CMBS Conduit Loans

11.10.17: Trepp: CMBS Delinquency Rate Drops Sharply in October

The Trepp CMBS delinquency rate dropped sharply in October, marking the fourth straight monthly decline. The delinquency rate for U.S. commercial real estate loans in CMBS is now 5.21%, down 19 basis points (bp) from the September level. That is the second-largest rate drop measured in the last 19 months. One year ago, the overall 30-day delinquency rate was 4.98%. The delinquency rate had been climbing consistently for more than a year as loans issued in 2006 and 2007 reached their maturity dates and were not paid off via refinancing. In the 16 months between March 2016 and June 2017, the delinquency rate moved up 13 times. However, now that the dreaded "wave of maturities" has passed, delinquency levels have receded as well.

Trepp notes that further declines in the overall reading are possible in the coming months as fewer 2006 and 2007 loan reach their maturity dates and more distressed loans are resolved.

Vacancy by Property Type, October 2017

Sector October
2017
October
2016
BP Change
Industrial 6.24% 6.55% -31
Lodging 3.42% 3.84% -42
Multifamily 2.98% 2.00% -2
Office 6.92% 7.10% -18
Retail 6.47% 6.56% -8

Source: Trepp

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11.5.17: Sears and Kmart: More Stores to Close

Sears Holdings Co. announced that it will close another 18 Sears stores and 45 Kmart locations in late January 2018. This round of closures brings the total number of Sears and Kmart stores shutting down this year to 243. After the locations shutter, about 680 Sears stores will remain operating in the United States, down from 3,500 locations in 2010. Currently, 610 Kmart locations are operating in the United States.

Market professionals believe the company is likely to file for bankruptcy after the Christmas 2017 selling season. The iconic store chain, whose goods once filled U.S. households from the garage to the living room, has struggled to remain relevant as shoppers increasingly bypass it to head to big box giants like Walmart or specialty retailers like Best Buy and Home Depot.

There are continuing signs that Sears is no longer the dominant player it once was. Last month, Sears announced that for the first time in more than 100 years, it would no longer sell Whirlpool appliances because the two companies could not reach an agreement on price.

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11.1.17: Multifamily Trends – Vacancies Rise as Supply Exceeds Demand

Property managers are offering larger and larger concessions to try to attract tenants to their apartment communities, but the vacancy rates are inching higher anyway.

The percentage of vacant apartments in Manhattan in October rose to 2.47%, up from 2.39% the year before. At the same time, property managers offered potential renters months of free rent, equal to 28% of a year’s lease in October, on average, up more than four percentage points from a year ago.

Marcus and Millichap notes in a recent report that apartment absorption has begun to fall short of the wave of new unit deliveries in numerous markets, modestly softening Class A fundamentals. Class B and C apartments remain near record occupancy levels, but some renters from these properties are being enticed into higher-tier apartments by a range of incentives. Looking forward, positive employment trends and a thinning development pipeline offer the potential for performance reinvigoration.

For additional details, see the complete report
at http://www.marcusmillichap.com/research/researchreports.

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10.27.17: Great Rates for Borrowers as CMBS Spreads Approach Post-Crash Low

A current rally has pushed the long-term super-senior AAA-rated CMBS bonds near the lowest levels that prevailed before the financial crisis in 2008-2009. On Friday, Morgan Stanley, Bank of America and Wells Fargo priced the super-senior CMBS from a $944-million offering at 76 basis points (bp) over swaps, down from 83 bp on the prior deal that priced a week earlier. The post-crisis low of 71 bp that was recorded in August 2014 now appears to be within reach.

CMBS traders and investors attributed the strong demand partly to the possibility that supply will dwindle as the year comes to an end. Also, concern exists that CMBS loan originators will have fewer lending opportunities in 2018 because of a decrease in maturing mortgages and increased competition from agency and portfolio lenders for loans.

“With these CMBS deals establishing new pricing levels, borrower loan spreads have fallen roughly 10-15 bp as declines in CMBS spreads directly correlate to borrower loan spreads,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “As a result, we are seeing interest rates in the 4.25-4.50% for low-leverage transactions and 4.50-4.75% for full-leverage transactions.”

Now may be a good time to secure a fixed-rate CMBS conduit loan as rates may rise in 2018 if the Federal Reserve continues to increase rates in 2018.

10.24.17: ValueXpress Helps Clients with CMBS Insurance Claims

The destructive natural disasters, including hurricanes, wildfires and tornados, that have occurred this year are resulting in a spike in insurance claims for CMBS borrowers. Many of our clients are reaching out to ValueXpress for assistance with coordinating approvals of insurance claims on their properties with insurance adjusters and CMBS servicers. We provide this service at no charge to our clients. Many of our clients are unaware the servicer needs to be notified in the case of a loss, depending on the amount of the claim.

The first step to determine the level of servicer involvement is to calculate what is known as the restoration threshold. In the CMBS Loan Agreement, the restoration threshold will be defined as a percentage of the loan amount, often 3%. So on a $5-million loan, with a 3% hurdle, the restoration threshold is $150,000. This means that the borrower may negotiate an insurance settlement without servicer involvement at or below that dollar amount, and although the settlement check will be payable to both the borrower and the servicer, the servicer will promptly sign over the proceeds to the borrower and the borrower will be obligated to complete the restoration.

For damage above the restoration threshold dollar amount, the process is more involved. The borrower may settle and adjust such a claim only with the prior written consent of the servicer, and if the borrower fails to settle and adjust such a claim within sixty (60) days after the casualty, the lender has the right to settle and adjust the claim at the borrower’s cost and without the borrower’s consent.

10.20.17: Office Trends -- Flexibility and Work/Life Balance

In order to attract and retain talented workers, corporate property managers need to accommodate “flexible working,” according to Regus, a leading provider of small office workspaces with 3,000 locations in 120 countries. More than 50% of workers now work outside the main office two to three days per week or more, according to the Regus Workplace Revolution report.

Compared with previous years, Regus notes that more consultants and freelance workers, as well as older employees working beyond pensionable age, want greater freedom to work flexibly. These workers can be highly skilled and talented, but they require flexibility in terms of work environment, such as accommodating an unwillingness to commute an hour or more to a suburban office location when the work can be completed in a local office environment.

Giving staff the ability to work in flexible or activity-based workspaces, even if it’s just for part of the week, attracts talent and it can save corporations a lot of money in desk space. Although leases have become shorter and more flexible in most cities over the past 30 years, living and working costs are high in the major cities. Annual costs in London are $88,800 per employee, according to the Savills Live/Work index, and $111,900 in New York City.

Yolande Barnes, Savills World Research Director, suggests that property managers need to look at other workspaces too, including shared spaces or studios that are laid out in a way that encourages co-working or co-creation. Such spaces are better suited to new flexible work styles, fit employee lifestyle choices and meet the needs of different generations. They offer places to meet interesting groups and to collaborate more easily.

10.12.17: CMBS Conduit Loan Originations Up 5%

Through the first three quarters of 2017 CMBS conduit loan originations are up 5%, as measured by CMBS securities issuance. According to Commercial Mortgage Alert, CMBS conduit issuance as of September 30, 2017 totaled $33.8 billion compared with $32.2 billion a year earlier. However, overall CMBS loan origination volume is up a whopping 34% to $66.6 billion when large single-borrower loans are included. Based on this pace, combined CMBS loan originations are on track to easily exceed last year’s $76-billion total.

The strength in new CMBS originations stems from a variety of factors. CMBS issuers are now comfortable with risk-retention rules, having successfully sold CMBS using all three methods of risk retention -- vertical, horizontal and L-shaped -- without any method having much impact on bond prices. As a result, CMBS bond spreads have been stable, with senior AAA-rated CMBS market spreads holding steady below swaps plus 100 basis points (bp) for lower leverage deals and roughly swaps plus 100 bp for higher leverage deals.

With stable CMBS prices and relatively stable Swap and Treasury rates for most of 2017, borrowers have enjoyed interest rates on CMBS loans in the 4.5%-4.75% range for full-leverage loans and 4.25%-4.5% for low-leverage loans. It is anticipated that these levels of interest rates will remain available for the balance of 2017. Market professionals are forecasting slightly higher rates for 2018 as anticipated short-term rate increases proposed for 2018 by the Federal Reserve are expected to push CMBS conduit loan rates higher next year.

10.9.17: Discussion Under Way to Improve CMBS Servicing

Industry professionals are recognizing that the long-term appeal of CMBS for commercial real estate finance may be diminished if the borrower experience with loan servicing is poor. Recently, Stacey Berger, an Executive Vice President, and Bob Wright, a Senior Vice President, of Midland Loan Services, a major CMBS loan servicer, wrote a piece on what can be done to improve the CMBS borrower servicing experience.

The authors note that borrowers typically don't have a choice of servicer for a CMBS conduit loan. CMBS issuers sell the master servicing rights to a select group of bidders and special servicers are selected by the transaction investors. So borrowers cannot select a servicer based on quality of service. Borrower-initiated lender approval requests are one of the most important interactions between the borrower and servicer. These can range from routine to major credit issues, and the servicer's performance while handling these interactions is a major factor in determining borrower satisfaction. Setting appropriate expectations as well as establishing reasonable time frames and fees is critical to a successful result.

Progress is being made to streamline approval requests. Master servicers can now approve routine borrower requests such as reserve releases and minor lease and budget approvals, while major credit approvals, such as assumptions, change of ownership, or property management changes, are directed to the special servicer for its approval. These recent changes are improving the efficiency of the borrower/servicer interaction.

However, borrowers need to understand that servicers can't review and approve requests without complete information, which is required to make the decision. Servicers need to be specific about what information borrowers need to provide up front and follow up with the borrower regarding missing information. Effective communication between the servicer and borrower is key to improving the borrower experience for CMBS conduit loans.

10.4.17: Cash-Out SBA 7(a) Loans Now Available

ValueXpress has partnered with a non-bank SBLC licensed SBA 7(a) lender to originate SBA 7(a) loans nationwide that allow for cash-out proceeds to the borrower for a refinance. The firm has a Preferred Lenders Program (PLP) designation, and therefore, the SBA has delegated credit decisions and servicing to the firm.

Most SBA 7(a) lenders limit cash proceeds to the borrower on a refinance to relatively small amounts of working capital. In the new program, SBA 7(a) loans on a refinance can be up to 75% Loan-to-Value as long as 51% of the loan proceeds is utilized to pay existing debt. The balance of the loan proceeds would be remitted to the borrower.

The loan structure remains the same as any other SBA 7(a) loan. The loan term and amortization is up to 25 years. All SBA 7(a) loans are self-amortizing. The loan is floating rate, based on margin over the prime rate (ranging from 1.0% to 2.75% typically) and adjusts quarterly. The SBA charges the borrower a guaranty fee that can be paid out of the cash-out proceeds. Eligible assets are owner-occupied properties-only in which the owner occupies at least 51% of the property. The prepayment penalty is 5%/3%/1%.

“We expect to do a lot of business cross-selling this product to our existing customer base that owns hotels and self-storage facilities, as these assets are considered owner-occupied by the SBA but are also eligible for CMBS conduit loans,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “ValueXpress has hundreds of clients that have completed cash-out CMBS conduit loans for hotels and self-storage facilities, and we would look to this client base for borrowers seeking cash-out who are not eligible for a CMBS conduit loan.”

9.29.17: Reach Out to Community Banks for CMBS & Non-CMBS Opportunities

ValueXpress is always looking for effective avenues to find borrowers that may be interested in CMBS conduit loans. Until recently, a steady source of CMBS conduit loan originations resulted from refinancing maturing 10-year term CMBS conduit loans closed in 2006-2007 during the height of the CMBS market. You may recall the market for CMBS conduit loan originations in the United States peaked in 2007 at $228 billion, well in excess of the $75-billion annual rate in recent years. Most of the CMBS loans closed in 2007 were structured with 10-year terms, but all have now matured and refinanced.

So new business needs to be found. We are finding some success through the community banking system, in particular community banks that originate income-producing loans in the $3-$15 range for their balance sheet. We have developed relationships throughout the United States with community banks to refer requests to ValueXpress for income-producing loans that don’t fit their lending criteria. These opportunities are mostly requests for non-recourse loans or very large unrestricted cash-outs on refinances. Other opportunities arise from borrowers that reach their legal lending limit at their bank or need to reduce their contingent liabilities related to large amounts of personally guaranteed loans. Taking some or all of these loans into the non-recourse CMBS market opens up capacity for the bank to continue to lend to the customer.

A side benefit we have discovered through this process is how active community bank lenders have become on income-producing commercial loans. Commercial banks have fully recovered from the financial crisis, and with low cost deposits, they are aggressively closing loans at attractive terms. So when we meet with commercial bank loan officers, we share our CMBS product information with them. At the same time, we learn the terms and benefits of their loan programs. While most community banks still only close recourse loans, we find that in certain instances in which a borrower is not concerned about recourse, we can place that loan with a community bank to get the best terms for our client.

9.25.17: ValueXpress Is Refreshing Its Website

ValueXpress is updating its website to incorporate advances in technology since we first launched our website in 2006. The current website has won awards for its graphics and we have updated it piecemeal over time, but it’s time for a complete overhaul.

The refresh will provide a more personalized experience. For example, the images of people currently on our website are stock images. They will be replaced by images of actual ValueXpress professionals. Photographs and background descriptions of each team member will be featured on the “Team” web page. Video clips will be included that feature our team members explaining in their own words the “ValueXpress experience.”

“Many of our clients never get to meet us in person,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “When we provide a photo/video experience on our website, I believe clients will feel more at ease when they speak with us on the telephone. It will facilitate even more comfortable conversations as clients can 'picture us' as we discuss their deals."

We also intend to better organize and present our content. We have completed over 200 transactions of all kinds. They will be organized in such a way that borrowers can quickly and easily find concise descriptions of transactions similar to what they are seeking to do. Our loan programs will be detailed with supporting transactions showing why the transaction benefitted from the selected loan program. Loan rate sheets and market indexes used to set loan rates will be prominent.

Finally, we have been writing for over five years about loan structuring for the benefit of borrowers, pitfalls to avoid, working through servicing issues, ways to streamline the loan processing and closing process, ways to lower transaction costs and a host of other important borrowing issues that can only be learned through 25 years of experience. These articles will be indexed for the benefit of those clients who visit our website.

9.18.17: ValueXpress to Be a Sponsor of the 12th Annual Vishal Bhagat Memorial Golf Tournament

ValueXpress has committed to be a sponsor of the 12th annual Vishal Bhagat Memorial Golf Tournament, which will take place at the NorthShore Country Club in Portland (Corpus Christi), Texas on Friday, November 3, 2017 and Saturday, November 4, 2017. The event is the primary fundraiser for the Vishal Raju Bhagat Foundation, which has raised over $1.4 million for the primary purpose of supporting juvenile diabetes research. The foundation was founded in memory of Vishal Bhagat, who died tragically in a 2006 drowning accident in Corpus Christi. Vishal’s family and friends honor his memory by continuing his noble war against diabetes.

