Four Common Mistakes That Make Financing Your CRE Difficult, If Not Impossible

I’m surprised how often I am asked to find financing for a property that for one reason or another is obviously not financeable.  It’s as if the borrower wants the lender to forgo the use of common sense.  I’m going to let you in on a little secret: IT ISN’T GOING TO HAPPEN!!!  Anyone who is at all knowledgeable about commercial real estate lending realizes that lenders are risk averse.  They are not in business to take on any more risk than is absolutely necessary. 

So if you want to either refinance your property or to sell your property there things you must do a year or two before financing is needed to get the property to the point where I call it, “lender friendly.”  Not doing so will likely make it much more difficult, if not impossible, in getting a lender interested.  Here are four common mistakes:

1.   The property is in poor physical condition.  It’s a big turn off to lenders to see a property poorly maintained.  Why would a lender refinance a property for a borrower that is not willing to maintain his property?  If you want to refinance a property that has a lot of deferred maintenance you better have an excellent explanation as to why it’s in poor condition.  Better yet would be to get the big ticket items fixed prior to refinancing your property. 

2.   The occupancy rate for the property is below market calling into question the seller’s property management company’s ability to professionally manage the property.  If the property is self-managed you’re in deep trouble.  If the property is for sale some sellers or listing brokers think that providing a rent guarantee on the unoccupied space will satisfy a lender’s concern.  WRONG!!  It does just the opposite.  It’s a great big red flag that something is wrong with the property.  A better solution is to offer as much free rent as needed to get the vacant space occupied.  Offer the free rent at the beginning of the lease.  Once the free rent has burned off, then refinance or put the property up for sale.  You still need to disclose the free rent to the lender but it is much better to have your property at stabilized occupancy with free rent than to have a property with a high vacancy rate. 

3.   Operating expenses are well above normal for a property of that age and condition.  You need to investigate if there is a reason for this.  Is it an anomaly?  Are some ongoing maintenance expenses actually capital expenditures?  Can you explain why?  If you can determine that the additional expenses are costly one-time expenses then capitalize what you can identify and operate the property for a year to show what your operating expenses should be for a normal year.  If you rush to refinance the property with higher than normal operating expenses it will likely lower the loan amount because of the lender’s minimum debt coverage requirement.  And if you’re trying to sell the property, the value of the property will be adversely impacted because the NOI for the property will be lower than it should be.  Worst case scenario, the lower NOI could reduce the loan amount and thereby increase the equity required by the buyer beyond what he is willing to invest in the property killing your sale.      

4.   Most tenants are on a month-to-month basis (not a concern for apartment renters) or have only 1 or 2 years remaining on the term of their lease.  Most lenders will not accept rollover risk.  Again, proposing a rent guarantee on those tenants whose leases have expired or will expire shortly is a big turn off to lenders.  One way to mitigate risk is to identify when each tenant originally moved in.  If they have been a tenant at the property for 10 or more years then it is much less likely they plan to move once the lease expires.  But the best thing to do before you sell or refinance your property is to get as many tenants re-leased for as long as possible.  Once you’ve minimized the rollover risk then seek financing. 

Remember, it’s all about getting the lender as comfortable as possible with financing the property.  You’re asking the lender to lend you or your buyer lots of money.  Make sure to take some common sense steps prior to requesting a loan that makes it easy for the lender to say yes. 

Timing Is Everything When Financing CRE

They say that, "Timing is everything."  Right?  Well it certainly holds true when it comes to financing commercial real estate.  There are times during the year when trying to get a loan financed is pure misery and there are times when the financing "gods" are looking down benevolently on you.  But let me tell you a little secret: It's not rocket science to figure out when is the optimal time to get things financed.  It's plain common sense.  Shown below are the worst times and then the best times to get your property financed.

Worst Times to Finance CRE

1. June 10th through Labor Day - If you haven't signed your loan application before summer starts, good luck!  Summer is the time when kids are out of school and family's take long vacations.  Loan officers, underwriters, loan processors, real estate brokers, mortgage brokers, attorneys, appraisers, etc. all lose focus during the summer months and as a result the financing process slows down to a crawl, or so it seems.
2. November 1st through Year End - If your loan is not expected to close before year end, your deal will go to the bottom of the pile.  All the focus during the end of the year is to work on deals that will close before year end so loan officers can make their quotas and for those who have had a good year, to make their bonuses.

Best Times to Finance CRE

1. First Quarter - The best time of the year to start the financing process is during the first quarter.  Bankers are refreshed after the holidays and eager to start working on their annual quotas in order to acheive their year end bonuses.  Most insurance companies will be back in the market ready to lend.  As the year progresses, they become more and more selective on property type and quality of transaction.  
2. Labor Day through October 31st - People are back from vacations, kids are in school, and lenders are again eager to get their last round of deals started for the year so that they close before the holiday season. 
3. November 1st through the 15th - To paraphrase Charles Dickens, "These are the best of times and the worst of times."  No sane loan officer should commit to closing a loan in less than 60 days.  But those loan officers who haven't reached their quota, or have, but want to increase their bonuses even further go into "warp speed" trying to cram in the final deals for the year.  If the "moon and the stars" line up perfectly or they're just plain lucky they succeed.  I just found out late last week that I have a client that must close his commercial real estate purchase before the end of the year or he will experience adverse tax consequences.  There are less than 50 days to the end of the year and the deal is not yet under application.  I haven't closed a loan this year under 75 days, most have been considerably longer. And yet, I have four lenders who have committed to closing on this deal before year end. This just tells me there are a lot of hungry loan officers who want to get deals closed no matter what it takes. 

