Trends in real estate financing.(This is the third in a series of six commercial real estate articles being penned by CREW-NY (Commercial Real Estate Women-New York). Each column will focus on emerging trends in a given area of commercial real estate.)
Reports from all quarters tell us the Manhattan real estate market is definitely on the rebound. Rental rates have increased and sale prices are starting to climb, but what about financing? I went to our CREW members who are experts in this field. Below are their responses to my questions.
What types of properties are being financed today?
Victoria Kahn, senior director of Jones Lang Wooton Realty Advisors, investment advisors Investment Advisor
1. A person making investment recommendations in return for a flat fee or percentage of assets managed, known as a commission.
2. For mutual fund companies, it is the individual who has the day-to-day responsibility of investing and monitoring the cash and to state and private pension funds, says "Today's money is chasing high (institutional) quality product with stabilized revenue streams in markets with strong demographics and minimal downside. In terms of retail, while this has not been a strong performing year in general, regional mall transactions continue, although not at last year's pace. CBD (Component Based Development) Building applications with components (objects). See component software.
CBD - component based development office product has rebounded in many markets, such as Boston, Washington DC and Seattle, as vacancy rates shrink, supply holds constant and rental rates rise accordingly. Well-built, very well-located residential property is also being favorably received for both new financing and re-financing."
"What is still being viewed with disfavor is pure development," adds Kahn. "Lenders, remaining very risk-averse, will finance current income securitized securitized
Of, related to, or being debt securities that are secured with assets. For example, mortgage purchase bonds are secured by mortgages that have been purchased with the bond issue's proceeds. by credit tenants. Unless a development property is pre-leased to credit tenants, capital will be hard to find, costly, or both."
Daun Paris, president, Eastern Consolidated Properties, Inc., a real estate investment brokerage firm, agrees with Kahn about residential and retail properties. Says Paris, "Multi-family residential Multi-family residential is a classification of housing where multiple separate housing units are contained within one building. The most common form is an apartment building.
Many intentional communities incorporate multi-family residences, such as in cohousing projects. and retail properties are readily being financed. Even hotels and development land, once red-lined from a lending point of view, are now back in favor. Office buildings are still facing unusually difficult lending terms, with banks requiring 40 to 90 percent equity before they will lend. This even applies to well-located, prime Midtown mid·town
A central portion of a city, between uptown and downtown.
US & Canad the centre of a town office buildings."
Like Kahn, Roberta Hyman, vice president, Galesi Realty Corp., an office and retail sales and leasing brokerage firm, also reports conservative lending practices, the key being dependable, long-term, income streams. "Insurance companies and pension funds are lending on properties with credit tenants, long-term leases and triple-net leases," says Hyman. "Types of properties being financed are shopping centers shopping center, a concentration of retail, service, and entertainment enterprises designed to serve the surrounding region. The modern shopping center differs from its antecedents—bazaars and marketplaces—in that the shops are usually amalgamated into with credit tenants, office buildings with credit tenants, build-to-suits for credit tenants, etc."
When it comes to lending terms, the news from the front is positive. "Interest rates are low and there is an abundance of lenders for most New York New York, state, United States
New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of properties," says Paris. Kahn concurs, adding "Overall, the terms for commercial mortgage money are very 'workable,' given that interest rates are at record lows. At present, long-term (over 7-years) fixed financing is available from insurance companies, pension finds and via securitizations, at approximately 130-150 basis points over corresponding treasury yields. The banks have also gotten back into this market in a big way, and are very competitive as to rate. However, while lenders have ample funds to place and are anxious to do so, financing at greater than 60 percent loan-to-value, even for well-leased Class A product, is rare."
Hyman adds "There is abundant mortgage money currently available. The terms are workable as long as the project has realistic numbers and the tenants are financially stable. The terms for a property without credit tenants could require a greater input of cash, thus causing the deal to have a cash-on-cash return Cash-on-Cash Return
A rate of return often used in real-estate transactions. The calculation determines the cash income on the cash invested: that is too low."
Who are the lenders?
