Get ready for the return of cheap, plentiful, non-recourse capital to fund commercial real estate. The dark days are over… time to get back in the game!
Here is a preview of my latest white paper titled CMBS 2.0: Crack is back!
Crack? What kind of metaphor is that?: The Wall Street juggernaut is the biggest drug dealer in the history of civilization. Even the most upstanding, solid commercial real estate investors were seduced by the lure of easy, cheap, plentiful capital. Wall Street kept dealing out capital because the profits were enormous, Sponsorship did not matter, and the risks were shifted to the bond buyers not their own balance sheet.
It was a great party until the music stopped and we looked ourselves in the mirror the morning after to only to find a strung out junkie with a bunch of properties purchased at unsustainable price levels, debt up to the eyeballs, falling rents and no fix to be found. As Nietzsche said, “That which doesn’t kill us makes us stronger!” Global real estate investors have been at the Betty Ford Clinic for the last three years getting “clean”. We emerge to a brighter day, a lower basis and a world brimming with new opportunities.
Why borrow funds from a CMBS 2.0 lender?: Loan proceeds will be higher than LifeCos, banks, and Fannie & Freddie in pre-review markets. Loans will be Non-Recourse. Loans will close faster than Agency lenders for multifamily properties. Speed wins… closings typically running 60 days from application. Cash-out refinances considered. The most active active and aggressive lenders are start-up companies run by experienced real estate lending professionals focused on understanding the “intrinsic value of the underlying real estate”, the cash flow generated from the asset and the amount of debt the project can support. CMBS 2.0 lenders can be aggressive because they don’t have any “legacy issues” to deal with from loans made 4-7 years ago. They have a clean balance sheet that they will risk for the right loan opportunities.
Deal Size: Some CMBS shops have $20 million minimum – some $10 million – some $5 million – some $3 million – few active “small balance” CMBS lenders looking to make loans in the $1+ million space (note: the sub $3 million loans need to be simple, clean and easy to underwrite with no hold backs or earn outs)
New to CMBS 2.0: To fund “large, high profile deals” from “high profile sponsors” there is a willingness to cut the note into an “A” piece and a “B” piece in which the “B note” will be held on the lender’s balance sheet and only the A-piece put into the securitization. Non-Bank CMBS lenders with Balance Sheets can take more risk than shops that have limited ability to warehouse their paper or banks that have “political” risk. Willingness to do high leverage bridge loans as a feeder to permanent loans. The ability to access a balance sheet means the ability to do creative deals.
Property Types: Multifamily, office, retail, flex, warehouse, R&D, self storage and hotels.
Recourse: Loans will be non-recourse with standard carve-outs
Prepayment: Yes, defeasence with some willing to do yield maintenance or structured pre-payment.
Term: 5-7-10 year term
Amortization: 30 years on multifamily and highest quality commercial assets otherwise 25 years. Interest only is available for first one or two years of the term.
Location: Nationwide. Will go to core, primary, secondary and tertiary markets including smaller markets like Des Moines & Fargo. Will go to distressed markets such as Michigan, Ohio, Florida, Arizona and Nevada for strong assets with strong, experienced sponsorship.
Underwriting: Sponsorship matters in CMBS 2.0 but not as much as borrowing from a bank or LifeCo since the intrinsic value of the real estate is more important than the Sponsor. Need to review Sponsor’s resume, track record, detailed schedule of REO, recourse, know about Sponsor’s bumps and bruises from “The Great Recession”. Financial underwriting is focused on Debt Yield (NOI less Reserves/Loan Amount), LTV up to 80% on multifamily, 75% on retail, 70% on office & self storage, 65-70% on hotels with strong flags and Sponsorship. Big focus on the current rent roll, lease expirations and Trailing 12 financials. No “artificial rules” like Fannie & Freddie – if the asset and the market show a 18% vacancy factor then that is used in the underwriting model to calculate proceeds rather than it being an automatic pass. Cash-out refinances considered.
Debt Yields: Rather than sizing loans to debt coverage ratios CMBS 2.0 lenders are sizing on Debt Yield (NOI/Loan Amount) to understand the risk. Multifamily 8-8.5% on class A – 9-9.25% on class B, 9.5-10% on Class C and tertiary markets. Highest Debt Yields are at 13-13.5% on Skilled Nursing Facilities (SNF).
Pricing: most are 10 year loans based on the SWAPS not Treasuries – CMBS is priced higher than the Agencies (will allow cash out, lower occupancy, higher leverage, etc. to compensate for slightly higher rates) – A “full loan” that has a 1.2 to 1.25 debt cover prices around 6% give or take an eighth. Rates are lower for loans with lower leverage.
Application fee: $5,000 to lender (less on multiple properties), add third parties ($12-15,000) add legal ($8-13,000)… total cost will $25-33,000. Small balance loans have slightly lower fees and more “cookie cutter” documents.
For my entire loan checklist please visit: https://bisonfinancial.com/loans/checklist
PS – In addition to the above… I have access to JV funds for 100% of construction cost (including developer fees) for projects with investment grade tenants (or “close”). Looking for single deals or a “platform developer” that will be doing multiple locations with the same tenant(s). Agnostic as to property type (retail, office, industrial, medical, student housing, data center, alternative energy projects with a PPA, etc.) as long as the responsibility for payment is a credit worthy tenant (will consider tenants that are not investment grade according to S&P) on a long term lease. Sale/Leasebacks, too.