So when is the best time to finance commercial real estate?  It's plain common sense: Whenever your loan officer is highly motivated to get the deal done.

Source: The Importance of Luck and Timing in Real Estate, by Kevan McCormack, Metropolitan Capital Advisors

CRE Delinquency Rates Continue to Plummet

The commercial real estate market is getting better.  What we've sensed was happening has numbers to prove our thinking.  There are two very insightful charts by SNL Financial that show the slow but steady decline in delinquency rates over time on commercial real estate loans.

U.S. commercial banks reported a delinquency rate of 5.28% on CRE loans compared to a high of 10.76% nine quarters ago.  Oregon has fared even better with a delinquency rate of only 3.04% on CRE loans. 

The asset quality of CRE loans has been improving at a faster pace than one-to-four-unit plexes (considered residential).  However, residential loan delinquencies have also declined by about 200 basis points to 12.66% as of the end of the 2nd quarter of this year. 

Looking at delinquency rates by state shows that the Northeast, the Plains states, Alaska and Hawaii have fared the best, while the Southeast and the state of Nevada have the highest overall delinquency rates.   

Source: CRE delinquencies continue to plummet; by Harish Mali and Robert Clark, SNL Financial, August 29, 2012

First 9 Months 2011 Transaction Activity

The first 9 months of 2011 has come and gone!  From a sales standpoint how well did we do compared to previous years?  Shown below is the criteria we used to tabulate the results:

• Sales information from the CoStar database
• Transactions closed between January 1st and September 30th
• Investment properties only (no owner user)
• Property types - apartments, industrial, flex, office, retail, mixed use
• Transactions with sales prices of $1 million or larger
• Arms length transactions
• Transactions located between Kelso, WA and Eugene, OR including Bend

Based on these criteria the chart below compares the sales activity for the first 9 months of 2011 with each of the preceding four years for the same time period.

As you can see, the sales activity for the first 9 months of 2011 has almost doubled from last year and is almost back to the same number of transactions recorded in 2008.  We are definitely on the rebound!

We then analyzed the 205 transactions by property type:

Multi-family and retail properties continue to dominate the property transactions but other property types are beginning to make their presence known.  All other property types represented 35% of the total sales transactions compared to 28% for the first 6 months of this year. 

Of the 205 transactions, 96 had brokers representing both sides of the transaction.  Forty-nine transactions had no broker representation.  The remaining 60 transactions had only one side of the transaction represented.

If you add it all up, there were a total of 156 broker paydays (2 x 96 + 60).  So if you want to know your personal market share of all the broker paydays divide your number of paydays by 156.  Shown below are the first 9 months lending sources for the 178 sales transactions where the lender was identified:

Seventy-three out of the 178 transactions (41%) were either all cash transactions, assumed the existing debt or were seller financed.  Only 105 transactions (59%) used conventional financing.  Of these, the vast majority were financed by banks 67 (64%). 

Thank goodness owners have to refinance their properties from time to time or most of the mortgage brokers would be out of business.

The sales transactions for the first 9 months of this year strongly suggests that commercial real estate is on the rebound.  Let's hope for all of our sakes that this trend continues into the foreseeable future. 

First Half 2011 Transaction Activity

The first half of 2011 has come and gone!  From a sales standpoint how well did we do compared to previous years?  Shown below is the criteria we used to tabulate the results:

• Sales information from the CoStar database
• Transactions closed between January 1st and June 30th
• Investment properties only (no owner user)
• Property types - apartments, office, flex, industrial, retail, mixed use & specialty use
• Transactions with sales prices of $1 million or larger
• Arms length transactions only
• Transactions located between Kelso, WA and Eugene, OR including Bend

Based on these criteria the chart below compares the sales activity for the first half of 2011 for each of the last five years:

As you can see, the sales activity for the first half of 2011 increased significantly over the same time period for the last two years: up 17% over 2009 and a whopping 54% over 2010.  We are still well below the transaction activity that we achieved in previous years but the trend is going in the right direction.  Hey that's encouraging!

We then analyzed the 91 transactions for 2011, starting by property type:

Multifamily and retail sales comprise 72 percent of all the sales transactions which is similar to what we've seen in the past couple of years.

Of the 91 sales transactions, 75 of them identified the broker representation and 77 of them identified the lending source that was used.  The remaining transactions did not identify broker representation or lending source.  Shown below is a summary of broker representation fo these 75 transactions:

Assuming that the trend for the 75 sales held true for all 91 sales transactions, then there were about 73 paydays for all of the real estate brokers in our area in the first half of this year (91 x 53% x 2 + 91 x 15% + 91 x 12%).  So if you want to know your personal market share of all the broker paydays divide your number of paydays by 73.

Shown below are the first half lending sources for the 77 sales transactions that a lender was identified:

Thirty out of the 77 transactions (39%) were either all cash buyers, assumed the existing debt or were seller financed.  Only 47 transactions (61%) used conventional financing.  Both regional and national banks made up the majority of these loans.  Insurance companies only made 2 acquisition loans in the first half of this year.