Over the years, funds raised from the event have provided grants to leading juvenile diabetes organizations such as the Juvenile Diabetes Research Foundation, March of Dimes, American Diabetes Foundation, the Miracle Foundation, Driscoll Children’s Hospital and numerous local organizations. To participate in the event or make a donation, please contact Mahavir Bhakta at 361-779-6666.

The schedule of events includes a 4-man Scramble on Friday with awards, cocktails and dinner that evening. Saturday will feature a best-ball golf tournament with a Gala dinner, including awards and cocktails. Prizes will be awarded for Hole in One on all par 3s, Closest to Pin and Long Drive.

Long considered the jewel of the Gulf Coast, North Shore is known for its famous stretch of holes on the back nine (holes 13-16) set against the backdrop of the bay. Built in 1985 by Bruce Devlin and Robert von Hagge, this private course is not particularly long and there are not many trees, but winds often blow 20-40 miles per hour on good days, and the course is filled with bunkers, water hazards, and side-hill lies to challenge golfers.

9.15.17: ValueXpress to Exhibit at the 3rd Annual National Alliance of Commercial Loan Brokers Conference & Expo

ValueXpress will be exhibiting at the 3rd Annual National Alliance of Commercial Loan Brokers (NACLB) Conference & Expo at the Gaylord Palms Resort and Convention Center in Orlando, Florida. The conference begins on Tuesday, October 17 with an opening cocktail reception and concludes on Thursday afternoon, October 19.

ValueXpress will be available during the conference at its booth and during networking events. Dennis Suh, a veteran loan originator and Senior Vice President at ValueXpress, and Stan Siciliano, Director of Marketing at ValueXpress, will be fielding questions regarding the origination, underwriting and closing of CMBS conduit loans. “We will have a bunch of giveaways as well, so I encourage all attendees to stop by our booth, if only to grab a handful of ValueXpress logo’d golf balls for their next round,” Stan said.

"Having taught over 400 Commercial Capital Training group (CCTG) graduates over the past few years, and now closing 3-4 CMBS conduit loan deals a month with graduates, this is an outstanding opportunity for ValueXpress to reconnect with experienced graduates and those just getting their feet wet," commented Michael D. Sneden, Executive Vice President at ValueXpress.

CCTG and BoeFly have teamed up to organize this event. It will serve as a "Class Reunion" for CCTG graduates and current classmates, providing an excellent opportunity for them to network regarding their business strategies. For the complete conference agenda and to register, visit http://www.naclb.net.

9.12.17: CMBS Conduit Loan Rates Stable as CMBS Spreads Remain Steady

CMBS conduit loan borrowers are finding calm waters as spreads on CMBS securities have been stable at attractive levels for most of 2017 to date. In addition, the 10-year Swap rate, the benchmark index for setting interest rates on CMBS conduit loans, has remained in a relatively narrow range of roughly 2.10%-2.30% since April. It is currently 2.15%. Interest rates for CMBS conduit loans are set by adding the 10-year Swap rate and the loan spread, which is derived from CMBS securities prices. The two indexes are added together at loan closing to set the interest rate, which will remain fixed for the entire loan term.

On the CMBS securities side, long-term, super-senior AAA-rated securities continue to trade at under 100 basis points (bp) over swaps, having broken the barrier at the beginning of February 2017 for the first time since mid-2015, with the exception of one very high-quality offering in August 2016. The market for long-term, super-senior AAA-rated CMBS highly correlates to borrower interest rates for CMBS conduit loans. Four CMBS deals are currently being marketed with long-term, super-senior AAA-rated securities at 92-95 bp over swaps, right in the middle of the range for CMBS deals that have priced since February.

Market professionals point to relatively low CMBS supply keeping a check on increases in CMBS spreads. The industry appears to be on track to slightly exceed last year’s CMBS issuance total of $76 billion, but indications are the industry could absorb $100 billion annually. In addition, CMBS investors note that the loan quality is improving and leverage decreasing in transactions, reducing perceived risk in the bonds.

As a result of steady swap and CMBS securities prices, CMBS borrowers are seeing stable interest rates while loans are processed to closing, and therefore, loans are closing at rates close to levels indicated in their Term Sheets. Low-leverage CMBS loans are being closed in the 4.25% area and full-leverage loans are being closed in the 4.75% area. The rate is fixed for the entire loan term.

9.7.17: Small Balance Bridge Loans Now Available

We recently wrote about the benefits of bridge loans for transitional properties in which the assets can be eligible for CMBS conduit loans, but are temporarily underperforming. Typical situations are properties that may be in lease-up, perhaps in conjunction with a rehabilitation program that will make the property more appealing to new tenants, or a situation in which the property has lost one or two key tenants, but is well located in a strong market and is likely to re-lease quickly. The borrowers on these transactions would not want to lock in long-term CMBS conduit loan refinancing while the property is sub-performing because the property would qualify for a bigger loan once the property is stabilized and the cash flow is maximized.

Historically, bridge loans were available for only larger transaction -- $10 million and up. Now the program minimum has been reduced to $3 million, allowing small balance transactions to qualify. This coincides with the typical minimum of $3 million required for a long-term, fixed-rate CMBS conduit loan.

“We recently had a situation in which a borrower requested a long-term, fixed-rate CMBS conduit loan secured by a neighborhood retail center in the amount of $4.5 million,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “The center was 100% occupied, but one of the tenants occupying 20% of the space was in bankruptcy and the space had to be underwritten as vacant. Hence, the property cash flow was insufficient to support a $4.5-million CMBS loan. So the solution was a small balance bridge loan for $4.5 million until the space is released, at which time it is projected the cash flow will support a CMBS conduit loan of $4.8 million.”

9.1.17: CBRE Reports on Cap Rates at Mid-Year

CBRE recently published its survey of capitalization rates (“cap rates”) for income producing commercial real estate (retail, office, industrial, multifamily and hotel) as of June 30, 2017. CBRE notes that cap rates were little changed in the first half of the year, with slight increases or decreases in pricing depending on asset type. The multifamily and industrial sectors registered small declines in cap rates, while the office and hotel sectors had modest increases. Retail cap rates showed larger increases overall, likely impacted by negative sentiment in the retail sector from the effects of Amazon.

CBRE says the general outlook for cap rates and returns on cost in the second half of 2017 is for stable pricing. However, the sentiment of survey participants varied by property type, segment and metro-tier grouping. The consensus is that if rates do change in the second half of 2017, they are more likely to increase modestly.

Summary of Cap Rates – 6/30/17 vs 12/31/16

8.29.17: Tanger Factory Outlets Stock Takes a Beating

In order to make prudent commercial loans in the sector, many lenders are trying to sort out surviving retailers that will continue to be successful in brick-and-mortar retail stores. Some results are easy to see. Class B and C malls pretty much cannot be financed on a non-recourse basis, and they are struggling to borrow even on a recourse basis. On the other hand, neighborhood retail centers with good grocery stores or service-oriented tenants appear to be reasonably safe loans if leverage is not stretched.

The sector of retail property that has industry pros scratching their heads is factory outlet shopping centers. One the positive side, the thinking goes that the sector is safe because there are no department stores in any outlet shopping center. In addition, the majority of the tenants are clothing related and shoppers still prefer to try on clothing. To thwart the “try it on and if it fits buy it online” mentality, the outlet price, in theory, would provide enough discount to warrant an immediate purchase.

But investors in outlet shopping centers appear to think the future of outlet centers is not bright. Tanger Factory Outlet Centers, Inc. (NYSE: SKT) operates as a Real Estate Investment Trust (REIT) and is the only “pure play” REIT that owns solely outlet centers. The North Carolina-based company owns 44 outlet centers in the United States (22 states) and Canada. The company commenced operations over 34 years ago in Burlington, North Carolina, when the outlet industry was unknown. The company and its stock has performed very well, rising from roughly $20 per share prior to the financial crisis to over $40 per share in the fall of 2016. Coinciding with all the store closings, retail bankruptcies and related concerns, the stock price has plummeted, hitting a 52-week low of $23.03 during trading on August 30, down 50% from its 2016 peak. Clearly, investors are concerned about the outlet center sector.

8.23.17: Airlines and Resort Development – Perfect Together?

Bloomberg recently reported that Allegiant Travel Company wants to add real estate development to its list of corporate activities. The company is embarking on an audacious plan to build a 22-acre resort compound with a hotel, condominiums, bars and restaurants on the Florida Gulf Coast in Port Charlotte. The real estate offshoot, called Sunseeker Resorts, will have a 75-room hotel, along with about 720 condo units, ranging in price from $650,000 to $1.1 million based on the size of the unit. The property, scheduled to be completed in late 2019 or 2020, will also include North America’s largest private-resort swimming pool.

Longer term, Allegiant wants to tout its success with the Sunseeker property as a bid to begin managing other leisure-destination hotels for fees, further diversifying its revenue, according to company President John Redmond. It also sees lucrative opportunities in developing new food and beverage brands and restaurants it can use at other locations. In addition, it will offer meeting and banquet space, a marina with boat slip leases, and the ability of owners to rent their condos as part of the hotel operation.

All this new business development is, of course, far afield from the core operation of running an 88-jet airline with nationwide, less-than-daily service from small burgs to leisure destinations in Florida, Las Vegas and Phoenix -- a model that has proved wildly profitable. The airline is simultaneously working this summer to improve its operational reliability, which suffered earlier this year, while also shifting to an all-Airbus fleet by 2020.

8.18.17: Dennis Suh to Represent ValueXpress at SSA Conference & Trade Show

Dennis Suh will be representing ValueXpress at the Self-Storage Association’s (SSA) 2017 Fall Conference & Trade Show. The conference, which will be held at Caesar’s Palace in Las Vegas, Nevada, begins on Tuesday, September 5 with conference and trade show registration. Concurrent education sessions begin at 1 p.m. on Wednesday, September 6 and run through 8:20 a.m. on Friday, September 8. The Trade Show is open Wednesday and Thursday 11:30 a.m.-3:00 p.m. For additional information, please visit www.selfstorage.org.

Back by popular demand this year are Roundtable Discussions. These lively sessions always occur in front of a packed audience. The two Roundtable Discussions to be held in Las Vegas will offer a wide variety of topics -- educational on Wednesday and exhibitor products and services on Thursday.

Dennis will be meeting with clients to discuss the benefits of CMBS conduit loans for self-storage owners during the conference. Self-storage loans have been one of the best performing asset classes in CMBS, and CMBS conduit loans for self-storage are highly sought after. As with all eligible asset classes, the CMBS conduit loan program provides for unrestricted cash out for any purpose on a refinance, and all CMBS conduit loans are non-recourse, meaning there are no personal guarantees for repayment of the loan.

“The self-storage industry continues to grow rapidly, and owners want to continue to build more units to satisfy demand,” commented Dennis. “CMBS conduit loans are really the only loan product that allows for unrestricted cash out that can be used as equity to obtain a construction loan to build additional self-storage facilities.” To visit with Dennis at the show, send him an email at dsuh@valuexpress.com or call him at 212-883-6487.

8.14.17: Which Hotel Brands Are Eligible for CMBS Conduit Loans?

Most borrowers are aware that hotel properties are eligible for CMBS conduit loans. However, some sponsors mistakenly believe that all hotels are eligible for CMBS conduit loans, but that is not true. In general, independent hotels that are not operated under a nationally recognized franchise brand are generally ineligible for a CMBS conduit loan. An exception to this guideline is beachfront hotels in desirable locations that do not require a franchise to provide room demand; the beachfront location drives the demand. In addition, luxury and upscale hotels generally located in major metropolitan area that provide a unique experience at an elevated price point are also typically eligible for CMBS conduit loans, even if they do not have a franchise brand.

Furthermore, not all franchise brands are eligible for CMBS conduit loans. In general, economy brands, sometimes referred to as “budget” brands, are not eligible for CMBS conduit loans. “Often I am asked ‘how do I determine a budget brand from other brands to determine if the brand is eligible for a CMBS conduit loan?’ ” commented Michael D. Sneden, Executive Vice President at ValueXpress. Luckily there is a resource that publishes the answer.

STR, a Hendersonville, Tennessee, company that tracks supply and demand data globally for hotels publishes a list of “Hotel Chain Scales” that categorizes each hotel franchise brand into the following categories – Economy, Midscale, Upper Midscale, Upscale, Upper Upscale and Luxury. All categories except Economy are eligible for a CMBS conduit loan.

To download a one-page summary of the Hotel Chain Scales, last published in 2015, for all the major chains, click here. If you do not see your franchise brand on that list, click here to see the Hotel Chain Scale – Detail” file, which has all 1,000 brand franchise as of 2017. As a final note, the hotel needs to be interior corridor (except for beachfront hotels) in order to qualify for a CMBS conduit loan.

8.9.17: Remember, ValueXpress Will Help Clients Through the Assumption Process

ValueXpress has many borrower clients who obtain CMBS conduit loans for the sole purpose of selling the property under the assumption clause. How many times have we heard “the acquisition deal fell apart because the buyer could not secure financing?” Selling the property under the loan assumption provision can eliminate the financing risk related to the sale. Very simply, the seller just needs proof the buyer has the equity to close. In addition, low-rate, non-recourse assumable financing can help achieve a higher purchase price for the buyer.

However, all assumptions are not automatically approved. The buyer needs to complete the assumption approval process, which can be lengthy and burdensome if the buyer and seller are not familiar with the process and do not know what they are doing.

Fortunately, ValueXpress has successfully navigated the assumption process for many of its clients and will continue to do so. We know how to qualify purchasers up front to determine that they will qualify as a replacement non-recourse guarantor for the selling guarantor. We are knowledgeable regarding the rules for foreign buyers, group buyers and buyers attempting to utilize a non-credit entity to be the guarantor for non-recourse carve-outs (not going to happen).

The process of getting CMBS conduit loan assumptions approved is more difficult since the restart of the CMBS market in 2010 compared with pre-2007. New standards in underwriting, additional layers of approvals, and a laundry list of conditions make it critical that you work with an experienced advisor. This is just another reason to utilize ValueXpress for your next CMBS conduit loan.

8.4.17: Dennis Suh Promoted to Senior Vice President at ValueXpress

ValueXpress LLC has announced the promotion of Dennis Suh to Senior Vice President, Originations. The announcement was made by Michael D. Sneden, Executive Vice President at ValueXpress.

“Dennis’s passion for structuring loan transactions that provide the best terms for his clients has been evident in every transaction that Dennis has been involved since joining our firm last year,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “As anticipated, Dennis has utilized his extensive investment banking knowledge and relationships to problem-solve complex issues on a number of transactions and he was able to close transactions in which borrowers were unsure that a loan closing was possible.”

“I take great personal satisfaction when I am able to close a loan for a client that provides a financing solution that allows a borrower to grow his real estate business,” commented Suh. “Along the way, I have successfully worked through some intricate issues that provided some stress relief for the borrower and I often get that satisfying “thank you” call at the closing of the transaction.”

“I am pleased to recognize Dennis’s achievements through this promotion,” commented Sneden, “Dennis represents what ValueXpress is all about, namely a group of talented individuals with extensive experience and relationships in lending and an ability to utilize their capabilities to provide best-in-class financing solutions to our clients.”

Please contact Dennis for your next financing at 212-883-6487 or via email at dsuh@valuexpress.com.