"Traditional lenders - banks, insurance companies, pension funds - all are active players looking for Looking for
In the context of general equities, this describing a buy interest in which a dealer is asked to offer stock, often involving a capital commitment. Antithesis of in touch with. very much the same product," says Kahn. "The lending perspective is differentiated more by term than product, with the banks placing five- and seven-year money, while the insurers/funds look for longer terms. Banks and insurance companies are reluctant, in my experience, to allocate more than $60 million per asset on a non-recourse basis (regardless of the debt/equity ratio Debt/Equity Ratio
A measure of a company's financial leverage calculated by dividing long-term debt by shareholders equity. It indicates what proportion of equity and debt the company is using to finance its assets. )."
Susan M. Deutsch, senior vice president, Llama llama (lä`mə), South American domesticated ruminant mammal, Lama glama, of the camel family. Genetic studies indicate that it is descended from the guanaco. Company, a real estate investment banking firm, sees a diverse group of lenders. "A great deal of capital has come into the real estate markets in the past two years," says Deutsch. "Until recently it came primarily from Wall Street through conduits. Conduit money is market driven by the buyers of the ultimate securities and the rating agencies that rate these securities. The loan underwriting Underwriting
1. The process by which investment bankers raise investment capital from investors on behalf of corporations and governments that are issuing securities (both equity and debt).
2. The process of issuing insurance policies. is standardized standardized
pertaining to data that have been submitted to standardization procedures.
standardized morbidity rate
see morbidity rate.
standardized mortality rate
see mortality rate. and there is not much room for creativity. Insurance companies, banks and, to a lesser extent, pension funds, have re-entered the market. They are competing with conduits for top quality and stable property types such as Class A multi-family housing properties and retail. Joining conduits for the remaining property types, including office, industrial/warehouse, hotels, trailer parks and storage, are the finance companies."
"In 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. , lenders that are current mortgagees dominate the market," continues Deutsch. "Values are not there yet to refinance Refinance
1. When a business or person revises their payment schedule for repaying debt.
2. Replacing an older loan with a new loan offering better terms.
When a business refinances they typically extend the maturity date. and bring in new capital. Tenant improvements are financed by those entities with a stake in the property, i.e. landlords and existing lenders. Sales are being made by lenders that take back the property and sell it."
Is Manhattan being "red-lined"?
On the subject of "redlining Identifying text that has been changed in a word processing document by displaying it in a special color, for example. It allows the original author of the text or other users to see ongoing revisions. The term comes from manual editing where a red pen is used to mark up the pages. " there is a lively difference of opinion among CREW members. Victoria Kahn does not think Manhattan is discriminated against by lenders. "There has been a fair amount of transaction activity within the past year, so lenders are lending so that buyers can buy," says Kahn. "I am currently completing a very large refinancing Refinancing
An extension and/or increase in amount of existing debt. of a mixed-use facility in the Metropolitan area. Not a single lender I approached expressed any "concern about allocating investment dollars in the Manhattan market. Of course, the collateral at issue here is a Class A property which is 95 percent leased under long-term leases to credit tenants (primarily financial services The examples and perspective in this article or section may not represent a worldwide view of the subject.
Please [ improve this article] or discuss the issue on the talk page. ). But the tenants' fortunes are inextricably in·ex·tri·ca·ble
a. So intricate or entangled as to make escape impossible: an inextricable maze; an inextricable web of deceit.
b. linked to those of Manhattan itself."
Daun Paris, on the other hand, feels that "Manhattan office buildings are being red-lined by almost everyone. However, there is an indication that some banks and insurance companies are beginning to move into this category as the lending atmosphere becomes more competitive."
Is lack of available financing or poor terms limiting commercial sales in the market?
On the subject of the effects of financing on commercial sales, Kahn and Paris are in agreement. Says Kahn: "Prices may, in many cases, still reflect discounts from replacement value, but that has little to do with the amount of financing available, and more to do with the quality of the product offered for sale."
Adds Paris: "Commercial sales haven't been this strong in years, including sales of office buildings, despite heavy equity requirements. Particularly in the Grand Central area, office building sales have been more active than anytime within the last 10-15 years. This activity reflects an optimism on the part of the investment community that we are on the bottom of a cycle."
"In the past few months alone," continues Paris, "office properties such as 18 East 41st Street (100,000 square feet), 485 Fifth Avenue (200,000 square feet) and 56 West 48th Street (75,000 square feet) have been sold or put in contract with half or more of the purchase price funded with equity. At least ten other office buildings within five blocks of Grand Central are due to close within the next six months. Sales activity in well-located apartment properties also remains incredibly strong, with properties selling at a 67 percent return versus the 10 percent return they were trading at one to two years ago."