Thank goodness owners have to refinance their properties from time to time.  Refinancing properties is not included in the figures above.  If we had to live solely off acquistion financing many of us on the lending side would be out of business.

Let's hope for all of our sakes that the upward trend in commercial real estate activity continues to improve so there are more paydays for all of us in the industry. 

Why a Greek Default is Important to Us

I know that if I emphasize too strongly what is happening in Greece I will be accused of being another Chicken Little proclaiming that “the sky is falling.” But reality is that a default by Greece on its debt obligations will likely have a serious adverse impact on us in the United States. But before I explain why let me back up a bit and give you a brief overview of what’s going on.

The Greek sovereign debt crisis has grown to the point that it is no longer a question of if Greece will default on its debt it’s now only a matter of when. It’s going to happen. Last week Standard & Poors lowered the country’s debt rating to triple C – its worst rating for any country in the world. The Greek government is teetering on collapse as massive demonstrations express their rage and frustration in the streets.

A survey indicated that 85 percent of all Greeks would rather default on their country’s debt than institute the severe austerity measures that are being proposed for a temporary bailout. And make no mistake it is a temporary bailout. Barring an absolute miracle any bailout will only delay the inevitable. They have already tried “kicking the can down the road” too many times and at some point they will have to pay the piper.

There are three ways a default by Greece on their debt will affect us:

1. A small portion of their debt is borrowed from U.S. banks – $10 billion or about 5% of their total debt. It’s not pocket change but that amount is not a serious exposure to their debt. That can be absorbed by our banks.

2. However, U.S. banks through credit defaults swaps have indirect exposure to 56% of the total Greek debt. This represents $116 billion of the total $206 billion that Greece owes. That’s huge! Simply put, a credit default swap is default insurance. What has happened is European banks have lent money to Greece but insured their Greek loans with default insurance from U.S. banks.

So the big question is, which no one has an answer for, “Will the Greeks be able to restructure their debt (negotiate a lower interest rate, maybe a forgiveness on some of the debt, etc.) or will it be a complete default?” If it is a restructuring of debt (kind of a “soft landing”) the European banks will absorb the losses. It will not likely trigger the default insurance.  If it is a complete default, then it is likely that the American banks’ credit default swaps will take the hit. And because most of those American banks who issued the credit default swaps are “too big to fail” guess who will be footing the bill?

3. As tight as credit has been over the past three years, it’s going to get even tighter if $100+ billion is taken out of U.S. banks to pay off the credit default swaps on the defaulting European bank loans to Greece.  That money would better served lending to worthy businesses and individuals in the U.S.  That’s the real killer concern.

Here’s my thinking on this situation:

1. Banks are hoarding cash. They are reluctant to lend to businesses, to consumers and on commercial real estate which would help get this economy going again. The potential default by Greece and others – Portugal, Ireland, and Italy are next in line – will only make matters worse if American banks are picking up the tab through credit default swaps.

2. Congress needs to enact legislation regarding credit default swaps that either bans this financial product or greatly reduces the American taxpayers’ risk if something goes horribly wrong.

3. Finally, it’s time to get tough on banks that make stupid investment decisions. The federal government should not have to provide bailout money to keep these banks solvent. Let them fail!

Sources: Time to Get Outraged, Thoughts from the Frontline by John Mauldin, June 10, 2011; Greek Debt Tsunami Could Reach U.S. Shores, MSNBC.com by John W. Schoen, June 16, 2011; Greek Crisis May Put California Bank in Play, The Street, by Dan Freed, June 16, 2011; Global Markets Shaken by Greek Debt Crisis, AlJazeera.net, June 16, 2011.

Exposing the Soft Underbelly of the Beast

For those of us who believe the Federal Reserve, Wall Street and the major financial institutions in this country wield too much power, something recently happened that has me baffled. 

In March the US Securities and Exchange Commission requested a few of the regional banks to clarify their loan modification policies, what we call in the business "extend and pretend."  Last month the Financial Accounting Standards Board (better known as FASB) also got into the act by issuing new accounting guidelines for "troubled debt restructurings" (TDRs).

On the surface the new accounting guidelines for troubled assets seems quite reasonable.  FASB wants to standardize the definition of what constitutes a TDR so all financial institutions are operating under the same rules.  Right now that isn't happening.  In order to determine if the restructuring is a TDR, a lender must separately conclude that both the borrower is experiencing financial difficulties and the restructuring constitutes a concession.

Beginning June 15th lenders must re-examine their restructured debt to determine how much of it qualifies to be a TDR.  If so, the lender must classify it as such.  The end result is that for the very first time we will see how much of a lender's loan portfolio is deemed "troubled."  At the present time, lending institutions have been able to hide their TDRs with the hope that one day the market will turn around and the loans will be refinanced at market rates and terms, or better yet paid off in full. 

The new accounting rules could have enormous implications, most of which fall in the range between bad and catastrophic.  At the very least the number of loans classified as troubled debt will rise dramatically throughout the banking industry.  But the big question is, "Will the general public's confidence in a bank's solvency be adversely affected?"  Once the cat is out of the bag will the stronger financial institutions be reluctant to transact business with their weaker brothers?