7.31.17: ValueXpress Actively Pursuing Bridge Loans

One method to increase CMBS conduit loan originations is to provide bridge loans on assets that are eligible for CMBS conduit loans, but are temporarily underperforming. Typical situations are properties that may be in lease-up, perhaps in conjunction with a rehabilitation program that will make the property more appealing to new tenants, or a situation in which the property has lost one or two key tenants, but is well located in a strong market and is likely to re-lease quickly. The borrowers on these transactions would not want to lock in long-term CMBS conduit loan refinancing while the property is sub-performing because the property would qualify for a bigger loan once the property is stabilized and the cash flow is maximized.

However, capital may be required to reach stabilization as often costs are incurred for leasing commissions, tenant improvements and possibly building improvements. Therefore, a bridge loan with a manageable prepayment provision allowing for refinancing into a CMBS loan can be a perfect solution in these situations.

Typical bridge loan terms are 65%-70% loan-to-value and are interest-only based on 30-day LIBOR plus a margin. The margin typically ranges from 500-700 basis points depending on the perceived risk and asset type (hotels usually fall at the higher end of the range). The loan term is 12 months, but can be extended for another 12 months on payment of an extension fee. Bridge loans require the payment of an origination fee of 1%-2% and have an exit fee of 1%-2%. However, as incentive to refinance into a CMBS conduit loan on stabilization, the exit fee is typically waived.

Please contact Mike Sneden (msneden@valuexpress.com) if you have any situation in which a bridge loan would be a suitable solution.

7.26.17: Today’s Blue Light Special … a Refund of Your CMBS Good Faith Deposit at Closing

With the potential demise of Kmart the old “Blue Light Special” may become a thing of the past. Kmart became known for its "Blue Light Specials" that occurred at surprise moments when a store worker would light up a mobile police light and offer a discount in a specific department of the store, while announcing the discounted special over the store's public address system.

Well, we have the current version of a “Blue Light Special” going on in the CMBS conduit loan world. To increase originations one of our partners is offering an expense credit at closing of $25,000. The way the program works is a borrower will send in the typical deposit of $35,000-$45,000 along with the executed Term Sheet. At closing, the settlement statement will reflect a credit of $25,000 against transaction costs.

The credit will offset the cost of third-party reports and a big chunk of the lender’s legal charges. This is quite a deal, and the promotion applies to all Term Sheets executed by Labor Day.

7.21.17: “Loan Sizing” Accurately Determines Loan Amounts for CMBS Conduit Loans …

We are in the business of providing loan quotes for CMBS conduit loans. To do this requires loan sizing. Here’s the detailed method we use:

CMBS conduit loans are based on the amount of property cash flow. To determine the maximum loan amount that can be offered to a borrower, CMBS loan underwriters perform cash flow analysis on the property. This is often referred to as “loan sizing.”

ValueXpress has sophisticated loan sizing models for each asset type that can be financed in CMBS (multifamily, commercial, hospitality and self-storage) in which market capitalization rates, minimum debt-service coverage and maximum loan-to-values (LTV) for each asset type are built into our models. The models also have CMBS industry-standard vacancy factors, management fees and replacement reserves built in.

“The results produced by our loan sizing models are very accurate and highly reliable in determining the maximum loan amount that can be offered to a borrower,” commented Michael D. Sneden, Executive Vice President at ValueXpress.

“But loan sizing takes a lot of time,” notes Jim Brett, head of underwriting at ValueXpress. “For a commercial property, I have to input the property rent roll including all the lease terms. Plus I need to input the most recent 12 months’ income and expenses for the property and the prior 3 years as well. This can take two to three hours.”

Borrowers sometime won’t wait or cannot readily provide all the data to perform detailed loan sizing. Plus, we don’t want to spend the time sizing deals that will not reach the requested loan amount, so we use the “debt yield” method as an alternative to give a borrower quick CMBS loan terms.

7.18.17: … While Using Debt Yield Allows for a Quick Size of a CMBS Conduit Loan

When time does not permit for a detailed loan sizing analysis, a reasonably accurate shortcut method can roughly determine the maximum CMBS conduit loan amount that can be offered to a borrower. The method utilizes a metric called “debt yield,” which is defined as the property net cash flow for the most recent 12 months (including vacancy, management fees and replacement reserves) divided by the proposed loan amount, expressed as a percentage.

For example, if a borrower on a retail center says his most recent net cash flow after expenses is $1 million including a management fee and replacement reserve and the loan request is $10 million, then the debt yield is 10% ($1,000,000 divided by $10,000,000). The result can be compared with the minimum debt yield required for each asset type. If the calculated debt yield exceeds the minimum debt yield, preliminarily, the loan amount is acceptable.

The following are the minimum debt yields for each eligible asset type financed in CMBS:

Asset Type Minimum
Debt Yield
Multifamily/Manufactured Housing 8.5%
Retail 8.5%
Office 8.5%
Industrial 8.5%
Self-storage 9.0%
Hotel 12.0%

More important, the debt yield formula can be reworked to indicate the loan amount. Suppose the same borrower in the example above said, “I have net cash flow after expenses of $1 million including a management fee and replacement reserve. How much can you lend me?” The calculation using debt yield would look like this: $1,000,000 (net cash flow) divided by 8.5% (the minimum debt yield for retail properties) equals $11,750,000 (rounded). So the borrower can be offered $11,750,000, which would meet minimum debt-service coverage and maximum loan-to-value requirements.

I often get a skeptical look from folks who are unsure of the accuracy of the debt yield method: What about market cap rates, debt-service coverage, appraised value and other metrics? How can all of these be incorporated into one metric? Well, it simply works.

7.12.17: Document All Tank Removals Please

We recently had to work through an environmental issue on a transaction because of shoddy work by a firm that completed the prior Phase I Environmental Site Assessment (ESA) and lack of documentation on the removal of an underground storage tank that occurred prior to 1992.

The story starts with the fire department. Its records indicated up to four underground storage tanks (USTs) were installed on the subject property at the time of development in 1969. An ESA completed in 2000 stated that on the date of inspection by the ESA firm no USTs were identified on the property. This was inconsistent with the fire department data. Therefore, the ESA firm returned to the site with a metal detector to determine the potential locations of the tanks. No metal objects were found. The ESA firm noted that the building superintendent for the property indicated all of the tanks were removed prior to 1992. No documentation of these removals was located by the ESA firm during the course of the Phase I investigation.

You cannot close on a CMBS conduit loan that lacks proper documentation. It must be clear in the documentation that soil contamination did not occur. It seems clear USTs were installed and subsequently removed. The ESA firm should have flagged the lack of documentation as a “Recognized Environmental Concern" (REC) and required further investigation and testing.

Our borrower had two choices:

  1. Phase II Investigation: The use of ground penetrating radar would identify the general locations of the former tanks and confirm they were actually removed. Second, soil borings in the area(s) of the former tanks would be required, which would take approximately 20 days.
  2. Environmental Insurance: We reached out to the insurance consultant working on the transaction for a quote to insure over the risk.

In the end, we received a very competitive quote for environmental insurance and closed after binding coverage. The moral of the story is to always document any tank removal. Undocumented removals will always be flagged as a REC in CMBS and will have to be mitigated before the transaction can close.

7.7.17: Pace of CMBS Conduit Loan Originations on Par with a Year Earlier

CMBS conduit loan originations at midyear are on pace with a year earlier, as measured by CMBS securities issuance. CMBS conduit issuance as of June 30, 2017 totaled $38.8 billion compared with $30.7 billion a year earlier. After a slow start to 2017, volume picked up in the second quarter. CMBS conduit issuance of $15.2 billion in the first quarter of 2017 fell short of the $19.2 billion for the same period in 2016. But $23.5 billion of issuance in the second quarter of 2017 easily surpassed the $12.6 billion of issuance in the prior year. Industry professionals have predicted volume of $65-$70 billion for full-year 2017, which now appears to be easily achievable. Expectations now are that last year’s total volume of roughly $75 billion is within reach.

The strength in new CMBS originations stems from a variety of factors. CMBS issuers are now comfortable with risk-retention rules, having successfully sold CMBS using all three methods of risk retention -- vertical, horizontal and L-shaped -- without any method having much impact on bond prices. As a result, CMBS bond spreads have been stable, with senior AAA-rated CMBS market spreads holding steady below swaps plus 100 basis points (bp) for lower leverage deals and roughly swaps plus 100 bp for higher leverage deals.

Indications are that third-quarter issuance will be strong as well. According to Commercial Mortgage Alert, $25.9 billion in transactions have been identified in the pipeline for the third quarter.

7.3.17: Gross Profit Margins Now Transparent for CMBS Issues

Risk-retention rules have made the accurate calculation of gross profit margins for CMBS issues possible. Although the results do not include transaction expenses, the gross profit indications are more accurate than previous methods to “reverse engineer” the pricing results of the public bonds and estimates for the pricing of the non-public bonds.

Risk-retention regulations require new disclosures that make the gross profit margin calculation relatively simple for deals that utilize two of the three options under risk-retention rules – the “horizontal strip” structure and the “L-shaped strip” structure. Under these two structures, the issuer must disclose the amount of bonds retained, and this allows for the calculation of the gross profit margin. For example, if an issuer sells $1 billion of CMBS for $40 million more than the $1-billion face amount, the gross profit margin would be 4% ($40 million divided by $1 billion).

The determination of net profit margin is trickier. Deal expenses need to be subtracted from the gross profit margin. These expenses include fees paid to service providers, including legal fees and fees paid to rating agencies. Some loan contributors are required to pay fees to have bonds distributed to investors. In general, it is estimated that these fees will total roughly 0.5% of the deal amount. In addition, it is even harder to determine the cost of any hedging efforts.

Excluding any hedging impact and assuming transaction costs of 0.5%, estimated net profit margin for deals that utilized the “horizontal strip” structure and the “L-shaped strip” structure ranged from 2.04% to 6.10% for the first half of 2017, well in excess of the target margin of 2.0% expected by issuers.

6.28.17: Hilton’s Tru Brand Latest Entrant into Crowded Hotel Franchise Space

Hilton Worldwide Holdings (Hilton) opened its first Tru by Hilton Hotel in Oklahoma City in May. The new mid-priced brand is pricing rooms at less than $100 to attract cost-conscious travelers such as millennials. The larger lobbies and amenities such as craft beer and pool tables encourage communal interaction to offset the smaller guest room size. Lobbies look like a newly renovated campus hub at a small college -- complete with a snack bar, circular signs, and funky chairs. Hilton hopes to have over 150 locations open by the end of 2019.

The brand will face quite a bit of competition as the number of hotel brands proliferate, making differentiation difficult and paralyzing hotel guests with too many brand choices. According to STR, 154 hotel chains are within the “mid-scale” brand category, of which Tru is considered part. In total, there are almost 1,000 hotel chains worldwide, according to STR.

To further differentiate the brand, the hotels will be located in smaller markets with a focus on highway locations that are popular with leisure travelers as opposed to corporate guests. To outperform its competitors in the same price range, such as Best Western or Quality Inn, Tru will try to hold costs down by making rooms smaller and easier to clean and the hotels will be all-new construction.

6.23.17: Don’t Forget: CMBS Conduit Loan Rates Are Listed on Our Website

CMBS conduit loan rates are listed on our website at valuexpress.com every Monday. To access our CMBS conduit loan rate sheet from the ValueXpress home page, click on “Loan Rate Sheet,” which is located at the lower right corner of the home page. On the new page that appears, you will be instructed to “Click on a title to access a printable document.” Click on “Loan Rate Sheet – CMBS Conduit” and a one-page .pdf document called “Indicative CMBS Conduit Loan Rates - $2 million - $100 million” appears.

Why not bookmark this page for direct access each Monday? Many of our mortgage banking associates who focus on the origination of CMBS conduit loans stick this Rate Sheet on their bulletin board each Monday. Then they have the current rates nearby when borrowers call for rates. In CMBS, rates are determined by adding the current swap rate (5-, 7- or 10-year swap, depending on the loan term) to the spread. The rate is determined at closing by adding the indexes together and the rate is fixed for the entire loan term.

Our Rate Sheet is useful for other purposes as well. It serves as a refresher that ValueXpress offers 5-, 7- or 10-year loan terms in CMBS, with loan payments based on 25- to 30-year amortization schedules. The sheet lists all the asset types that qualify for CMBS conduit loans. Furthermore, you can quickly see the underwriting criteria for each asset type, including minimum debt-service coverage ratio, maximum loan-to-value and minimum debt yield requirements.

“Although the interest rate spread is shown as a range, we can quickly determine a specific loan spread for any deal by running the rent roll and income and expense statements through our loan sizing and pricing models,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “Please email me any deals that you need loan pricing on at msneden@valuexpress.com.

6.21.17: Houston Awaits Hotel Market Recovery

A recently released report identified Houston, Texas as one of the most troubled markets within the Kroll Bond Rating Agency (KBRA) ratings universe, which covers most major U.S. metropolitan areas. KBRA’s observations of the top 25 lodging markets revealed that loans within the Houston MSA were more frequently identified as loans of concern, meaning the loans had an elevated probability of default than those in any other market. Loans of concern primarily exhibit substantial declines in cash flow relative to levels underwritten when the loan were closed.

Of the 80 CMBS hotels secured by CMBS conduit loans located within the Houston MSA, 27 (33.8%) serve as collateral for loans that have been identified as loans of concern, of which 24 are loans that were securitized after 2010. The next-highest concentration was represented by the Washington, D.C. MSA (21.7%), where 13 of 60 lodging loans were designated as loans of concern. Philadelphia rounded out the top three MSA exposures with 8 (17.8%) of its 45 lodging loans identified as loans of concern.

Among the factors behind performance declines for the Houston MSA are exposure to the energy sector and oversupply, both of which have led to declines in average occupancy. According to a May 2017 STR report, average occupancy declined 3.6% year to date from May 2016, which was the worst among the Top 25 markets despite slight bumps in ADR during February 2017 from Super Bowl LI. Average occupancy within the Houston market for year-to-date May 2017 was 63.7%.

As the price of oil stabilizes and the realization that domestic oil and gas production in Texas, particularly in the Permian Basin, is cost effective even at $40, the Houston market should begin to recover as new supply is absorbed over the next 18-36 months.

6.15.17: Is the Mall at University Town Center the Last in Our Lifetime?

Class A mall developer Taubman Centers Inc. opened what might be the last newly constructed mall for a long time. The property, University Town Center, is an 862,000-square-foot mall that Taubman started in 2004, but construction was slowed by financial crisis and it finally opened in October 2015. The property is located in the affluent city of Sarasota, Florida.

The mall is anchored by Macy’s, Saks Fifth Avenue and Dillard’s, one less anchor than the original design. Taubman expects the mall to be successful because it will be considered “Class A.” Class A malls contain higher end tenants and have remained successful in the era of Amazon and on-line shopping. Taubman asserts that the decline in Class B and C malls has helped Class A malls, as evidenced by increasing tenant sales at its malls to levels that significantly exceed sales at Class B and C malls.

