Printer Friendly

Marking to market valuation returns - with a new twist.

A common practice in the early 1990's among commercial mortgage lenders was called "marking to market," a valuation technique used in evaluating how much a building was worth for the purposes of determining how much loan to value to lend.

Essentially, in an economic climate in which rents were falling, lenders would discount all rems in a multi-tenant building to the currently achievable level to arrive at the building valuation.

Today, lenders are once again marking to market, but for an entirely different reason and with substantially different results.

Today, lenders are allowing owners to gross up all rents in a building to currently achievable levels. This reflects a best case scenario for valuation. It also allows the lenders to lend more on a given property without stepping outside their set loan-to-value ratios. Moreover, being able to lend more on a property makes a lender more competitive. It's an example of how competition among lenders is dramatically changing the economics of the real estate business.

"This is a very aggressive approach to lending," said Jerry Swartz, principal of Pergolis Swartz Associates, Inc., one of the most active commercial mortgage brokerage firms in the New York area. "But in some ways it was inevitable. When competition is very hot between lenders, there are only a few things that can give: rates, loan-to-value ratios and valuations. Essentially, this trend of marking to market upwards is a strong vote of confidence in the long-term health of the real estate market."

Swartz notes that marking to market has not yet become universal. It is most frequently seen only in the strongest market segments.

"Not surprisingly, we're only seeing this in the areas in which the lenders have the most confidence," said Richard Pergolis, also a principal in Pergolis Swartz Associates. "In Manhattan, the loft market has seen a lot of this activity, and Downtown, too, where space has grown very tight and achievable rents have skyrocketed, but where average existing rents are still depressed."

A typical example of marking to market might involve a Midtown South loft building which achieved rents of $20 per square foot in the 1980's. By 1990, the achievable rent for newly vacant space in the building might have fallen to $12 per square foot. At that time a lender would have valued the building based on an average rental figure of $12 per square foot, even though there were many tenants still paying the higher rents negotiated years before.

As this typical building experienced tenant turnover, average rents began to fall, hitting perhaps $15 per square foot on average. But as rents began to rise once again in the mid 1990's, the achievable rent quickly outpaced the average rent, hitting $18 per square foot.

The most aggressive lenders today are willing to assume an average rent for such a building of $18 per square foot.

"I don't think lenders are doing anything wrong here," summed up Swartz. "Just as it was actually appropriate for them to mark a building down when that was clearly the trend in rents and valuations, it's equally appropriate for them to mark up. It's good business as long as it isn't carried to an extreme. Most lenders learned in the 1980's how dangerous taking things to extremes can be. I don't think we'll be seeing the same kinds of mistakes."
COPYRIGHT 1997 Hagedorn Publication
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1997, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:mortgage lenders
Publication:Real Estate Weekly
Date:Dec 10, 1997
Words:556
Previous Article:C&W enhances real estate/capital markets capability.
Next Article:Rockland County is poised to thrive.
Topics:


Related Articles
Current trends in real estate banking.
Third generation brokerage marks 100th anniversary.
Predictions for the mortgage industry in 1999.
Fannie Mae, Calyx team-up to provide technology solutions for small lenders.
Prepare for reorganization in commercial mortgage industry.
New risk management tool being offered. (Technology Update).
FNIS launches new tool, HQ Score. (Technology Update).
First Lenders relaunches 'History Pro'. (Technology Update).
New loan fraud screening solution.

Terms of use | Privacy policy | Copyright © 2019 Farlex, Inc. | Feedback | For webmasters