Which leads me back to my original thought: Why did the SEC and the FASB do this?  If you believe like I do (most days) that the Federal Reserve, Wall Street and the major financial institutions wield way too much power, why would they allow these new TDR accounting guidelines to be implemented?  This is not in their best interests.  The change in these accounting rules has the potential of exposing the truth that they desperately want to keep hidden from the public - most banks are hopelessly insolvent.  This only helps to expose their true predicament.

The huge bank bailouts by both the Bush and Obama administrations, the extend and pretend lending policies of the banks, and the historically low interest rates by the Federal Reserve have all been implemented to directly benefit the financial institutions of this country.  So why are they now exposing the soft underbelly of the beast?  If you have an explanation, I'd like to hear it.

Sources: The Extend and Pretend Expose' - coming to a bank near you, ft.com/alphaville by Tracy Halloway, May 20, 2011; More Transparency Coming to Hidden Costs of 'Extend and Pretend' Strategies, CoStar Group by Mark Heschmeyer, May 18, 2011. 

My Crystal Ball Forecast for 2011 Commercial Real Estate

Doug Marshall, CCIM
Market Assesment


Back in December I asked my reading audience to give their opinions about what the commercial real estate market would look like in 2011.

I was pleasantly surprised by the number of people who responded. Thank you. Generally those who responded had similar thinking about the coming year as I did. So here goes:

· It’s the economy stupid! Everything hinges on what the economy ends up doing. The good news is that the economy is on the upswing. I know it doesn’t feel that way but the economy is on the rebound, albeit ever so slowly.

Believe it or not, we have had five consecutive quarters of positive growth in the GDP averaging just under 3% annually. Job growth is a different matter. There has been virtually no real improvement in the unemployment rate during this time period, currently stuck at 9.8% nationally.

The recent compromise tax bill maintaining the Bush era tax rates for another two years and lowering the payroll tax by 2 percent will have a positive impact on the economy. So I’m expecting a modest improvement in the overall economy by the end of the year.

· Rising interest rates. No one expects interest rates to stay at the current level. We are all predicting them to rise, the only question is how much. If they rise gradually over time we’ll be OK. If they rise dramatically over a short period of time, like they did from early October through mid December of 2010, it will shut down our industry until real estate prices adjust to the higher rates.

The consensus is that rates will rise slowly. Let’s hope we’re right. The alternative would be disastrous

· Will there be more lenders in the market? Yes. Absolutely. And their rates will be more competitive too. I am beginning to see this especially for apartment financing. I get calls from lenders saying that they plan to dramatically increase their loan volume in 2011 and asking what they need to do with their rates and terms to get more deals.

I also see a few lenders getting back in the retail side of the market. Lenders are showing more interest but underwriting will continue to be difficult. I think there will be more lenders in the market as their balance sheets improve. We are not over the banking crisis but we are beginning to see a light at the end of the tunnel.

· What property types will show increased sales in 2011 over the prior year? Everyone agrees there will be increased sales transactions in 2011. That’s probably because to be in commercial real estate you have to be a cockeyed optimist!

However there wasn’t a consensus as to which property types will show the most improvement. This is my take: I believe all property types except for land and hotels will show improved sales activity this year.

However for most property types, office, retail and industrial, the properties that are distressed with blood in the water will be in demand and those that are strong credit tenant properties will also be in demand. Everything in between will likely have very little sales activity.

Lenders have shown little appetite for properties that have any “hair” on them whatsoever, i.e., high vacancy, rental rates trending down, short lease terms, etc. Apartments, being the exception will do fine regardless of size, condition, and location as there are several lenders wanting to finance apartments with more recently coming into the market.

· Where are vacancy rates, concessions and rental rates heading? Improvement in vacancy rates, concessions and rental rates will be dependent on job growth, especially for office and industrial properties. Apartments and retail are less dependent on job growth but they too would show improved demand if the unemployment rate were to dip a bit.

The unemployment rates for Oregon and Washington, 10.6% and 8.9% respectively are not expected to improve significantly this year. At best I think we will see modest improvement in the unemployment rate, but probably not enough to affect real estate values.

· What will cap rates do? I think rising interest rates will stop any fall we might have seen in cap rates due to improving fundamentals and demand. They will counterbalance one another.

I believe it is possible that the top of the line properties may see some improvement in cap rates but all other properties will see either have a flat or slightly rising cap rate during the year.

A special thanks to Mike Baron, Mark Barry, Charles Conrow, Tom Davis, Alan Evans, Tom Hanacek, Cliff Hockley, Steve Morris, Marc Rogers, Dan Rodriguez, and Christian Trandum who gave valuable input for this article.

Banks On The Rebound

Doug Marshall, CCIM
Market Assessment


Second quarter banking results show strong evidence that U.S. banks are beginning to dig themselves out of the big hole they’ve been wallowing in for the past three years.

Among some of the rosier statistics are:

• The FDIC second quarter numbers showing 90-plus day delinquencies leveling off and eventually set to decline because 30-89 day delinquencies are declining. Also, net charge-offs are leveling off too.
• The banking industry’s quarterly earnings of $21.6 billion are up dramatically from a year ago loss of -$4.4 billion and represent the highest quarterly earnings since the third quarter 2007.
• Sixty-five percent of the banks are reporting higher year-over-year quarterly net income.
• Loan loss reserves are showing improvement as insured institutions added $40.3 billion in provisions to their loan loss allowances in the second quarter. While still high by historic standards, this is the smallest total since the industry set aside $37.2 billion in the first quarter of 2008.