Tenants at University Town Center include Michael Kors, Godiva, Apple and even a Tesla car showroom. In addition, the Capital Grille made its Sarasota debut in the mall. Taubman does not publish sales figures for individual malls, but said the sales per square foot at University Town Center is comparable with the average of $776 per square foot for its entire portfolio for the year ended in March.

Taubman does not have any more malls planned in the United States. “We have every expectation that not many malls are going to be built, but we didn’t expect this to be the last,” said Bill Taubman, chief operating officer of Taubman Centers.

6.9.17: Industrial Warehouse Buildings Are Hot!

Industrial warehouse real estate is one of the hottest sectors in commercial real estate this year, with e-commerce boosting demand. Many markets are reporting industrial building space is being gobbled up quickly, with Amazon leading the way.

In New Jersey, 9.4 million square feet of industrial space is under construction, according to Kyle Schmidt of Cushman and Wakefield, and 51% has been pre-leased. Based on strong interest in the remaining buildings, it is possible that the properties could be over 70% pre-leased by the time the buildings are ready for occupancy. In April, Amazon announced plans to open three additional fulfillment centers in Cranbury, Edison and Logan, New Jersey totaling nearly 3 million square feet. Amazon’s first major fulfillment center -- which contains 1.2 million square feet of space -- opened in 2014 in Robbinsville, New Jersey.

In South Florida, inventory of industrial space has grown by 9 million square feet in the past three years, according to a new construction update published by JLL Research. Another 4.6 million square feet of warehouse space is expected to come online in 2017, surpassing last year’s record of 3.9 million square feet. Amazon is reportedly negotiating a lease for an 850,000-square-foot warehouse. This is in addition to its existing footprint of over 500,000 square feet of space in Miami-Dade County, Florida.

Furthermore, Amazon just announced that it is spending $200 million on what will be one of its most expensive fulfillment centers ever. Amazon's new regional fulfillment center in Utah will total 800,000 square feet, according to Utah Governor Gary Herbert. The state gave Amazon a $5.6-million tax credit to win the facility. Amazon was reportedly considering six other states for the center, according to the Tribune.

6.5.17: Redevelopment Strategies for Former Department Stores

With reports of department store closings now routine, particularly in mall locations, mall owners are actively redeveloping these spaces for alternative uses in strong markets.

CBL & Associates recently redeveloped a vacant Sears store at Fayette Mall in Lexington, Kentucky, into a total of 20 new inline retail tenants totaling 115,000 square feet (sf) of former Sears space, including a two-level 23,000 sf H&M as well as a Michael Kors and Brighton Collectibles. In addition to redeveloped retail space, two new mall entrances -- one flanked by restaurants with outdoor dining -- were added, featuring restaurants including The Cheesecake Factory. In a similar fashion, CBL subdivided a former 182,000-square-foot Sears store at the CoolSprings Galleria in Franklin, Tennessee, into smaller spaces that are now leased to American Girl, H&M and The Cheesecake Factory.

Simon Property tore down a Nordstrom and Saks Fifth Avenue at the Florida Mall in Orlando and replaced the building with a newly constructed Dick’s Sporting Goods and a crayon-based family attraction called the Crayola Experience. The area formerly occupied by Saks Fifth Avenue was carved into space for American Girl, H&M, Forever 21 and Zara.

Retail real estate trust PREIT had three Sears stores close in malls that it owns. PREIT has leased all of the nearly 400,000 sf of vacated space. CEO Joe Coradino said the tenants that are moving in, such as the Dick's Sporting Goods and Field & Stream in Capital City Mall in Pennsylvania, will pay more in rent and drive more interest than Sears.

6.1.17: Hotels Seek Chain Restaurant Owners/Operators as Partners

Most franchised select service and full-service hotels require on-site restaurants to comply with franchise requirements. However, most hotel owner/operators consider running a hotel restaurant a necessary evil, and most hotel restaurants do not make money. In addition, hotel guests do not care to frequent a “no name” restaurant offering in the hotel and instead seek a familiar chain restaurant nearby.

To kill two birds with one stone, hotel owners are seeking partnerships with chain restaurants that are more efficient and skilled in operating restaurants and provide menu features that hotel guests are familiar with.

For example, Ruth’s Chris Steak House is featured in over 20 Embassy Suites hotels in major U.S. metropolitan cities. In fact, the Ruth’s Chris in the Embassy Suites in Chattanooga, Tennessee just tied for top honors among the brand’s 81 franchised restaurants. According to the hotel owner, “The Ruth's Chris restaurant is an asset to the hotel. The restaurant staff also handles the food service in our banquet room space so we can focus on selling rooms.”

Another steak chain that partners with hotels is Outback Steakhouse, such as the one found at the Marriott Springhill Suites in Chicago, Illinois, just east of O’Hare International Airport. A recent guest comment indicates how chain restaurants can turn a minus into a plus: “My flight was cancelled (snow/below zero cold) so I spent the night at the hotel, so no luggage or car, and I'm very glad Outback was here.”

5.27.17: Furnished Apartment Deals Are Okay in CMBS

We recently received a request to finance a 100-unit multifamily property located 12 miles outside a major southeastern city on a heavily traveled interstate. The immediate area is heavily populated with large commercial and industrial facilities, and the area is well known to have a growing manufacturing presence. The property was built in 1995, 92% occupied and in good condition.

The buyer and seller entered into an $8-million purchase contract and the buyer was all set to utilize agency financing through Fannie Mae or Freddie Mac for $6 million. The property was not located in an area of market concern for Fannie/Freddie (sometimes referred to as pre-review markets). A no-brainer, thought the buyer.

But the loan was turned down by the agencies for the requested loan amount. Why? Well the commercial and industrial nature of the market generated demand for medium-term furnished apartment rentals. In particular, the subject property had 42 furnished (sometimes referred to as “corporate”) units in which the units were leased fully furnished with all utilities and cable provided at the cost of the landlord. Because the units are furnished and utilities paid by the landlord, the monthly rent is much higher than an unfurnished apartment unit. Fannie Mae and Freddie Mac marked down the rental rates on the furnished units to the level charged for unfurnished units and the resulting cash flow did not meet the minimum required debt-service coverage for a $6-million loan.

The buyer then turned to the CMBS market. The key to the transaction is that the seller was able to show five years of occupancy greater than 90% despite the potential volatility from the move-in/move-outs of the shorter term furnished units. We were able to achieve the full $6 million in proceeds and utilize the actual in-place furnished unit rents and a 90% occupancy rate. Icing on the cake? The interest rate was a mere 10 basis points higher than the agency rates.

5.23.17: Report from ICSC RECon Conference

Dennis Suh and Stan Siciliano represented ValueXpress at the International Council of Shopping Centers (ICSC) RECon convention at the Las Vegas Convention Center in Las Vegas, Nevada May 20-23. Much of the discussion at the convention centered on the fate of malls in America.

Class B and C malls in secondary locations cannot be financed and will have to be repositioned or, in the worst case, torn down and the land reused for another purpose. Class A malls will survive. Defaults on CMBS loans secured by class B and C malls are soaring. What is fascinating is that many of the CMBS loans on class B and C malls are reporting debt-service coverage well in excess of 1.25x for many years, yet are defaulting at maturity. This is a strong indicator that lenders are unwilling to finance these properties even though they are performing.

Another hotly discussed topic was the positive effect restaurants are having on retail properties. So far, Amazon cannot deliver chef-prepared hot meals to your door, and with more Americans eating out, restaurant tenants are one bright spot in retailing. Mall owners are looking to add as many diversified restaurant options as they can accommodate, and neighborhood and big-box centers are luring restaurant tenants to pad sites, end caps, or in-line spaces in an attempt to increase traffic to their centers.

Finally, Amazon chatter was everywhere. A primary takeaway was that retail owners are all looking to add “service” tenants that do not compete with Amazon, such as urgent care centers, dentist offices, hair salons and gyms. Grocery-anchored shopping center owners seemed the least stressed over the Amazon effect and were comfortable that home-delivery options will come from their tenants, not Amazon. For additional color on the ICSC RECon conference, contact Dennis at dsuh@valuexpress.com or call him at (347) 393-3208.

5.19.17: CMBS Industry Working on Improving Loan Servicing

Borrower complaints regarding CMBS loan servicing are resulting in action by industry participants to improve the loan servicing experience. Industry leaders are recognizing that poor servicing experiences are driving borrowers to other loan products, depressing already relatively low CMBS loan origination volume.

Borrowers cite difficulty in communicating with their loan servicer (assuming they can even figure out who it is) as the number one complaint. Servicers simply do not get back to borrowers in a timely manner, if at all.

As a result, the industry’s trade group, the CRE Finance Council (CREFC), has set up a task force to propose customer service improvements. Meanwhile, some lenders and servicers are implementing initial changes on their own in an effort to streamline borrower servicing requests. CREFC set up its Servicing and Issuer Task Force in September to craft a set of uniform standards and practices for CMBS lenders and servicers. Immediate plans call for drafting a basic framework, possibly by year-end, that would address some of the long-time concerns raised by borrowers about conflicting provisions or lack of clarity in loan documents. The framework will also try to prevent excessively complicated review procedures for relatively minor issues.

5.12.17: Meet ValueXpress at ICSC’s RECon in Las Vegas!

On May 21-24, 2017, Dennis Suh and Stan Siciliano will be representing ValueXpress at the International Council of Shopping Centers (ICSC) RECon convention at the Las Vegas Convention Center in Las Vegas, Nevada. RECon is the world’s largest retail real estate convention with more than 37,000 attendees representing 58 countries. Attendees gather for power deal making, endless networking and innovative education.

ValueXpress will be meeting with owners and operators of retail properties who may be seeking fixed-rate, non-recourse commercial real estate loans now or in the future. ValueXpress has completed hundreds of retail real estate loan transactions, including grocery-anchored centers, unanchored centers and free-standing properties such as drugstores. ValueXpress specializes in retail loans in the $5-$30 million range, but it has the capabilities to provide loans as small as $1 million. ValueXpress will provide unrestricted cash-out loan proceeds up to 75% Loan-to-Value and interest-only payments on lower leverage transactions.

Dennis and Stan will be available beginning Saturday night, May 20th through Tuesday evening May 23rd for a drink, quick bite, or quick chat. Contact Dennis at dsuh@valuexpress.com or call him at (347) 393-3208 to set up an appointment.

5.9.17: CMBS Conduit Loan Volume Increasing

More borrowers are securing CMBS conduit loans as we progress in 2017, as evidenced by trends in the issuance of CMBS conduit securities. CMBS conduit issuance of $15.2 billion in the first quarter of 2017 fell short of the $19.2 billion for the same period in 2016. However, volume has picked up, and the market is on pace for $30 billion of issuance in the second quarter, according to projections from Trepp. This compares with $11.4 billion of issuance in the second quarter of 2016. Furthermore, industry professionals believe that last year’s total volume of roughly $75 billion is within reach, with many predicting volume in the $65-$70 billion range.

“We are seeing more CMBS conduit loan requests now than we’ve seen in quite a while,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “The requests span a variety of asset classes and situations. For example, we continue to refinance CMBS conduit loans that are maturing, multifamily loans that don’t quite fit Fannie Mae and Freddie Mac criteria and transactions in which the sponsor completed a value-add and wants to take cash-out of the property.”

The strength in new CMBS originations stems from a variety of factors. CMBS issuers are now comfortable with risk-retention rules having successfully sold CMBS using all three methods of risk retention -- vertical, horizontal and L-shaped -- without any method having much impact on bond prices. As a result, CMBS bond spreads have been stable, with senior AAA-rated CMBS market spreads holding steady below Swaps plus 100 basis points, and the Swap rate has also been relatively stable, resulting in attractive interest rates for borrowers below 5% for full-leverage transactions and in the 4.5% area for low-leverage deals.

5.3.17: A Lesson on Why Non-Recourse Is Important

One of the primary benefits of CMBS conduit loans is that they are non-recourse. As such, the borrower and guarantor (typically an individual who owns or controls the majority of the borrowing entity) are not personally liable for repayment of the loan in the event of default and foreclosure.

The non-recourse provision works well for partnerships of individuals in which no one partner cares to personally guarantee the loan. It also works well for institutional owners in which no individual employed by the institution is going to personally guarantee the loan. But from the individual owner I often get “I don’t need non-recourse, because I will never default, and if I did, I would just work out a payment plan with the lender.”

Well, defaults on loans with personal guarantees do often get worked out. Typically on a loan default the property is foreclosed and sold, a deficiency judgment is filed against the guarantor based on the difference between the loan amount and the property sale amount, and the deficiency is settled (perhaps by splitting the difference). The deficiency judgment is paid and released, and life goes on. But recently I saw a situation that scared me to death.

A sponsor defaulted on a personally guaranteed loan in the amount of $15 million. The lender foreclosed on the property and . . . did nothing. The lender refused to sell the property and refused to negotiate a settlement on the guaranty. The sponsor could not get a commercial real estate loan on his other performing properties. Why? The net worth of the sponsor was less than $15 million and he would be insolvent if the lender collected on the entire $15-million guarantee. Although this was unlikely, since the judgment on the guarantee could not be determined, lenders were unwilling to make a guess.

Needless to say, this sponsor said he will never provide a personal guarantee on a commercial loan again.

4.28.17: Raising Real Estate Capital in the Digital Age

In the past, raising outside equity for small- and mid-sized real estate operators to purchase commercial real estate was dominated by investment advisors who would pitch deals to their clients. The minimum investment amounts were fairly low, in the $25,000-$100,000 area, and investment advisors successfully sold deals to thousands of individuals seeking regular dividends and distributions that were higher than bonds or dividend stocks. The problem was that the fees to the advisors and related parties were eating up to $13 of every $100 invested, so investments made by individuals were only worth $87 when the deal closed. Worse, fees were not disclosed.

New disclosure rules effective in 2016 have halted this method of fundraising. Now, fees must be disclosed, and rather than have clients upset at the perceived high fees, advisors stopped pitching these deals altogether. This left small- and mid-sized real estate operators with limited alternatives to raise outside equity for real estate projects.

Luckily, new technology-based fundraising methods with very low fees are evolving rapidly to fill the void. The concept, known as crowdfunding, is a web-based platform on which real estate deals are posted and marketed directly to individual investors in $10,000-$50,000 amounts rather than through a fee-based middleman such as an advisor. As a result, roughly $97 of each $100 gets invested in the project. In addition, these web-based platforms have nationwide/worldwide reach, far superior to the largest U.S. advisor network. This exciting new method of fundraising has been made economic through the assistance of the Jumpstart Our Business Startups (JOBS) Act. JOBS simplified SEC regulations for selling securities for real estate projects, which has helped propel crowdfunding.

“I have a client who we are looking to take through the crowdfunding process,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “We just completed a $28-million CMBS loan and will be looking to sell 49% of the equity position, which is allowed under the loan documents. We expect to raise $5 million to invest in new projects. I will let you know how it turns out.”

4.25.17: CMBS Conduit Loan Rates Stable as CMBS Spreads Remain Steady

CMBS conduit loan borrowers are finding calm waters as spreads on CMBS securities have been stable for most of 2017 to date. In addition, the 10-year Swap rate, the benchmark index for setting interest rates on CMBS conduit loans, has remained in a relatively narrow range of roughly 2.30%-2.60%. CMBS conduit loans’ interest rates are set by adding the 10-year Swap rate and the loan spread, which is derived from CMBS securities prices. The two indexes are added together at loan closing to set the interest rate, which will remain fixed for the entire loan term.

