Continued growth in real estate loan portfolio.In July of 2004 I wrote, "Rates have not yet increased enough to dampen the ardor ar·dor n. 1. Fiery intensity of feeling. See Synonyms at passion. 2. Strong enthusiasm or devotion; zeal: "The dazzling conquest of Mexico gave a new impulse to the ardor of discovery" for purchasing real estate, both for investment and personal occupancy." Today, the rise of short-term rates has almost eclipsed the ability to gain positive leverage on an initial purchase. The majority of cap rates that I calculate for new purchases, after a clear view of expenses, are still in the 4% to 5% range. The steep yield curve from 2004 has flattened flat·ten v. flat·tened, flat·ten·ing, flat·tens v.tr. 1. To make flat or flatter. 2. To knock down; lay low: The boxer was flattened with one punch. , and long-term rates are marginally higher. An impartial viewer of the situation would conclude capitalization rates Capitalization Rate According to the Appraisal Institute, it is a method used to convert an estimate of a single year's income expectancy into an indication of value in one direct step, by dividing the income estimate by an appropriate rate. are bound to increase based on the changing interest rate market and the general consensus that long-term rates will eventually move higher. I predict higher cap rates for properties without the potential for increases in income. In the New York Metropolitan area New York–Northern New Jersey–Long Island is the most populous metropolitan area in the United States and the third most populous in the world, after Tokyo and Mexico City. , the upside of property investment is apparent, as rents for all property types have been increasing. As long as there is steady economic growth and the economic and social atmosphere of the New York Metropolitan area remains attractive, gross income receipts from commercial properties will continue to improve. Consequently, investors will be paying pay large sums for properties with initially small returns. Capitalization rates will remain the lowest for rent-regulated apartment buildings, where rents are far below market levels. As a lender on commercial real estate, the positive view translates into plans for continued growth in the real estate loan portfolio. The risks to lending in this environment are the ability of a property to service existing debt, increased debt service at loan maturity, and a rapid change in the local economic conditions. Low capitalization rates pose a problem for prudent lenders. Loans greater than 75% of a property's purchase price will often have inadequate debt service coverage. Since the lowest capitalization rates are observed for rent-regulated apartments, loans for acquisitions of other commercial property types have proven to be attractive due to their ability to service debt payments. Not only do the properties have adequate debt service coverage, many of the existing leases signed during the most recent recession are below current market levels. M&T has been lending on commercial real estate for over 100 years. We continue to prosper through good and bad real estate markets because of innovative loans, as the real estate market evolves. In this environment, we maintain our discipline on non-recourse lending. Since there are no carve outs to the exculpatory exculpatory adj. applied to evidence which may justify or excuse an accused defendant's actions, and which will tend to show the defendant is not guilty or has no criminal intent. language in our New York City New York City: see New York, city. New York City City (pop., 2000: 8,008,278), southeastern New York, at the mouth of the Hudson River. The largest city in the U.S. based real estate lending, the loans must have adequate debt service coverage now, and the expectation with reasonable assumptions, to meet demand if rates increase when the loan matures. To bridge debt service inadequacies, we offer several innovative loan structures to meet our clients' needs. Often, we finance real estate with a non-recourse 'A' note and a recourse 'B' note for customers with demonstrable de·mon·stra·ble adj. 1. Capable of being demonstrated or proved: demonstrable truths. 2. Obvious or apparent: demonstrable lies. financial capacity. We also have the capacity to accept other types of collateral as part of a transaction, including marketable securities Marketable Securities Very liquid securities that can be converted into cash quickly at a reasonable price. Notes: Marketable securities are very liquid as they tend to have maturities less than one year, and the rate at which these securities can be bought or sold has , subordinate financing on other properties and pledges of partnership interests. Some of our clients enjoy our offer of a committed provision to increase a loan, upon proven increases in gross and operating income Operating Income The profit realized from a business' own operations. Notes: This would not include income from things such as investments in other firms. Also referred to as operating profit or recurring profit. . There is a danger inexperienced in·ex·pe·ri·ence n. 1. Lack of experience. 2. Lack of the knowledge gained from experience. in purchasers and their financiers will create a bubble in real estate values. For lenders to avoid the damage of the early 1990's, it will be necessary to avoid lending on speculative increases in value and focus on current cash flow. At M&T, we will continue to serve our clients with the ability to find properties with cash flow to cover debt service, and we will provide the means for our clients to improve the economic performance of their investments in real estate. GARDNER B. SEMET, TEAM LEADER M&T BANK, NYC NYC abbr. New York City NYC New York City COMMERCIAL REAL ESTATE |
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