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By Brad Donnell

There are five basic food groups of commercial real estate funding these days and the appetite lenders have for each different type can vary substantially.  Pre-2008, the different types of commercial properties could pretty well be grouped into a category just called “food.”  Lenders had an insatiable appetite for “food” and dumbed down their taste buds to eat all they could, like drunken college students raiding the local Pancho’s Mexican Buffet.  Continuously raising the flag for the waitress to bring another helping of chile rellenos, not a lot of attention was paid to the risk factors each different type had and how macroeconomics affects how well they can stomach them.

Today, lenders have become very picky eaters.  Those of you with young children can relate to the challenges of selling a finicky tot a plate of lima beans or spinach.  In the post-bust lending environment, one must become familiar with the new food groups in order to effectively convince a lender to loan on them, just like a chef needs to know how to best prepare a plate of sweetbreads.  The best chefs can make even the most bland or questionable food appetizing, and if your commercial property is something akin to an organ meat, you better find a good chef if you need to refinance it today.  The good news is even cardboard can be appetizing with enough cheese sauce slathered on it.  Often, the biggest challenge in coaxing a lender into making a loan is making it look and taste good.  Here are the new five food groups of commercial real estate and their respective need for a good slather and a chef who knows how to prepare it correctly.  The more stars, the more need for a good bucket of Velveeta.

Carrots

Carrots have never been my favorite food.  They are hard, cold and gritty.  You have to boil them, coat them in honey and sugar or dunk them in a bowl of fat-laden ranch dressing to choke one of them down.  Commercial office space these days is similar to carrots.  It is about as popular to lenders as carrots are to a six-year-old, and it takes about as much effort to lease one as it does to convince the six-year-old that a hard orange root is delicious.  With the hiring market in a deep freeze, office expansion is at a virtual standstill.  Until employers begin to get a grasp on the upcoming healthcare costs, they will be reluctant to invest in their most expensive assets, people.  Expect to be underwritten with a higher-than-expected vacancy factor and a low loan-to-value.

Need for cheese sauce:

New Construction ★★★★★★

Existing ★★★★★

Sausage

Sausage, on the other hand, can be a fine food or one that is truly horrific.  Made with questionable techniques and ingredients, sausage can be one of those food groups that really satisfy a craving.  Retail is kind of like sausage; it can be really good or it can leave you bent over a trashcan.  It, too, consists of sometimes questionable and often foul parts and can have a very short half-life before it turns into something truly rancid.  Most consumers like retail just like they do sausage or bacon.  Retail centers have lots of shiny things in them to spend money on and they are nice to have handy.  You just really have to watch them though, because they can turn bad fast.  It does not take much to empty out a retail center, especially if you have an anchor tenant like a grocery store bail on you.  The next thing you know, a condom store that sells hard liquor and makes payday loans springs up in the middle of your nice subdivision as if someone dropped a pound of steaming andouillette in your living room.  Lenders have had enough sausage for a while, especially the generic brand.  They will still yield to the temptation if it is prepared with a lot of other good things like rated credit and lots of anchor tenants.

Need for cheese sauce:

Anchored – Construction or Existing ★★

Unanchored – Construction or Existing ★★★★★★

Turkey

Turkey is something that is eaten only so often.  It is not nearly as versatile as chicken and usually only eaten on Thanksgiving and Christmas.  Hotels are a lot like turkey.  They can be dry and send you looking for a couch to go to sleep on and there is only so much you can do with the leftovers.  Non-flagged, limited service hotels are a bit of a yawner for lenders.  Nothing too much to get excited about and occupancy levels in these types of hotels can be a bit dodgy.  Mix in the fact that many people have put off travel and vacations since they cannot afford them and you have a problem that has persisted since 9/11.

Need for cheese sauce:

Non-Flagged Generic – Construction or Existing ★★★★★★★★

Flagged – Construction or Existing ★★★★

Luxury – Construction or Existing ★★★

Potatoes

Most of the time, potatoes are a very pedestrian and boring food group.  Like potatoes, industrial properties are generally pretty generic as well and lenders only want so many.  However, in the hands of someone like Joel Robuchon, a potato that is properly prepared can be outstanding.  There is a limit though; you don’t want to fill up on a bunch of starchy potatoes if you know what is next on the buffet, and there is a reason why potatoes and turkey go so well together if you are looking for a good nap.  Credit tenants or deals with low leverage are the preferred pomme de terre du jour.

Need for cheese sauce:

New Construction ★★★★

Existing ★★★

Pizza

If I were to classify multifamily into a food group, it would be pizza.  Most everyone likes pizza and there are many types, ranging from the bland to the exotic.  A slice of even bland pizza is generally preferred to any of the other food groups as the risk with multifamily is historically low.  You can exist without any of the other food groups, but you always need a place to live.  With home ownership now shunned by many, rental housing is booming, occupancy levels are high and rent growth is healthy.  There is substantial demand for new construction although the only deals getting done right now are infill locations.  Attracting equity to new construction, however, is difficult as equity providers have a flood of transactions to choose from.

Need for cheese sauce:

New Construction – Infill ★

New Construction – Suburban ★★★★★★

Existing – All ★

Dessert Course

Healthcare is very similar to baking things for dessert.  No one quite knows how to make them from scratch unless it is a pre-packaged box of mix.  Measuring baking soda and flour, picking the right temperature for the oven and making a cream cheese icing are all very foreign to lenders—and most chefs for that matter.  Everyone knows they like to eat cakes; they look pretty and smell good, but beyond that no one knows much more about the science of baking cakes nor do they have the patience to learn.  These really take a lot of explaining and the trick in this recipe is the icing.  Nothing harder to eat than a piece of dry cake:

Need for cream cheese icing:

New Construction/Existing/ALZ/Acute & Managed Care/Hospitals/Rehab Centersééé

Independent Living ★★★★★★

Instead of being the gluttons they once were, lenders have become very picky about the types of food groups of real estate they are willing to lend on.  Instead of eating everything in sight, they have become calorie conscious, saving room for the things they only really like.  They may eat a bit more than just pizza, but it is in limited quantities and it needs to taste really, really good if they are going to pass up that extra slice of pizza for it.  That is why it has become so much more important to pick the right chef to originate a loan on a commercial property these days, even for pizza.  Frozen pizza can only be so-so, but it can be jazzed up with the right ingredients and prep work.

Today’s fickle lending environment requires more creative engineering in the kitchen than ever before.  While debt for most all property types is readily available now, the diners have a much more refined palate.  Metropolitan Capital Advisors has substantial experience with everything from molecular gastronomy to the most basic cheese sauce.   Before your transaction is ready to go into the oven, please give us a call.