On the CMBS securities side, long-term super-senior AAA-rated securities continue to trade at under 100 basis points (bp) over swaps, having broken the barrier in the beginning of February for the first time since mid-2015, with the exception of one very high-quality offering last August. The market for long-term super-senior AAA-rated CMBS highly correlates to borrower interest rates for CMBS conduit loans. The two most recent CMBS deals are currently being marketed with long-term super-senior AAA-rated securities at 94-95 bp over swaps, right in the middle of the range for CMBS deals that have priced since February.

Market professionals point to relatively low CMBS supply keeping a check on increases in CMBS spreads. As of the end of April, $18.5 billion of CMBS deals have priced compared with $22.4 billion for the same period in 2016. And 2016 levels were down from $33.6 billion in 2015. The forward pipeline does not indicate a spike in CMBS issuance, so bond buyers have few new CMBS issues in which to invest.

As a result of steady swap and CMBS securities prices, CMBS borrowers are seeing stable interest rates while loans are processed to closing and therefore are closing at rates close to levels indicated in their Term Sheets. Low-leverage CMBS loans are being closed in the 4.5% area and full-leverage loans are being closed in the 5% area. The rate is fixed for the entire loan term.

4.19.17: National Alliance of Commercial Loan Brokers (NACLB) Announces 3rd Annual Conference & Expo to be Held in Orlando, FL

The Gaylord Palms Resort and Convention Center in Orlando, Florida is the site of the NACLB’s 3rd Annual National Alliance of Commercial Loan Brokers (NACLB) Conference & Expo. The conference begins on Tuesday, October 17 with an opening cocktail reception and concludes on Thursday afternoon, October 19.

ValueXpress will be available during the conference at its booth. Jim Brett, head of underwriting at ValueXpress, will be fielding questions regarding the origination, underwriting and closing of CMBS conduit loans. “We will have a bunch of giveaways as well, so I encourage all attendees to stop by our booth, if only to grab a handful of ValueXpress logo’d golf balls for their next round,” Jim said.

"Having taught over 400 Commercial Capital Training group (CCTG) graduates over the past four years, and now closing three to four CMBS conduit loan deals a month with graduates, this is an outstanding opportunity for me to reconnect with graduates just getting their feet wet," commented Michael D. Sneden, Executive Vice President at ValueXpress. "In addition, I will participate on CMBS conduit loan panels to share the most current trends in the CMBS conduit loan market with all interested attendees."

CCTG and BoeFly have teamed up to organize this event. It will serve as a "Class Reunion" for CCTG graduates and classmates, providing an excellent opportunity for grads to network regarding their business strategies since graduating from CCTG. For the complete conference agenda and to register, visit http://www.naclb.net.

4.13.17: AAHOA Trade Show in San Antonio, TX a Huge Success

On April 12-13, 2017, ValueXpress exhibited at the annual Asian American Hotel Owners (AAHOA) Trade Show held in San Antonio, Texas. The sold-out trade show was attended by a record crowd of more than 6,500 Asian American hoteliers ready to lock in long-term, fixed-rate hotel loans before interest rates head upward.

ValueXpress Booth 1141 at the 2017 Asian American Hotel Owners Trade Show.

“We had a significant amount of inquiries from clients looking to complete cash-out refinancing of their hotel properties,” commented Jay Bhakta, Senior Loan Originator at ValueXpress. “Many owners were looking to use the cash-out proceeds to complete Property Improvement Plans (PIPs) required to renew franchises. For example, some noted that it could easily cost $1 million to complete the new ‘Formula Blue’ PIP required by IHG for the renewal of Holiday Inn Express franchises. CMBS conduit loans with their unrestricted cash-out provisions are ideally suited for hotel properties requiring expensive PIPs so owners do not have to come out of pocket to pay for the PIPs.”

“In addition, we had requests for portfolio loans in which the owner gets one loan secured by a portfolio of properties, consolidating a variety of local lenders into one loan, converting recourse loans into non-recourse and obtaining cash-out proceeds for additional investments,” noted Michael D. Sneden, Executive Vice President at ValueXpress.

“In one case, the owner wished to build a new Hampton Inn property, but his local community bank wanted cash equity of 35%, or nearly $3 million, invested in the $8-million project. The owner had only $2 million cash on hand, so we are going to provide a $1-million cash-out on a Holiday Inn Express owned by the sponsor,” noted Bhakta.

4.10.17: Hoteliers Should Use CMBS Loans to Finance PIPs

Competition among hotel franchises is fierce. Franchisors are continually updating the interior and exterior designs for new hotels that become part of their franchise. This updating is often referred to as the latest “prototype” or “brand standard.” Properties that were franchised 10-15 years ago look outdated compared with newer properties. Owners who seek to renew their license agreements are required to upgrade the interior and exterior of their properties to look like the latest “prototype” to remain in the franchise. The upgrades are known as “Property Improvement Plans," or PIPs.

Take a look here to see how an older Hampton Inn, for example, is converted to the new brand standard.
 
While the transformation looks very cool, it is very expensive for hotel owners to complete the conversion. Yet leaving the franchise for another is not usually an option for hotel owners as other franchises are typically already taken in the market and any change to a lower-rated franchise could severely reduce the revenue generated by the hotel.

The cost to upgrade a 10- to 15-year-old Hampton Inn or Holiday Inn Express can easily exceed $1 million and can reach as much as $2 million. Many hoteliers have not set aside this large sum of money to complete the required PIP for a license renewal and risk losing the franchise to a competitor.

What is an owner to do? A cash-out CMBS conduit loan!

Here’s how it works: Let’s say the property is a Hampton Inn and has a $1.5-million PIP requirement to obtain a 15-year license renewal. The property is currently worth $8 million as a Hampton Inn and has a $4-million existing first mortgage loan on the property. We will provide a new $5.6-million CMBS conduit loan (70% of $8 million). We will pay off the existing $4-million first mortgage loan and place $1.5 million is escrow to be drawn for the PIP. This way the owner gets a brand new 15-year license with no cash out of pocket!

4.5.17: Class B Malls Struggle to Refinance

With Sears, Macy’s and JC Penney closing hundreds of stores, mostly in older malls in less-desirable locations, the divide between good malls and bad malls is widening. The best malls, often owned by Simon Property Group, Taubman Centers, Inc. and Westfield LLC, have lenders knocking down their doors to provide financing. But older, less-desirable Class B malls are struggling to find financing to take out maturing loans.

Lenders are afraid of Class B malls because deteriorating performance is resulting in appraisal value reductions, maturity defaults and other payment defaults, according to information provided by Trepp. For example, River Valley Mall, a Class B mall located in Lancaster, Ohio, had its appraisal value cut from $70 million when the loan was written to $18.4 million today. Recently, the Galleria at Pittsburgh Mills mall sold at auction for $100 to the existing lender, based on an estimated value of $11 million as opposed to its original loan balance of $143 million. Another example is Eastern Shore Centre, a Class B regional mall located in Spanish Fort, Alabama. The property, lender-owned after being foreclosed in 2015, was originally appraised for $99 million and is now worth an estimated $19.25 million.

One last example is Sunset Mall, a Class B regional mall located in San Angelo, Texas. The mall, originally valued at $39.6 million, recently went into maturity default despite a net cash flow DSCR of 1.54x on $3.2 million of net cash flow. The loan payoff was $27.7 million, so the debt yield was a very healthy 11.5%, a level that is typically very easy to refinance. But the property could not obtain a new loan, and a new appraisal valued the property at $16.4 million.

With one bad Class B mall story after another, the entire sector is being painted with a broad brush. Any diamond-in-the-rough good story will have to be very well told in order for the owner to obtain financing.

3.31.17: Small-Balance CMBS Loans Still Available

ValueXpress is making a market in small-balance CMBS loans as an accommodation to new and existing customers, while most CMBS conduit lenders have minimums of $3 million and even $5 million in some instances.

“With a push to close more self-storage and small-balance single-tenant loans such as drug stores and dollar stores, we recognize the need to be able to accommodate lower loan balances,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “These property types, particularly self-storage, tend to have lower property values, resulting in loans below $3 million. We don’t want these clients to be shut out of the CMBS conduit loan market.”

“We recently received a low-leverage CMBS conduit loan request for $2 million secured by a 400-unit Class B self-storage property located in Maryland,” commented Dennis Suh, Vice President at ValueXpress. “The sponsor recently renovated the property, resulting in an increase of $100,000 per year in net cash flow and a 90% occupancy rate, but he could not find a CMBS lender interested in a $2-million loan.”

ValueXpress was able to offer two options to the client. Both offers were for full-term interest-only payments. The first option provided for fixed third-party fees through the small-balance fixed fee program. This program fixes the costs of third-party fees and lender counsel fees to $20,000-$25,000. The second option provided for a slightly better interest rate, but without fixed third-party fees. The sponsor leaned toward the fixed-fee option as both options resulted in a sub-5% interest rate, which was the sponsor’s target.

3.28.17: Underlying Co-op Loans Fit in CMBS

Underlying co-op loans tend to be lower leverage and are highly desired in CMBS. The loans are a niche product mainly because not many residential properties are under a cooperative form of ownership outside the New York metropolitan area.

A residential cooperative, or co-op, is a legal entity, usually a corporation, that owns real estate consisting of one or more residential buildings. The corporation is membership-based, with membership granted by way of a share purchase in the cooperative. Each shareholder in the corporation is granted the right to occupy one housing unit. A primary advantage of the housing cooperative is the pooling of the members’ resources so that their buying power is leveraged, thus lowering the cost per member in all the services and products associated with home ownership. Each unit owner/shareholder pays its pro-rata share of the costs to operate the building, including taxes, insurance and common utilities. Each owner is free to sell the share in the corporation representing their unit in the open market. The corporation is managed by a board of elected officers.

So where does a CMBS loan fit in a co-operative structure? Many residential buildings that are under a co-operative form of ownership were previously rental apartments that were “converted” into a co-op. As part of the conversion, the co-op assumed the existing mortgage secured by the apartment buildings. This loan is known as the “underlying” mortgage. The mortgage is typically a balloon that eventually matures and needs to be refinanced. In addition, the refinancing provides an opportunity to increase the loan amount to provide for major capital improvements. Plus, the loan needs to be non-recourse to the unit owner/shareholder. A CMBS conduit loans fits all of the above parameters and is an excellent choice for co-op boards.

“We have done a handful of underlying co-op loans at ValueXpress, mainly as a function of our proximity to the New York metro area, which has many co-ops,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “We remain on the lookout for more of these transactions.”

3.22.17: CMBS Delinquency Climbs as Final “Wall of Maturities” Struggles to Refinance

In 2007, $228 billion of CMBS conduit loans were pooled and sold as CMBS securities in the United States, the largest amount in history. Most of the loans provided for a 10-year term, creating a potential refinancing bonanza for 2017. As it turns out, the majority of the loans were closed in the first half of 2007, so the maturity wave is nearly over. Few CMBS conduit loans will mature in 2018-2020 as less than $25 billion of CMBS conduit loans were closed in that three-year period.

New originations from the 2007 era continue to disappoint. Many good loans have elected to refinance through non-CMBS programs. A large proportion has not been able to refinance at all. As evidence, the delinquency rate for CMBS conduit loans rose in March to 5.37%, according to Trepp, and has moved higher in 11 of the past 13 months. In March, another batch of loans turned newly delinquent, increasing the delinquency rate from 5.31% in February. Trepp notes, “It is hard to see the rate going down anytime in the near future. We still believe that trend will continue until the summer as the 'wall of maturities' plays out. The rate should begin to level off or retreat later in 2017.”

Industrial, retail, and lodging delinquencies helped push the rate higher in March. Delinquency readings for office and multifamily loans fell month over month. The industrial delinquency rate increased dramatically, to 7.03% from 5.94%. Office delinquency fell to 7.38% from 7.55%, but remains the worst performing asset class in CMBS. Multifamily delinquency dropped to 2.60% from 2.82% and remains the best performing asset class in CMBS.

3.17.17: Stan Siciliano Joins ValueXpress

Stan Siciliano, a 20-year veteran in commercial real estate lending and marketing, joined ValueXpress effective March 20. Stan is primarily responsible for marketing CMBS conduit loans to new ValueXpress clients nationwide. Stan will be working closely with Dennis Suh, Vice President of Originations at ValueXpress. Stan has successfully marketed commercial mortgage loans through multiple channels, most recently with Prime Commercial Finance.

“ValueXpress is extremely pleased to have Stan Siciliano join the ValueXpress team,” commented Dennis B. Suh, Vice President at ValueXpress. “Stan brings with him a depth of knowledge and experience in marketing CMBS conduit loans that will benefit new clients as we bring a better CMBS conduit loan experience to more borrowers.”

CMBS conduit loans are probably the most complex commercial loan product out there,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “We hear many stories from borrowers about poor CMBS conduit loan experiences. The ValueXpress team has many years of in-depth CMBS conduit loan knowledge, and we want to reach more borrowers to provide a better experience for them. Stan’s expertise will help us achieve this goal.”

You can reach Stan at 585-721-7826 and stans@valuexpress.com.

3.13.17: ValueXpress Exhibiting at AAHOA Annual Convention and Trade Show in San Antonio, TX

On April 12-13, 2017, ValueXpress will be exhibiting at the annual Asian American Hotel Owners (AAHOA) Trade Show in San Antonio, Texas. ValueXpress will be located in Booth 1141 at the Henry B. Gonzalez Convention Center noon-6:00 p.m. on Wednesday, April 12 and noon-5:00 p.m. on Thursday, April 13.

“ValueXpress is an Allied Member of AAHOA and has been exhibiting at the AAHOA Trade Show for over 15 years,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “We have completed over 300 hotel loans during this period with many of those loans to AAHOA members. The trade show presents an excellent opportunity to allow hotel owners to meet personally with us to learn how we can assist them with their financing needs.”

Representing ValueXpress at the trade show will be Michael D, Sneden, Executive Vice President, Dennis Suh, Vice President, and Jay Bhakta, Senior Loan Originator. “This year it’s particularly important for us to talk with our clients and potential clients,” stressed Jay. “We want to share how we use our 25 years of experience to deliver a smooth loan process as well as leverage our extensive Wall Street contacts to provide the best terms and structure to our clients.”

ValueXpress welcomes the opportunity to meet with hotel owners at the trade show to explain in detail its SBA 7(a), SBA 504, USDA B&I, CMBS conduit and conventional loans for hospitality properties. Call Jay Bhakta at 601-918-2850 for your personal appointment and be sure to stop by our booth (#1141) during trade shows hours.

3.10.17: Visit ValueXpress at the Inside Self Storage World Expo in Las Vegas, NV

Continuing our efforts to meet with clients, Deb Oprean, Charley Lobetti and Dennis Suh will be representing ValueXpress at the Inside Self Storage World Expo and Trade Show at the Paris Hotel & Resort in Las Vegas, Nevada, April 10-13, 2017. ValueXpress will be exhibiting during trade show hours on Tuesday, April 11 4:30-7:30 p.m. and Wednesday, April 12 1:00-5:00 p.m. in the Paris Hotel Ballroom.

