We are currently shopping for first mortgages in the $5 to $25 million range on exclusive marketing assignments on several different property types (retail , multifamily, hotel, and mixed use / commercial). We have been astonished by the blend of rates and terms we are getting from CMBS lenders and portfolio lenders alike. The capital markets that had frozen over in 2008 have thawed and are now flooding the commercial real estate marketplace with liquidity.
CMBS lenders have mortgage pools that they need to fill and securitize before the end of the year. They are getting very aggressive for the right properties. A typical deal is:
- Fixed rate for a term of 5-7-10 years with payments calculated on a 25 or 30 year amortization schedule
- Lenders are offering very flexible terms on low leverage loans. There is a line in the sand at or below 65% LTV defining low leverage vs. full leverage.
- As leverage drops below 65% we have been able to negotiate a spectacular blend of rate and terms for our borrowers including:
- Interest Only is available for slight increase in spread for a term of 2-3-5-7-10 years. When payments are based on interest only as opposed to a 25 or 30 year amortization schedule… the cash flow to the owner skyrockets. The additional cash flow to the owner can be reinvested in improvements to the property to generate higher NOI or to acquire additional assets.
- Depending on leverage CMBS lenders will underwrite, but NOT collect reserves for Tenant Improvements Leasing Commissions & CapEx (these sometimes painful forced savings accounts are the typical reason borrowers do not do a fixed rate, non-recourse CMBS loan)
- Our current 10 year CMBS quotes range from 160 to 225 over 10y Swaps – this pegs the rate on 9-24-14 as low as 4.29% fixed for 10 years (269 10y Swap + 160 spread). When I entered the commercial real estate industry in 1985 (link) I calculated mortgage payments based on a chart that started at 8.5% and went all the way to 18%. The ability to borrow money at a fixed rate for 10 years at a rate in the low to mid 4% range is simply astonishing.
- There is a willingness on the part of CMBS lenders to do holdbacks for increases in NOI over a 1-2 year period of time if the increase in value can be proven and verified
- Willingness to entertain high octane loans which provide leverage from 80 to 90+% of cost with layers of mezzanine and preferred equity on top of senior debt
- Willingness to provide floating rate loans as well as fixed rate loans for transitional properties that will be sold or refinanced in less than five years
- Prepayment penalty based on Treasury Defeasance or Yield Maintenance for a slight increase in spread
In order to compete with CMBS lenders there are some niche portfolio lenders with no legacy issues that have entered the market. We are working with a national lender that offers:
- Portfolio product, not CMBS
- Focus on “small balance commercial loans” which they define as loans in the $1 to $10 million size range
- Fixed rate for 3-5-7-10 year term with payments based on a 25 year amortization schedule
- Rates starting in the upper 3% range
- Step-down pre-payment penalty NOT yield maintenance or Treasury Defeasance (a 5 year deal may be 5-4-3-2-1 and a 10 year deal at 5-5-4-4-3-3-2-2-1-1) with no pre-payment penalty during the floating rate period
- Interest rate caps during the floating rate period
- Non-recourse available for leverage under 65% of value
- Lender underwrites but does not collect impounds for TILC and CapEx
- Programmatic loan has low start-up fees, legal fees and closing costs
- This is a “wholesale only” lender with no retail distribution so they ONLY originate through the channel of commercial mortgage brokers like Bison Financial Group
It’s time to get off the sidelines and back in the game. Rates are low, lenders are flexible and hungry to get money on the street before the end of the year. Let’s close a deal together in 2014!