“Without question, the industry still faces challenges. Earnings remain low by historical standards, and the number of unprofitable institutions, problem banks and failures remains high,” says FDIC chairman Sheila C Bair.

“But the banking sector is gaining strength. Earnings have grown, and most asset quality indicators are moving in the right direction.”

Regionally, Sterling Savings Bank has been successful in raising the required funds to stay in business while Bank of the Cascades has asked for another extension.

Having both of these banks come back from their death beds would be encouraging to a Pacific Northwest economy that has been slow to recover.

From our perspective at Marshall Commercial Funding, we are witnessing a number of lenders coming back into the market in the last few months, some with very favorable rates and terms.

It’s too soon to say the banking crisis is over but it is encouraging to see the baby steps being taken in the right direction.

Sources:
U.S. Banks Report CRE Loan Troubles Subsiding Amid Strong Quarterly Earnings, CoStar Group, September 8, 2010;
Sterling Financial hits $730M investment goal, Portland Business Journal, August 28, 2010;
Bank of the Cascades gets another extension, Portland Business Journal, July 16, 2010.

How to Get the Best Possible Loan for Your Property

Doug Marshall, CCIM
Market Assessment

You have three basic options to consider when shopping for a commercial mortgage loan. You can choose to:

1. Finance your property with a lender you already do business with,
   
2. Shop the mortgage market on your own, or,
3. Employ the services of a commercial mortgage broker to shop the market.

For most property owners the option that significantly improves your chances of getting the best possible loan for your property is using the services of a mortgage broker.

As self-serving at that may sound, come to your own conclusion as you review the advantages and disadvantages of each option discussed below.

Option #1 – Finance your property with your existing lender
Convenience is the primary advantage of financing your property with a lender you currently do business with. It certainly is the path of least resistance and in most cases it should be the quickest way to get the job done.

The disadvantage of this approach is that you will never know whether you received the best rates and terms currently in the market. The likelihood is that another lender will be more competitive than your current lender.

Option #2 – Shop the mortgage market on your own
The advantage of this option is that you have a higher probability of finding better loan terms than financing your property with your existing lender.

The disadvantage is that it will take considerably more time and effort on your part. If you take this option I have these suggestions for you:

1. Hunt down the most competitive lenders
Contact commercial real estate professionals (real estate brokers, appraisers, escrow officers, etc) or other owners of commercial real estate who can recommend lenders for you to contact.

2. Contact several lenders for loan quotes
To do this correctly you should put together a preliminary loan package that includes at a minimum the following documentation:

a. Two years plus the current YTD operating history on the property,
b. A current rent roll,
c. Photos of the property,
d. Personal financial statements on the borrowers,
e. Two years of personal tax returns, and
f. A brief resume on the owners

Ask each lender to provide you their loan quote in writing. Fight the urge to accept a loan quote over the phone. A loan quote over the phone is meaningless. Get it in writing.

3. Let Lender A know that Lender B has a better loan quote
It is not uncommon, even in today’s lending environment, that if a lender knows they don't have the best quote on the table that they will go back to their underwriter and see if they can tweak the quote to make it more competitive.

Asking for an improvement in a loan quote should be done tactfully. If done in a heavy-handed manner it will only irritate the lenders which may backfire.

4. Do not focus too heavily on one loan parameter
Often times a borrower chooses the lender that they consider best based on one particular “hot button.” There is nothing wrong with this approach, but a better approach is to review the pros and cons of each loan quote and then decide.

It is not uncommon that when comparing the loan quotes in detail, another lender is chosen rather than the one originally considered the borrower’s first choice.

5. Do not dribble the loan documentation to the lender
Once you have chosen your lender, one of the most important recommendations I can give you is to make the loan process as easy as possible for the lender. You do this by completing the lender’s forms quickly, thoroughly and accurately.

A borrower who is unwilling to focus on getting the forms to the lender in a timely manner is putting the loan at risk.

6. Do not violate the “golden rule” of lending
...Which is, “He who has the gold makes the rules.” Each lender has its own unique way of underwriting, processing and closing loans. Don’t get into an argument about their process. Provide them with what they are asking for and you’ll be better off in the end.

Option #3 – Employ the services of a commercial mortgage broker to shop the market
There are four distinct advantages of taking this option:

• The primary advantage of using a mortgage broker is that they know which lenders have the most competitive rates. It’s their job to know.

• Compared to shopping the market on your own, this option takes significantly less time and effort on the part of the owner. Much of the “heavy lifting” of finding the right lender and processing of the loan is performed by the mortgage broker, not by you.
  
  
• Establishing trust between the borrower and the lender is a vital component to insure a successful loan outcome. If you’ve never worked with a particular lender, a trust relationship has not been established.
  
  On the other hand, a commercial mortgage broker may have worked on several loans with this lender.
  
  They know each other. They know each others idiosyncrasies and because of their prior relationship there is a higher probability of getting the loan closed with a mortgage broker than by you going directly to the same lender.
  