Deb, Charley and Dennis will be available for one-on-one meetings outside trade show hours beginning Monday evening, April 10 through Thursday evening, April 13. If you want to meet for a drink or conversation, please email Deb at dprean@valuexpress.com, Charley at clobetti@valuexpress.com or Dennis at dsuh@valuexpress.com.

The Inside Self Storage World Expo is the industry’s foremost source for relevant and unbiased cutting-edge information regarding the self-storage business. The conference presents an opportunity to explore a wide variety of industry topics, all geared toward providing relevant information to grow within the vibrant self-storage industry. Participants will have an opportunity to learn from industry leaders, network with peers and interact with the industry’s top suppliers. The show will bring together nearly 200 exhibitors who represent all segments of the business, including retail product, management software, building components, security equipment, financing, marketing services and much more to help attendees accelerate their self-storage business.

"We have been growing our 10-year, fixed-rate self-storage lending significantly since the restart of the CMBS conduit loan market in 2010,” commented Deb. “Self-storage loans are the best performing asset class in CMBS, and the market is hungry for more loans.”

“CMBS conduit loans are perfect for self-storage borrowers who want to grow,” explained Charley. “CMBS conduit loans provide for unrestricted cash out on a refinance, and our typical self-storage client uses the cash proceeds to buy or build another facility.”

3.3.17: Michael Sneden and Dennis Suh Represent ValueXpress at the Self Storage Association Spring Conference & Trade Show in New Orleans, LA

Michael D. Sneden, Executive Vice President, and Dennis Suh, Vice President, will be representing ValueXpress at the Self Storage Association Spring Conference and Trade Show at the New Orleans Marriott in downtown New Orleans, Louisiana, March 15-17, 2017. They will be exhibiting during trade show hours on Wednesday 3:30-7:30 p.m. and Thursday 11:30 a.m.-1:45 p.m., which includes lunch on the trade show floor. Mike and Dennis will be available for one-on-one meetings outside trade show hours beginning Tuesday evening, March 14 through Thursday evening, March 17. If you want to meet for a drink or conversation, please email Mike at msneden@valuexpress.com or Dennis at dsuh@valuexpress.com.

The Self Storage Association is the industry’s foremost source for relevant and unbiased cutting-edge information regarding the self-storage business. The conference presents an opportunity to explore a wide variety of industry topics, all geared toward providing relevant information to grow within the vibrant self-storage industry. Participants will have an opportunity to learn from industry leaders, network with peers and interact with the industry’s top suppliers.

"We have been growing our 10-year fixed-rate self-storage lending significantly since the restart of the CMBS conduit loan market in 2010,” commented Dennis. “Self-storage loans are the best performing asset class in CMBS, and the market is hungry for more loans.”

“CMBS conduit loans are perfect for self-storage borrowers who want to grow,” explained Michael. “CMBS conduit loans provide for unrestricted cash out on a refinance, and our typical self-storage client uses the cash proceeds to buy or build another facility.”

3.1.17: Report from the 2017 MBA CREF Conference

Industry pros expect a stable CMBS market in 2017, with CMBS origination volume of $60-$70 billion. While stable markets are always welcome, volume of $60-$70 billion was viewed as somewhat disappointing. CMBS conduit loan originations post-crisis peaked at $101 billion in 2015 and have been on the decline since, posting $76 billion of loans in 2016 and projected to decline further in 2017.

A panel of industry veterans debated the direction of CMBS conduit loan originations during a breakout session called “CMBS: The New Normal.” The panel was moderated by Chris LaBianca, Managing Director and Head of Origination for UBS Real Estate Finance. Chris set the tone by noting that the market share for CMBS conduit loans has fallen from 40% of all commercial real estate loans to under 20%. Chris asked the panelists -- Steven Schwartz from Torchlight Investors, Dennis Bernard from Bernard Financial Group and Joseph Geoghan from JPMorgan -- about what’s going on. Below are the takeaways:

“We have aligned ourselves with “vertical” risk-retention partners right now as they are offering the lowest loan spreads for our clients,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “For example, we just issued a Term Sheet on a $7-million hotel deal with a “vertical” partner in which the loan spread was 25 basis points inside all the other bidders.”

2.28.17: Kroll Releases February CMBS Trend Watch

In its February CMBS Trend Watch, Kroll Bond Rating Agency (KBRA) notes that 2017 continued its sluggish start with $3.8 billion of CMBS securities priced in February. Year-to-date volume is down 48.5% from a year earlier and is the lowest it has been since 2012.

However, KBRA notes that based on the current pipeline, volume is going to pick up substantially as KBRA is aware of nine upcoming CMBS transactions. Most of the deals are expected to launch mid-March through April, including a CMBS issue from JPMorgan, a landmark deal that is the first to utilize a horizontal risk-retention structure. The JPMorgan deal follows the first use of the “L” structure last month as well as a number of deals that utilized vertical risk-retention structures.

Conduit spreads for the benchmark last cash flow (LCF) AAA-rated securities started the month of February at Swaps (S) + 88 basis points (bp), in line with the one deal that priced in January. However, the month ended slightly wider, as two deals priced at S + 94 bp and S + 95 bp. Moving in tandem with the LCF AAAs, the comparable BBB- CMBS spreads started off the month at S + 350 bp, in line with the deal that priced in January, but widened out to S + 450 bp toward the end of the month.

After the release of the KBRA report, Goldman Sachs priced an “L” shaped structure in which it contributed all of the approximate $1.1 billion of collateral loans. Rialto Capital agreed to purchase the b-piece at a reported 18.25% yield. The benchmark LCF AAA-rated securities priced at Swaps (S) + 88 bp, reaffirming the levels achieved in January.

2.17.17: Michael Sneden and Dennis Suh Represent ValueXpress at the MBA Conference in San Diego, CA

Michael D. Sneden, Executive Vice President, and Dennis Suh, Vice President, will be representing ValueXpress at the Mortgage Bankers Association Commercial Real Estate Finance (CREF)/Multifamily Housing Convention & Expo at the Manchester Grand Hyatt in San Diego, California, February 19-22, 2017. The convention is expected to attract over 3,000 commercial and multifamily professionals who will be networking with industry leaders and listening to professionals share their views on the direction of the industry.

"I have been attending CREF for over 15 years, and it is by far the best opportunity to meet my colleagues to share our past, current and future views on the commercial real estate lending markets," said Sneden. "This year, with various risk-retention structures being tested and the wall of maturities from 2007 not producing the level of new originations expected, I am curious to hear what industry pros have to say about these and other key elements of the CMBS business.”

“The MBA provides ValueXpress an opportunity to connect with all our debt investors to make sure we understand their appetite for deals,” commented Suh. “Some lenders prefer low-leverage deals and will provide very attractive interest rates to win those deals; some of our other partners will do more difficult deals for just slightly higher interest rates. We need to understand where everyone stands to be sure we direct our clients’ transactions to where they will receive the best execution.”

Mike and Dennis will be in San Diego from Sunday, February 19 through Wednesday, February 22. If you want to get meet for a drink or conversation between session presentations, please email Mike at msneden@valuexpress.com or Dennis at dsuh@valuexpress.com.

2.15.17: Hot Topics for the MBA Conference in San Diego, CA

The 2017 MBA will be ground zero for opinions and information on important issues that the CMBS industry is currently working through. At the forefront is structuring CMBS deals for the required 5% risk retention as there is still no consensus on the best execution – the vertical strip, horizontal strip or L-shaped structure that combines the vertical and horizontal structure. On Tuesday, a panel will debate this during a session called “CMBS: The New Normal.”

Implementation of the Dodd-Frank risk-retention rules in late 2016 will allow CMBS players to enter 2017 with a better understanding of the impact of these rules on pricing, loan origination and execution. Panelists will provide some straight talk on CMBS, including the expected impact of these regulations and current industry thinking about the market and loan demand.

In addition, quite a bit of discussion is expected on how smaller CMBS loan contributors will participate under these risk-retention rules as many do not have the capacity or interest in retaining the risk-retention piece of their CMBS deals. At the same time, the larger, well-capitalized banks are finding their deals well received in the market because they are retaining the risk. This is resulting in a competitive disadvantage for the smaller players in the marketplace.

Then there is the wall of 2007 CMBS conduit loan maturities that was to provide robust originations for 2017, particularly during the first half of 2017. But the originations have not shown up!! This topic will be hotly debated as we discover what is happening to these maturing loans (see our 2.8.17 article).

2.8.17: What Happened to the Wall of CMBS Maturities?

The “wall of maturities” refers to the avalanche of ten-year securitized loans that were originated at the peak of the last cycle, in 2006-2007. The last batch of those mortgages comes due in 2017, and conduit lenders had assumed that many of the borrowers would provide a steady supply of lending opportunities by turning to the CMBS conduit market for refinancing. But the results have been disappointing. According to a report last month by Bank of America Analyst Alan Todd, only 55% of the maturing CMBS loans have a debt yield of at least 9% -- the minimum level seen in most recently originated CMBS loans. This means that roughly 45%, or $43 billion, of the $96 billion of CMBS loans that mature this year will be ineligible for securitization, sharply reducing potential refinancing business. And the total balance of maturing CMBS loans will plunge to $21 billion in 2018.

Many borrowers appear to be turning to alternative markets, some voluntary, some involuntary. Borrowers with loans facing significant tenant rollover are being forced to seek recourse bank financing if they are strong enough to personally backstop the rollover risk with a recourse guarantee. Less-strong borrowers are sometimes forced into high-cost bridge loans until leases are extended or properties are re-tenanted. On the other side of the coin, high-quality performing loans are migrating to insurance companies or Fannie/Freddie programs (for multi-family properties).

2.3.17: CMBS Spreads Tighten Amid Limited Supply …

Two CMBS transactions recently priced with long-term super-senior AAA-rated bonds pricing at levels not seen since mid-2015. The first deal, a $1.3-billion offering by Citigroup and Deutsche Bank, priced the super-senior CMBS at 90 basis points (bp) over swaps, down 24 bp from the average of December’s CMBS issues. The pricing also broke the 100 bp barrier for the first time since mid-2015, with the exception of one very high-quality offering last August. The balance of the investment-grade structure of the CMBS bonds fared very well also. The BBB- bonds priced at 380 bp, down sharply from the range of 565-575 bp in December. Traders noted lack of new supply and confidence that new risk-retention rules will result in higher quality CMBS issues as reasons for the tight pricing.

Following the Citigroup/Deutsche Bank deal, Morgan Stanley, Bank of America and Wells Fargo priced a $977-million CMBS offering at tighter levels. The issuers priced the super-senior CMBS at 88 bp over swaps and the BBB- bonds priced at 350 bp, 30 bp better than the Citigroup/Deutsche Bank deal. However, the Morgan Stanley deal featured better credit metrics than the Citi deal, and the Morgan Stanley trio is becoming known as issuing the highest quality CMBS, which may have factored into better pricing.

“With these deals establishing new pricing levels, borrower spreads have fallen roughly 15-25 bp, well under 300 bp. With the 10-year Treasury yield roughly 2.45%, rates to borrowers are close to the important 5% level for full-leverage transactions and sub-5% for lower leverage deals,” commented Michael D. Sneden, Executive Vice President at ValueXpress.

2.1.17: And Risk Retention May Be Helping, Not Hurting Pricing …

CMBS market participants are breathing a sigh of relief as fully-complaint risk retention deals are being well received in the market. Whereas industry pros were concerned that the effects of the rules would make CMBS loans uncompetitive, the reverse is occurring, at least right now.

The most recent CMBS deals that priced at very tight levels (see our 2.3.17 article) successfully utilized two of the three possible structures to meet risk-retention rules. In the Citigroup/Deutsche Bank CMBS deal, the transaction benefitted from its use of the L-shape option under risk-retention rules. Citi and Deutsche are retaining a “vertical strip” equal to 1.9% of each class. And a KKR fund is taking down a “horizontal strip” made up of approximately 3.1% of a below-investment grade portion, which it must effectively hold for the deal’s ten-year life. In the second transaction, Wells, Morgan Stanley and Bank of America divided and retained a 5% vertical strip in proportion to their collateral contributions. The third possible structure, not yet utilized under risk-retention rules in 2017, is a b-buyer taking down the entire “horizontal strip,” made up of 5% of the most junior portion of the deal that it must effectively hold for the deal’s ten-year life.

On the two most recent deals, in addition to good market supply/demand characteristics, investment grade CMBS buyers were positive on having investors with “skin in the game” and were willing to pay up a bit for that. In addition, concern does not appear to be materializing that b-buyers would require significant additional yield for being forced to hold b-pieces for ten years and/or being forced to buy CMBS further up the capital stack than desired.

1.26.17: But How the Smaller CMBS Players Will Participate Is Still Unknown

With tight pricing and market acceptance of the vertical and L-shaped retention structure, what remains unknown is how the smaller CMBS originators will participate. As of now, only the largest bankers -- Citi, Deutsche, Morgan Stanley, Wells and Bank of America -- have contributed to these risk-retention compliant deals. These firms held five of the top seven slots in the CMBS origination league tables for 2016. These highly capitalized banks have the capacity to hold vertical and horizontal strips of CMBS on their balance sheets and are very good at originating high-quality CMBS loans.

But what about the other firms further down the league tables? At spots 11-16 are Rialto, Nataxis, Starwood, Credit Suisse, Ladder Capital and Benefit Street Partners. These firms originated a combined $10 billion of CMBS loans in 2016, which is significant. They also typically serve the smaller balance, higher leverage, “B” quality asset market. Without these participants, borrowers would have significantly fewer options for financing. Most of the firms seem to have opportunities. Rialto and Starwood are affiliated with b-buyers and could team up on risk-retention deals. Ladder is a public company that holds CMBS securities in its investment portfolio, so holding a “vertical strip” is not unfamiliar to the company. Nataxis and Credit Suisse are large banks that could do what the Morgan Stanley team is doing.

Hopefully, these firms and the rest of the top 20 can find a best execution to remain active in the CMBS market. We should find out their direction in the next few months as their newly originated loans are securitized.

1.20.17: How to Qualify for CMBS: From Owner-Occupied to Investment Property

Commercial real estate properties owned by a business that operates out of the buildings it owns are generally not eligible for CMBS loans. Financing related to these transactions is often referred to as “owner-occupied” loans and is often provided by commercial banks and the SBA with recourse to the business owners. However, mid-sized and larger companies can create a structure to be eligible for CMBS under certain circumstances.

ValueXpress recently underwrote a transaction for a building containing 40,000 square feet (sf) of office space and 360,000 sf of warehouse/distribution space that was purchased by a large book publisher in the Midwest. The building was to be used as an administrative office and distribution center. The building was larger than needed, so the publisher leased 40% of the space to a fortune 500 company for 15 years. The transaction was financed with a 65% loan with a local bank on a short-term, recourse basis payable on a 20-year amortization schedule. The publisher was not happy with the banker and sought a longer term loan on a non-recourse basis.

