been cleared.

Perhaps the greatest impediments to capital formation during pre-development are zoning/permitting and project cost verification.  Zoning and permitting can be a cause for delays in ground breaking.  The building permit application process is relatively speedy compared to the land use process because it is supposed to be based on objective criteria.  For this reason, it is less likely to delay fundraising.

The last milestone in the pre-development stage is the confirmation from a reputable General Contractor of the project hard costs.  This concept can cause for a real show stopper during a joint-venture equity agreement negotiation.  The joint-venture equity does not want to take risk that the project cost is higher than what the developer proforma suggests.  The project cost directly affects the project profit.  Joint-venture equity does not want to be surprised during pre-development, when the project they thought they had committed to might actually cost significantly more.  In most cases, the General Contractor cannot accurately cost a project until a full set of Schematic Design plans are completed.  This endeavor can be costly depending on the project size.  Therein lies the conundrum: how does the joint venture equity recoup its investment into the predevelopment stage if the project cost exceeds a level of viability?

That question is usually followed by a swift answer….the equity doesn’t jump into the deal until the sponsor is able to provide assurances that the project cost is as outlined in the investment brochure/business plan.

Based on the feedback from institutional equity investors in the marketplace, MCA was able to determine which investors were willing to accept pre-development risk and who was not.  Setting aside the pre-development aspect, the project had extremely favorable above-market returns and economic metrics.  After sourcing approximately 75 sources of capital, the majority of the capital prospects would not consider investing in a deal prior to the issuance of a Guaranteed Maximum Price Contract (“GMAX” or “GMP”) from a reputable general contractor.  Simply stated, the majority of the joint venture equity available in the market was willing to bet on the deal outcome as well as market conditions; however, they were not willing to bet that the sponsor’s costs were accurate absent of the GMAX contract.  When a reputable contractor with a strong balance sheet guaranties construction costs not to exceed a pre-agreed upon amount, it is essentially a credit enhancement to the project and can, in most cases, mitigate the potential for cost-overruns (save for change orders).

MCA was successful in identifying several candidates that, via various different forms of “structure” on the joint venture, were able to stomach the pre-development risks.  However, those equity providers generally priced in the pre-development risks in the equity waterfall returns and required a higher IRR or Equity Multiple threshold before the sponsor could earn their promoted interest.

Developers should know that in order to negotiate the most favorable terms from the joint venture equity market, the pre-development risks need to be eliminated and/or covered by the sponsor.  Putting the joint venture equity in a position to fund at the construction loan closing and ground breaking of the construction, will yield the best economic deal toward the sponsor as well as increase the appeal to prospective joint venture equity providers to the project.

The author, Todd McNeill, is a Director and Principal in the Dallas office of Metropolitan Capital Advisors. Todd can be easily reached at tmcneill@metcapital.com

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