  
• There are times in the loan process where you need someone to be your advocate, someone who strenuously defends your best interests. This can best be accomplished by a mortgage broker who has an established relationship with the lender.
  
  The lender’s loan officer inadequately fills this role as they work for the lender. They are being paid by the lender. Whose best interest do you think they are looking after?
  

The disadvantage of this option is that it may cost you an additional fee or a slightly higher interest rate for using the services of a mortgage broker, but it may not. It just depends on the lender.

If you decide to use a mortgage broker I have these suggestions for you:

1. Do not interview residential mortgage brokers. Do not consider using the services of a residential mortgage broker as they do not have the expertise to finance commercial real estate.
   
   
2. Interview more than one commercial mortgage broker. Get two or three recommendations for commercial mortgage brokers to interview. Prepare several questions ahead of time.
   
   Through the course of the interview find out whether you can trust them, whether they are competent and whether they are likeable. Finish your interview with this question: How are you different than your competition? Then choose one, and only one.
   
   
3. Do not use more than one commercial mortgage broker. When a borrower uses the services of more than one mortgage broker without their knowledge, all trust between borrower and broker evaporates.
   
   If Mortgage Broker A calls their lending sources and finds out that Mortgage Broker B has already talked to one or more of their favorite lenders, do you think Mortgage Broker A is going to work as hard on this loan request? Not a chance.
   
   
4. Request a side-by-side comparison of loan quotes. A good mortgage broker will get you multiple quotes and then show them in a side-by-side comparison. At the top of the page will be Lender A, Lender B, Lender C, etc.
   
   Down the page will be all the loan parameters a borrower needs to know in order to make an informed decision, such as loan amount, interest rate, loan term, amortization, loan fee, other financing costs, type of prepayment penalty, cash required at closing or estimated cash back on a refinance, before and after tax cash-on-cash return, to name just a few.
   
   This side-by-side comparison of the loan quotes makes it much easier to choose the lender that best meets your particular needs.

Whichever of these three options you ultimately choose depends on which advantages and disadvantages are most important to you.

However, I firmly believe that a mortgage broker’s counsel can help a borrower avoid serious pitfalls when shopping for a loan.

A wise man once said, “Plans fail for lack of counsel, but with many advisers they succeed.” That is why an owner optimizes his chances of getting the best possible loan for his property when employing the services of a commercial mortgage broker.

Much Ado About Fannie and Freddie

Doug Marshall, CCIM
Market Assessment

From time to time I quote a well-written article verbatim. This is one of those times.

I found this insightful article on the Globe St. com blog discussing what’s currently happening with Fannie Mae and Freddie Mac. It was written by Sule Aygoren Carranza who is the New York City-based editor of the Real Estate Forum and multifamily editor for GlobeSt.com.

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Earlier this week, Senate Democrats voted down a bill that would have essentially dissolved Fannie Mae and Freddie Mac after their conservatorship period was over.

Introduced by Senate Republicans John McCain (AZ), Judd Gregg (NH) and Richard Shelby (AL), the amendment to the financial regulatory reform package would have taken the GSEs off of taxpayer support and mapped out a plan to wind down and dissolve them over 15 years.

At the same time, both GSEs in the past few days have reported substantial first-quarter losses due to continued weakness in the market. Freddie Mac posted a $6.7-billion net loss, up $2 billion from the prior quarter and down from $10 billion the same period a year ago.

Fannie Mae’s first-quarter loss came in at $11.5 billion, down from $15.2 billion in the final three months of 2009 and $23.2 billion in the first quarter. The losses were attributed to credit-related expenses and the impact of new accounting standards.

These losses resulted in a net worth deficit of $10.5 billion for Freddie and $8.4 billion for Fannie, for which the companies requested a combined $19 billion in additional funding from the Treasury in order to continue operations. If accepted, that would bring the GSEs’ total federal bailout to some $140 billion.

The good news for multifamily, though, is that the agencies’ losses were primarily on the single-family and guarantee segments of their business.

On the multifamily end, Freddie earned $221 million in the first quarter and Fannie earned $99 million. Those figures are minuscule in comparison to the billion in losses, but they’re better than nothing.

Another bright spot is that the delinquency rate for both firms. Freddie’s monthly delinquency rate fell for the first time in three years, to 4.13% in March (down from 4.2% in February) for single-family homes and 0.24% for multifamily, down one basis point from February.

Meanwhile, Fannie’s serious delinquency rate (that is, loans that were more than 90 days late) rose from 5.38% in the final quarter of 2009 to 5.47% in Q1. Although it registered an increase, Fannie officials said the figures show a slowing growth rate of delinquencies.

The improvement reflects the willingness of lenders to do workouts with borrowers, but with the continued weakness in the economy and the number of underwater mortgages out there growing, I don’t see how this could be a long-lasting trend.

It’s safe to say Congress is stuck between a rock and a hard place. On one hand, the mortgage giants played a large role in the housing market’s downturn and the bailouts, which have been sharply criticized, seem to be growing.

On the other hand, it’s no question that financial support from both Fannie and Freddie is also the primary—if not sole—reason the housing market hasn’t completely imploded.

Source:
Much Ado About Fannie & Freddie, Globe St.com Blog by Sule Aygoren Carranza, May 14, 2010.