In order to make the 60% owner-occupancy level eligible for CMBS, the first test is determining the financial condition of the owner-occupant. ValueXpress obtained five years of audited financial statements that indicated sales in excess of $50 million per year and growing, and profits in excess of $5 million per year. Company debt, except that secured by the building purchase, was modest. Next, the terms of a “synthetic lease” were developed. Market rent was $7.00 NNN, so it was proposed that the company enter into a 25-year lease with the building entity (the company entity and building entity were separate) at $7.00 NNN or $1,540,000 per year. Adding back the existing mortgage payment on the loan being replaced, the company covered the rent payment over 4x.

With the two leases in place, the loan underwrote to a 65% LTV and an 11% debt yield, very good credit metrics and eligible for CMBS execution.

1.18.17: CMBS Mall Sells for $100 – A Great Headline, But Not the Full Story

The press had a field day this week reporting that a Pennsylvania mall that was foreclosed on after its owners failed to repay $143 million was auctioned off for $100. The 1.1-million-square-foot Galleria at Pittsburgh Mills was secured by a CMBS conduit loan with additional mezzanine financing. The mezzanine loan defaulted in 2011 after steadily declining occupancy in 2007-2010. In 2011, the CMBS loan was modified and had its maturity date extended to 2016. The modified loan remained current with a lockbox in place. However, occupancy continued to decline -- to 75% in 2012 from 85% when the loan was originally closed. In 2014, Sears announced it was closing its store at the mall in 2015, but the loan still remained current. However, the loan could not be paid off at maturity in 2016. Wells Fargo, the trustee for the CMBS loan pool, then executed on the foreclosure.

Many commented on social media that they could have put together a couple of beer buddies to rustle up a few more hundred dollars to be the proud owners of the mall. Others suggested that some sort of illegal manipulation took place. What really happened is that the most recent appraisal on the property, completed a few weeks ago, suggested the mall was worth $11 million. Wells put in a base bid of $100, and if any other bidders had shown interest, Wells would have bid up to $11 million to secure the property. The property is not worth $100. Wells will now sell the property at its real value in the $11-million area, which is not great compared with original $143 million, but not $100.

1.9.17: Hotels Send Mixed Signals for 2017

According to Daniel H. Lesser, LWHA,

“To the surprise of many, the U.S. lodging industry closed out 2016 with operating metrics still at record setting levels; however, its growth trajectory was notably lower when compared with years past. In general, occupancy levels have peaked and any short-term RevPAR growth will be driven by increases to ADR. New supply of hotel rooms will continue to occur primarily in the Upper Midscale and Upscale chain scales. Of the nation’s top 25 markets, New York, Seattle, and Denver are experiencing double-digit increases of new rooms under construction, while eight other markets are currently slated for increases of 5%-8% of existing room supply.”

“Given current U.S. economic expectations, many, particularly non-U.S. investors, believe the coming year will be a terrific time to deploy capital into transient lodging real estate assets that mark rents (average room rates) to market more often than buildings encumbered with long-term credit worthy tenancies. During the late 1970s and early 1980s when the United States was experiencing double-digit annual inflation growth, hotel assets were much better positioned to adjust rents compared with a 100% occupied office building with 10- to 20-year tenancies of government agencies. Clearly, hotel operating expenses will rise during any inflationary environment; however, continuous re-pricing of room nights should allow for revenues to, at a minimum, keep pace and in many situations exceed such increases. Negative pressures on the lodging sector include a strong U.S. dollar, which makes it expensive for people to visit America.

“Furthermore even with a late-year rally, availability of CMBS hotel financing was well off the pace of 2015. The good news is that alternative sources of debt financing have been available from banks, life companies, and private debt funds. At this juncture many lodging markets across the country have reached peak occupancy levels during 2015 and 2016, and they should now be poised for operators to aggressively increase average daily rates.”

1.6.17: U.S. CMBS Originations for 2016 Total $76 Billion

For the first time since the financial crisis of 2008-2009, CMBS conduit issuance declined for the year. CMBS volume totaled $76 billion in 2016, down a whopping 25% from 2015’s $101 billion. Atypically, no single capital market disruption was a precursor to a decline. In 1999, volume declined when a hedge fund -- Long Term Capital Management -- failed and Russia defaulted on its debt. In 2002, volume declined after the events of 9/11. And, of course, the CMBS market completely seized up in 2008-2009 during the financial crisis. But since the restart of the CMBS market in 2010 (sometimes referred to CMBS 2.0), the market hummed along nicely until 2016.

So what happened? Well, a number of incremental events took a toll on the CMBS market in 2016. Problems started in the first quarter when the heavy volume of CMBS issuance overwhelmed demand that had weakened over concerns about heavily indebted oil patch companies and other concerns in the high-yield debt markets. Spreads on new issue CMBS widened quickly and dramatically in January and February as dealers struggled to sell all the CMBS bonds and profits were wiped out. Borrowers that had not yet closed in that period had their loans re-priced. CMBS conduit lenders pulled back from originating new CMBS conduit loans until the market for CMBS securities improved. Finally, spreads for AAA-rated CMBS peaked at 173 basis points (bp) over swaps on March 3 and began to rally.

CMBS volume improved over the summer, but CMBS loan originators began to focus on risk-retention rules that would become effective on December 24. Risk-retention requires CMBS lenders or issuers to “keep skin in the game” by retaining 5% of their offerings -- typically for the life of a deal. Lenders were unsure how to best structure for risk-retention, which impacted the originations for smaller lenders that might not be able to comply.

Finally, interest rates rose on CMBS conduit loans post-election when the 10-year Treasury and Swap rates rose roughly 60 bp, and many borrowers went to the sidelines.

Summary of CMBS Issuance, 2009-2016

Full Year

U.S. Issuance
($ billions)

2009
$2.74
2010
$11.60
2011
$32.70
2012
$48.40
2013
$86.10
2014
$94.10
2015
$101.00
2016
$76.00

Source: Commercial Mortgage Alert

1.2.17: … While Predictions for 2017 Are Flat at $75 Billion

For 2017, CMBS professionals are projecting CMBS originations of $75 billion. Last year, the group’s average prediction of $110 billion proved to be too optimistic. The pros feel more uncertain about 2017 forecasts compared with other years. The culprit is risk-retention. CMBS issuers have successfully tested various deal structures that comply with the new risk-retention rules, but no particular structure stands out as best. The inability for the CMBS market to discover the best structure is causing some anxiety, particularly for smaller CMBS originators as certain structures might not work for them. As a result, they are originating loans at a slower pace until the best structure is proven.

In addition, should interest rates continue to increase or even remain at current levels, borrowers may be less inclined to purchase income-producing real estate using CMBS financing or refinance existing debt. This would put a damper on origination volume as well.

On the flip side, well over $150 billion of CMBS loans are slated to mature in 2017, representing the final wave of CMBS loan maturities from 2007 when $228 billion of CMBS loans were originated. It is expected that a significant amount of these loans will find their way back into CMBS, but so far the conversion rate of maturing CMBS loans into new CMBS loans has been disappointing. CMBS originators are finding that a good portion of the loans are sub-performing, requiring bridge financing in lieu of CMBS debt, and many low-leverage Class A property loans are going to insurance companies. Nevertheless, there will still be a large balance of loans in which a refinance back into CMBS will provide the best execution, particularly “B” quality assets that require non-recourse or cash-out.

12.28.16: Luxury Apartment Demand Set to Fall in 2017

Landlords of upscale properties across the United States are bracing for rough conditions in 2017 that will likely force them to slash rents and offer deep concessions as a glut of supply brings a seven-year luxury-apartment boom to an end.

The Wall Street Journal reports that the turnaround follows a more-than-26% jump in U.S. apartment rents since early 2010, far outstripping inflation and income growth. But in 2016, rents rose a modest 3.8%, a significant drop from the recent high of 5.6% year-to-year growth in the third quarter of 2015, according to a report released today by MPF Research, a division of RealPage Inc., which tracks the U.S. apartment market.

“This will be a very challenged leasing environment almost everywhere,” MPF Vice President Jay Parsons said.

The slowdown is being driven by a flood of new apartments, not by a pullback in demand, according to Parsons. After the housing bust, demand for urban properties jumped as young, high-earning professionals eschewed homeownership and flocked to big cities. Developers responded by focusing most of their efforts on high-end properties.

Now, though, the number of upscale apartments coming onto the market appears to be outpacing the number of renters able to move into them: More than 50,000 new units were rented by tenants in the fourth quarter in the United States, six times the number in the year-earlier period. But that demand was overwhelmed by the 88,000 new units that were completed in the quarter, the most since the mid-1980s, according to MPF.

12.23.16: Market Pros Expect CMBS Prices to Tighten

CMBS professionals are expecting the rule of supply and demand to positively impact CMBS bond prices in the first quarter of 2017. We previously reported that most CMBS issuers cleared out their inventory in anticipation of risk-retention rules effective December 24 (see our 12.7.16 article). This will leave dealers with little inventory of new CMBS loans that can be pooled into CMBS securities going into 2017. In addition, interest rates on CMBS conduit loans have increased roughly 50 basis points (bp) since the U.S. presidential election, dampening borrower enthusiasm to proceed with new CMBS loans right now.

Investors in CMBS securities -- mainly banks, insurance companies and pension funds -- typically get new CMBS investment allocations at the beginning of each new year. So these investors will be flush with fresh cash to invest in CMBS. With limited new issue CMBS supply, it is likely that there will not be enough CMBS securities to go around. As a result, when new CMBS deals are announced, orders for the CMBS bonds will exceed the amount of bonds available; deals will be “oversubscribed,” in bond parlance. When deals are oversubscribed, issuers typically tighten the spread and allocate the securities on a pro-rata basis. So if a buyer places an order for $2 million of AAA-rated CMBS and the class is 2x oversubscribed, the buyer will be allocated $1 million at the tighter spread with an option to drop out altogether if the new spread is unacceptable.

If subsequent CMBS deals continue to be oversubscribed, which is a strong possibility for the first few months of 2017, issuers will continue to tighten spreads until supply and demand come in balance. If the scenario of strong demand and limited supply does play out to tighten loan spreads, it will be a welcome relief to CMBS borrowers. “I think the lack of supply will result in CMBS spreads declining roughly 25 basis points across the board,” indicated one CMBS pro “resulting in a similar decline of 25 basis points in CMBS borrower rates by February.”

12.20.16: Structuring for Rollover Risk in CMBS Lending

One of the primary causes of CMBS conduit loan defaults for commercial properties is the loss of income when a tenant occupying a large portion of the property vacates or defaults on its lease payments. Typically, when a large tenant stops paying rent, the income from the property is no longer sufficient to cover the mortgage payment, and subsequently, the borrower defaults on the loan for not being able to make the loan payment.

As a result, CMBS conduit loan lenders love what is known as “tenant diverse” commercial properties. These properties have 10 or more tenants with no tenant occupying more than 10% of the total space at the property. In addition, staggered lease expirations over a number of years are highly desired. Why is this? When properties have a lot of tenants with varying lease expirations, the property can lose one or two tenants and still have enough cash flow to pay the mortgage because the lost income is not that great. But what if the property has only 4-5 tenants and the leases’ expirations are not far apart? Can these properties qualify for a CMBS conduit loan?

The short answer is yes. CMBS lenders have developed a loan provision to protect against a large tenant leaving/defaulting. The provision is known as the “Major Tenant” provision and it works like this:

All excess cash flow after the payment of debt service and all applicable reserves will be held by Lender as additional collateral for the loan if any tenant occupying more than 20% of the Property ceases to conduct its normal business operations, defaults under its lease, becomes insolvent, files for bankruptcy, and/or [6-24] months prior to lease expiration for any tenants occupying more than 20% of the Property.

So the idea is to sweep all property cash flow after debt service into a reserve to be available to pay debt service and tenant improvements/leasing commissions until a replacement tenant is found or the tenant renews its lease.

12.15.16: HHGregg Next in Long List of Struggling Retailers

In August, Indianapolis-based electronics and appliance retailer HHGregg announced that six stores in the Midwest, five stores in Wisconsin and one store in Illinois would close. Previously, the stores had been occupied by defunct retailers Circuit City and Linens & Things. Based on the chain’s declining financial picture, more closings from the 220-store chain may come.

The store closures are likely related to poor overall financial results for the chain. HHGregg’s revenues have declined over the past few years: The company reported net losses for 2015 and 2016 and barely broke even in 2014. The pace of declining financial performance is increasing, with sales for the second quarter of 2016 down 6.6% from the prior year and annual net sales for the same period declining 8%. The chain faces increasing competition from stronger chains, including Best Buy and Amazon.

Interestingly, there is significant HHGregg exposure to CMBS loans. HHGregg is a tenant in 43 properties that are secured by CMBS conduit loans. If more HHGregg stores close, some of these CMBS loan could be at risk for default as HHGregg comprises more than 20% of the leasable space in roughly one-third of these properties. Should HHGregg close or vacate any of these stores, it is possible that the income from the remaining tenants would be insufficient to pay the CMBS mortgage, triggering a cash flow sweep (see our 12.20.16 article) or worse, a loan default.

12.9.16: CMBS Prices Hold Steady Amid Heavy Bond Issuance …

CMBS issuers are finding stable CMBS pricing despite heavy issuance as dealers rush to clear inventory ahead of risk-retention rules that become effective December 24. Six CMBS deals were in the market in the first week of December, a few of which have already priced in a range consistent with prices seen in the latter part of November. This is great news for the CMBS market as in prior periods of heavy issuance, most recently fall 2015, spreads on CMBS widened as dealers could not find enough buyers without providing higher yields. In January 2016 we wrote:

CMBS spreads continue to drift wider in 2016, following a pattern of wider spreads that began in the summer of 2015. Three CMBS deals in the market have released pricing guidance in the range of 155-158 basis points (bp) over swaps for the benchmark AAA-rated senior CMBS class. That level is up from the 136-140 bp range from three CMBS deals that priced in December 2015. Equivalent CMBS spreads for the AAA-rated senior class were 100-110 bp last summer.

This go-round is different. Of the total $4.8 billion in the six deals, three deals priced the super-senior AAA-rated CMBS in a range of 110-114 bp over swaps, consistent with the 100-120 bp pricing for comparable CMBS in November. Dealers for the remaining three deals provided pricing guidance of 112-118 bp and have reported good demand for most of the bond classes. The subordinate BBB-rated CMBS also priced range-bound and those being currently marketed are expected to price with the range of 565-590 bp.

These six issues may wrap up the year for CMBS, setting the stage for what could potentially be a slow start for 2017.

12.7.16: … But a Busy CMBS Market Now Leaves a Hole for First-Quarter 2017

CMBS issuance for the beginning of 2017 looks very weak because CMBS issuers are clearing out loan inventory this month in anticipation of risk-retention rules effective December 24. According to a review by Commercial Mortgage Alert (CMA), only seven transactions totaling $6.4 billion are in the pipeline for January and February. The $3.2-billion monthly average would be well below the 2016 level of $6.3 billion and 2015’s $8.4 billion.

The slowdown has been widely blamed on the unknown consequences of the risk-retention rules set to become effective on December 24. Rather than wait and see, most CMBS players elected to move out their inventory under the old rules. With CMBS pricing stable and loans on the books priced at relatively healthy profit levels, it was not a difficult decision to simply move the deals out now.