The Oregonian Weighs in on Banking Crisis

by Doug Marshall, CCIM
Market Assessment

It is not often that I agree with an editorial written by The Oregonian Editorial Board. And it’s even less often when I just quote an article (it’s been shortened a bit) without comment. But this article is spot on and needs no comments by me. Please read this insightful opinion piece regarding the current commercial real estate banking crisis.


The Oregonian
March 7, 2010
“A wave of commercial real estate loan failures could threaten America’s already-weakened financial system,” begins a Feb. 10 report by the Congressional Oversight Panel, which gloomily predicts that losses at banks alone could reach $300 billion as more than $1.4 trillion in commercial real estate loans become due over the next five years.

This is leading to a massive recalibration of the commercial real estate market, and is likely going to spell a wave of foreclosures or distressed sales of commercial buildings. It also has the potential to undermine a swath of small and mid-size banks that made commercial real estate loans.

As the oversight panel put it, “their widespread failure could disrupt local communities, undermine the economic recovery and extend an already painful recession."

What to do?

The choices range, roughly, from writing down all the values to reflect current market conditions, which would likely spell the failure of many independent banks, to some sort of coordinated, TARP-like intervention by the federal government in the small-bank sector. Neither direction is promising or desirable.

A middle course would be to encourage lenders to work out with borrowers the terms of loans that have sunk underwater. This is precisely the course mapped out by a set of financial regulators last fall, but it doesn’t seem to be happening in any consistent way.

A policy statement issued by a coalition of regulatory agencies in October encouraged examiners to make it easier for banks and borrowers to work out under performing loans.

Yet independent bankers in Oregon complain that examiners haven’t relented on their demands that banks purge their balance sheets of underwater loans, or raise more capital in reserve. This has the effect of taking out of circulation money that would otherwise be lent to credit-worthy borrowers.

What’s best for the economy is that credit keep flowing, because it is the lubricant that makes it possible for businesses to hire people and buy equipment. We’re just coming out of a period when they were doing neither: we want to avoid driving ourselves into another recession.

There’s a growing tension between the forces of rigorous regulation and those who want to buy time to let lenders and borrowers work their loans, while hoping for a market rebound.

Washington Gov. Chris Gregoire, Rep. Barney Frank D-Mass., Sen. Chris Dodd, D-Conn., and others have expressed alarm about inflexible bank examiners, but market purists call that “extend and pretend,” and say it’s imprudent to allow banks to keep bad loans on the books without taking action.

A lot of loans shouldn’t have been made and deserve to be written down. But a massive, economy-wide write down will be destructive. It’s OK that some buildings will be sold at a loss and that some banks will be closed.

But the guiding principle for regulators, from senators to bank examiners, should be to keep credit flowing and follow no rule over a cliff, especially since valuation is an inexact science.

The bias should be toward survival. Close the banks that made too many imprudent loans, but don’t close the ones that deserve to survive, as angry shareholders of the wrongly seized Ben Franklin Savings and Loan would remind us.

Nobody wants to make a bad situation worse.

Banks in Path of Commercial Real Estate Crash, The Oregonian, March 7, 2010.

So Who's Financing Commercial Real Estate?

by Doug Marshall, CCIM
Market Assessment

Last week I showed you who in 2009 was lending on apartments. If you did not read that post and would like me to re-send it, please contact me.

This week I have the final results of who was lending in 2009 on commercial real estate sales transactions. But first I must define what I mean by commercial real estate.

I am referring to investor-owned real estate (not owner-occupied) and the property type could be office, flex, industrial, retail or shopping center.

Last year there were 81 arms length commercial real estate sales that occurred along the I-5 corridor from Kelso, Washington to Eugene, Oregon including Bend that were $1,000,000 to $10,000,000 in size.

As was true with apartment lending, the lenders for commercial real estate sales were both surprising and predictable. 41% of all sales transactions were financed either by all-cash buyers, seller financed or private sources!

That’s huge!!!

This is a very real indicator of the lending crisis we are currently going through when traditional lending sources are not lending.

Another interesting tidbit is that 22% of all loans did not disclose any financial details. What’s with this?

My hunch is that these transactions were distressed sales. Either lenders foreclosed on borrowers or sellers sold under duress to buyers where loans were assumed.

Local and regional banks totaled 30% of the financing for commercial real estate sales. On the banking side of lending, there has emerged some very real winners as well as some very real losers. We’ve all heard about those lenders that have been taken over by the FDIC.

Another interesting statistic is that over two-thirds of Oregon banks were not profitable last year. However, 2009 proved to be very profitable for a small group of lenders both regional and local.

The key to borrowing these days is to know which banks are still lending and which ones have the most competitive rates and terms.

As was true with apartments, life company lending was virtually non-existent in 2009 with only 2 transactions. I keep hearing that the life companies are back but that has yet to be proven by the statistics.

Please contact me if you have any questions, or better yet, if you have need for a loan quote on your next transaction.

So Who's Financing Apartments?

The final results of all apartment sales transactions for 2009 have been tabulated.

The CoStar Group identified 65 arms length apartment transactions that took place along the I-5 corridor from Kelso, Washington to Eugene, Oregon including Bend that were $1,000,000 or more in size.

As a mortgage broker my primary interest is who financed these 65 transactions and do I have access to these lending sources?

The results are both surprising and predictable:

Thirty percent of all the sales transactions were either all cash buyers, seller financed or private individuals.

That seems like a huge percentage! I wonder how that compares to previous years? My guess is that this percentage is substantially higher than a typical year when financing is readily available.

The federal agencies, Fannie Mae, Freddie Mac and HUD comprised 24% of the financing for apartments.

Fannie Mae was the primary lender of the three but Freddie Mac’s strategy was to do the larger transactions so loan volume between the two was very similar.

Even with the 35 year fully amortizing loan with no balloon and a reasonable step down prepayment penalty HUD could not overcome the negatives of financing with them: 6 to 9 months to close, and substantially higher closing costs.

Local and regional banks totaled 34% of the financing for apartments. This did not come as a surprise to me.

If a borrower wants a five year fixed rate loan, 30 year amortization at a reasonable rate it’s the banks that will be the most likely to come through.

But the key is to know which banks are the most competitive.

Surprisingly, no apartment sales were financed by the life companies. When it comes to apartment financing, life companies are generally not competitive with Fannie Mae or Freddie Mac.

2010 ULI Forecast (Part 2)

In my last market assessment, I summarized some salient points in the 2010 commercial real estate forecast presented in Emerging Trends in Real Estate.

This publication is a joint undertaking by the Urban Land Institute and PricewaterhouseCoopers. It reflects the views of more than 900 real estate professionals and is considered one of the best researched real estate periodicals of its kind.

This week’s market assessment covers their predictions for commercial real estate financing for the coming year. Their forecast:

• Banks will become willing lenders only when they have more equity or more earnings. In the meantime, an increasing number of “zombie banks” will be on the sidelines. For 2010, it’s survival of the most liquid. Surviving banks will start to dispose of real estate owned.

• Hundreds of banks could fail, particularly regional and community banks with significant exposure to homebuilder, land and construction loans, resulting in government regulators packaging and selling more bad loans.

• Those banks who will be lending will employ stringent underwriting to limit transactions. Sponsorship quality and longstanding, banker/borrower relationships will be the primary requirement to obtain loan approval.

• The CMBS market is described as a “huge time bomb” wrapped in a “ball of confusion.” Securitized loans will remain entangled in complex workouts of failed multi-tranched structures and many of these loans will go into monetary defaults before maturities because of borrower financial issues and lagging fundamentals.
  

As grim as this forecast is, I am beginning to see anecdotal evidence that the Portland lending market is turning a corner.

Since the beginning of the year I have talked with two local lenders who are actually hiring to beef up their commercial lending departments – Umpqua Bank and Northwest Bank. I’ve also talked with a couple other lenders who have loosened their loan underwriting standards a bit making it slightly easier to get a loan.

And then there are several other lenders who are talking like they are ready to come back into the market, which reminds me of the well known Texas saying, “Are they all hat and no cattle?” Who knows? We’ll have to wait and see.

No one has ever accused me of being Mr. Optimist but I believe our current lending environment is not all doom and gloom. We’ve got a long way to go before we reach a lending environment that approaches “normal” but I’m seeing baby steps in that direction.

Hang in there! There will be an end to this lending crisis.

2010 ULI Forecast – It Ain’t Pretty (Part 1)

Emerging Trends in Real Estate is a trends and forecast publication undertaken jointly by the Urban Land Institute and PricewaterhouseCoopers.

This publication is considered by many as the best researched real estate periodical of its kind. Their 2010 edition reflects the views of more than 900 real estate professionals. Their forecast for this coming year isn’t pretty; in fact to be blunt, it’s downright ugly.

I have divided their forecast into two parts – today summarizes their 2010 predictions for commercial real estate. The following week will focus on their thoughts about financing trends for the coming year.

For the weak-hearted, you may want to stop reading any further. Their forecast:

• The commercial real estate industry will hit bottom in 2010. Values will ultimately decline 40 percent of the mid-2007 pricing peak making it the worst decline in property values since the Great Depression.
• A lackluster economic recovery characterized by problematic job growth will hamper the pace of any real estate market resurgence.
• Rents and occupancy rates will continue to fall well into 2010 further hurting prospects of weakened owners securing financing on properties where loans come due during the year.
• Retail and office properties will take the biggest hits. Debt burdened consumers will continue to rein in shopping and companies will delay hiring while looking to shave occupancy costs.
• Apartments should rebound more quickly than other sectors thanks to pent-up demand from the expanding population of young adults tired of living with parents or roommates.
• Developers will go on enforced holidays. Slack demand will push up vacancies and many new projects will not meet leasing projections or debt service obligations. In many markets values will sink well below replacement costs. Development doesn’t pencil out when investors can buy existing real estate at bargain basement prices.

I believe that 2010 will be a watershed year for those of us in the commercial real estate industry. As bad as the market has been, we have not seen a proportional number of people getting out of the business as I would anticipate.

That will change this year. Those who have been hanging on by their fingernails will either make deals happen or will decide it’s time to find another profession.

For those of us who survive this year we can take solace in the words of the great philosopher Friedrich Nietzche: “What doesn’t kill us makes us stronger.”

Source:
Emerging Trends in Real Estate 2010, Urban Land Institute & PriceWaterhouseCoopers.