To be fair, a number of larger CMBS players have already rolled out risk-retention compliant deals with success, so the uncertainty surrounding the rules is less. However, it is still unclear which method of compliance -- the “horizontal,” “vertical,” or combination of horizontal and vertical approaches -- will become market standard. Without knowing, most CMBS originators are not aggressively pursuing new loans until the market standard for risk retention is determined, which will result in a slow start in 2017 for CMBS loans.

12.3.16: SBA Improves Cash-Out 504 Refinance Program

In December 2015, Congress approved a change to the SBA 504 program to allow refinanced properties to be eligible for the program. Prior to the change, the program was available for purchase transactions only. The summary of the rules at time of approval in December were as follows:

In November, improvements were made to the refinance program to increase the loan-to-value limitation for certain “cash-out” eligible expenses from 75% to 85%. In addition, minor changes in ownership over the prior two years are now allowed.

“The SBA 504 program crosses over two asset classes that we currently finance in CMBS, namely hospitality and self-storage,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “Historically we have been very active in hospitality refinances, completing over 400 hotel loans in CMBS and 504, and we are actively increasing our self-storage activity. The bulk of our transactions is cash-out refinancings. With a push-back of the amount of cash out allowed in CMBS by investors, we will be presenting the 504 program to our clients as an alternative when they qualify to get the best cash-out deal available for our hospitality and self-storage clients.”

11.26.16: Borrowers Adjusting to Higher Rates Post-Election

10-year Treasury and Swap rates have moved up significantly since U.S. presidential election results on November 8. The following chart shows the move in the Treasury since the election.

November 2016

Yield (%)

23
2.37
22
2.32
21
2.33
18
2.34
17
2.29
16
2.22
15
2.23
14
2.23
11
2.15
10
2.15
9
2.07
8
1.88

The 10-year Swap rate has moved in tandem with the 10-year Treasury Rate, to 2.20% from 1.70% during the same period.

The 50 basis point rise in the Treasury/Swap indexes has directly impacted interest rates to borrowers on CMBS conduit loans and other income producing loan products as these indexes are used to set the interest rates on CMBS conduit loans (Interest Rate = Swap + Loan Spread). The rise in rates has caused some borrowers to wait and see if the rise is overdone and whether Treasury/Swap indexes can reverse course. Typically markets overreact to events and eventually settle back down, but many market pros believe that sub-2% Treasury/Swap indexes may be a thing of the past.

However, loan spreads are expected to decrease as the higher Treasury/Swap indexes will likely slow CMBS originations in 2017 (see our 11.23.16 article below), reducing the supply of CMBS to investors. The expected decline in loan spreads will partially offset the rise in the Treasury/Swap indexes, but not completely.

“Whereas we had CMBS conduit loan rates in the 4.25%-4.75% rate here in the fall of 2016, it appears rates could drift over 5.0% in the beginning of 2017,” commented Michael D. Sneden, Executive Vice President at ValueXpress.

11.23.16: KBRA Releases 2017 CMBS Outlook

After six consecutive years of issuance growth, the CMBS market expansion came to an abrupt halt in 2016, according to Kroll Bond Rating Agency (KBRA). Private label CMBS is expected to end 2016 within a range of about $65-$70 billion, approximately 30% lower than 2015’s $95.8 billion. Despite what could be a slow start to the year, we believe that new CMBS private label issuance in 2017 could end the year within a range of $55-$65 billion, slightly below 2016 levels.

As KBRA reflects on 2017, the firm is cautious but constructive on CMBS issuance, property fundamentals and collateral performance. Employment growth continues, property fundamentals are positive across sectors, and interest rates remain at low levels. Although these underlying commercial real estate attributes are favorable, however, crosscurrents have been forming: Nonfarm monthly payroll additions weakened year-to-date through October compared with the monthly job increases in 2015; construction levels are still low, but the margin between completions and absorption is narrowing; property rent and price growth have slowed, and downward price adjustments may not be too far away; interest rates are trending higher, and with the additional costs associated with risk retention, total commercial real estate borrowing costs are expected to be higher in 2017.

Slowing rents and price growth will likely limit the number of defeasances and loan prepayments in 2017, leading to fewer upgrades. Excess supply in certain sectors and markets could generate more property- and market-specific downgrades, which are expected to be contained within the subordinate classes. Overall, as in 2016, ratings stability should continue in 2017, but the ratings upgrade to downgrade ratio will likely narrow.

11.16.16: MBA CREF Conference Returns to San Diego in February 2017

The Mortgage Bankers Association's Commercial Real Estate Finance/Multifamily Housing Convention & Expo returns to San Diego, California on February 19-22, 2017. This must-attend industry event draws more than 3,000 commercial and multifamily real estate finance professionals to San Diego for four days of networking, relationship building and deal making.

The conference will open with the Economic Outlook and Commercial Real Estate Market Forecast from Jamie Woodwell, Vice President, CRE Research, Mortgage Bankers Association and Michael Fratantoni, Chief Economist and Senior Vice President, Research & Industry Technology, Mortgage Bankers Association on Sunday, February 19. Panel Sessions on Construction Lending, High Yield Debt, CMBS Markets and Bank Lending will be featured on Monday, February 20.

The keynote speaker will be Mohamed A. El-Erian, Chief Economic Advisor, Allianz. Mohamed El-Erian will discuss our current economic path, underpinned by central bank policy experimentation, including the impact on the commercial real estate sector both domestically and globally. He points to signposts around us – rising inequality, sluggish growth, political tensions – and their correlation to volatile financial markets. He dissects continued pressures that warrant radically different monetary policy. And then, he offers his vision for a renewed global economy, prosperity and financial stability.

The ValueXpress team will be represented at the event. Look for information in upcoming newsletters and plan to set up a meeting with your ValueXpress representative.

11.11.16: Recent CMBS Deals Show Signs of Price Tiering

Last week, the Wells, Morgan Stanley and Bank of America team did it again. The group issued its second CMBS offering that followed the compliant risk-retention structure at spreads that blew away the market. The AAA-rated investment grade portion of the deal attracted particularly strong demand once again and priced at 107 basis points (bp) over swaps. That price beat prevailing levels for the “plain vanilla” AAA-rated investment grade bonds from a deal that priced at the same time, at 120 bp over swaps.

As we mentioned in August, Wells Fargo, Morgan Stanley and Bank of America designed a CMBS offering to comply with risk-retention rules. The deal was a big hit with bond buyers as the banks filled the deal with high-quality properties. The AAA-rated investment grade portion of the deal was heavily oversubscribed and priced at 94 bp over swaps. That price handily beat prevailing levels for plain vanilla AAA-rated investment grade bonds from deals that priced at the same time, at roughly 108 bp over swaps. Subordinate CMBS bonds from the Wells deal also priced much tighter than the plain vanilla CMBS offerings.

The two deals priced 14 bp and 13 bp, respectively, better than the market. The better execution translates into at least one point of additional profit, or alternatively, the group could offer lower loan spreads to borrowers of 15 bp or more to increase volume while maintaining the same profit level as the competition.

If the trio continues to issue CMBS on high quality properties compliant with risk retention, the superior pricing could provide a competitive advantage. The issuers would be able to offer lower interest rates than plain vanilla issuers and borrowers would seek the trio to get the best rates, potentially significantly boosting their loan volume.

11.8.16: Yeager Properties Opens Next Generation Office Suite Project

Yeager Properties had its grand opening of the next generation of its office suites concept building on October 20. The property, Yeager Office Suites of Plano, is located at 8105 Rasor Boulevard, Plano, Texas. ValueXpress arranged the financing for the existing Yeager office suite portfolio and expects to arrange the permanent financing through the same CMBS lender in spring 2017 for this newly completed project, which was 40% preleased at opening.

Yeager Office Suites of Plano

The latest generation of the Yeager Office Suites concept expands on the core elements of the Yeager philosophy -- to bring individuals and small businesses together in a creative environment. The common areas of each Yeager property are uniquely designed with fun, cheerful and calming interior elements that are unlike any existing office environment and the whole is dramatically different than the typical sterile corporate office building

Y-Member Space – Yeager Suites of Plano

The latest generation expands on the Y-member concept. Y-members are individuals and small corporations that gain access to a shared workspace, high speed internet with printing/copying capabilities, conference room and kitchen access on an as-needed basis for a very low monthly membership fee (currently $200/month). “A great example of this concept in practice is a residential real estate broker that rents two office suites, but also has two Y-memberships for agents that come and go, saving the broker $1,000/month in suite fees,” explained Scott Yeager, the owner of Yeager Properties.

Outdoor Common Space – Yeager Suites of Plano

Furthermore, the next generation of Yeager Office Suites incorporates more common area and in particular, outdoor common space. The outdoor common space is being coupled with restaurant/food service tenants to provide onsite food amenities for tenants as well as an opportunity to use the common areas for functions.

11.2.16: Brookfield and Macy’s Form Partnership to Extract Real Estate Value

Macy’s and Brookfield Asset Management have formed a strategic alliance to extract value in Macy’s real estate assets. Under the alliance, Brookfield will have an exclusive right for up to 24 months to create a “pre-development plan” for each of approximately 50 Macy’s real estate assets, with an option for Macy’s to continue to identify and add assets into the alliance. These assets primarily include owned and ground-leased stores and associated land, most of which are located in malls not owned by major mall owners. The breadth of opportunity within the portfolio ranges from the additional development on a portion of an asset (such as a Macy’s-controlled land parcel adjacent to a store) to the complete redevelopment of an existing store.

We are pleased to partner with Macy’s on this important initiative,” said Brian Kingston, CEO of Brookfield Property Group. “The Macy’s portfolio includes some of the highest quality real estate in the United States, and we look forward to working closely with them to unlock value for their shareholders and enhance the shopping experience for their customers.”

The Brookfield alliance is part of Macy’s previously-announced strategy to generate value from its real estate portfolio consistent with the company’s commitment to stores as a critical element of its long-term omnichannel strategy and its balance sheet objectives. The company is also exploring options for its flagship stores and closing approximately 100 full-line Macy’s stores due to underperformance or because the value of the real estate exceeds the value to Macy’s as a retail store location.

The Brookfield deal is not the only one Macy’s is pursuing. Macy’s is working on generating cash by selling five of its retail assets through its partnership with General Growth Properties.

10.28.16: Make Sure Your CMBS Term Sheet Is “Credit Approved” Before Signing

The credit box for CMBS conduit loans has gradually tightened during 2016, resulting in complaints from borrowers of last-minute reductions in loan proceeds before closing, mainly on cash-out refinances. Loan adjustments can often be traced to insufficient due diligence completed by the CMBS conduit lender at the beginning of the transaction, when the Term Sheet is executed. CMBS conduit loan brokers and borrowers help create a potential situation whereby loan proceeds are cut by demanding that Term Sheets be issued without providing sufficient due diligence information to the lender to allow an accurate assessment of the expected loan proceeds. As a result, lenders are issuing Term Sheets that may suggest unrealistic loan proceeds, creating a competitive disadvantage for lenders that are “honest” in projecting accurate loan proceeds or request additional information to make an accurate assessment of the expected loan amount.

A key determinant of whether the loan amount stated in a borrower’s CMBS conduit loan Term Sheet is accurate depends on whether the Term Sheet is “credit approved.” Best practices suggests that a Term Sheet should only be issued by the lender after the chief credit officer reviews the following and approves the deal:

    1. The CMBS conduit loan broker gathered all the diligence required for the loan to be fully cash flow underwritten for the past three to five years;
    2. market due diligence was completed;
    3. the appraisal review was completed with estimated value; and
    4. sponsor diligence was completed to affirm no sponsor credit issues.

“Borrowers and their loan brokers should recognize that this process is for their benefit. Yet they often resist completing the work,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “We will not allow a Term Sheet to be issued that is not fully credit approved as it is very important to our reputation that we deliver the loan proceeds in our Term Sheets. With the CMBS credit box getting tighter, it’s even more imperative that borrowers follow the rules and allow complete due diligence prior to executing a CMBS conduit loan Term Sheet to avoid a nasty surprise at closing.”

10.24.16: Simon and GGP Rescue Aeropostale; Is This the Future of Retailing?

A consortium led by developers Simon Property Group (SPG) and General Growth Properties (GGP) won an auction for the assets of Aeropostale in September. The group plans to keep open 299 of the bankrupt retailer’s stores. Aeropostale was facing liquidation if the SPG/GGP team did not step in with a winning bid. Liquidation would have created vacant stores in hundreds of shopping malls, many of them owned by SPG and GGP.

“Why would developers want to get involved in something like this? They’ve never done it before,” says Howard Davidowitz, chairman of Davidowitz & Associates, Inc., a national retail consulting and investment banking firm. “This is not their business, but they see the world crumbling around them.”

In fact, this is the first time in modern retailing that a property owner made such a dramatic move to save a retailer, and it is indicative of the pressure retail property owners face in maintaining high occupancy at their properties. The deal raises questions about whether retail property owners and mall landlords, in particular, will play a greater role in helping tenants survive in a highly competitive retail environment. Retail property owners may be forced to participate in additional rescues as they depend on specialty retailers like Aeropostale to fill their mall spaces and pay the handsome associated rents.

The SGP/GGP strategy “is about protecting their mall space and preventing vacancies and losses,” says Melina Cordero, head of retail research for CBRE. “When a retailer files for bankruptcy, the resolution process is often long and landlords don’t often have a say in what happens to a space.”

10.19.16: Best Western Announces New Brand – SureStay Hotel Group

Best Western has announced the formation of SureStay Hotel Group, a new economy and lower mid-level brand rolled out at the Lodging Conference held at the end of September at the Arizona Biltmore Resort and Spa. The brand is designed to complement the Best Western flagship brands – Best Western, Best Western Plus and Best Western Premier.

Best Western realized that as it was improving the flagship brands by requiring franchisees to make significant capital investment to upgrade guest experiences at its hotels to remain competitive, it was losing properties that did not have the capital to invest to other economy brands. Often, these properties fit well into a variety of budget brands such as EconoLodge, Travelodge, Super 8 and Americas Best Value Inn. Best Western wanted to capture those hotels and the associated franchise fees, hence the creation of SureStay Hotel Group to accomplish that goal.

Now franchisees that cannot upgrade to the flagship brand standards have an option to convert to the new brand, often with minimal conversion costs. Owners “stay within the Best Western family and keep the support provided by the world’s largest hotel chain,” said David Kong, president and CEO of Best Western Hotel and Resorts.

For the hotelier, the advantages of making a conversion to the SureStay brand are significant. SureStay offers an owner who does not believe the market can justify the costs to maintain the Best Western brand the opportunity to downscale to another price point. It is the first time Best Western has offered a migration route for members to an economy product. In addition, SureStay owners will follow a traditional franchise model with a 15-year franchise agreement and competitive franchise fees.

10.14.16: NACLB Convention an Enormous Success for ValueXpress; Attendance More Than Doubles

ValueXpress experienced overwhelming mortgage broker traffic at networking events and at its booth during the 2nd Annual National Alliance of Commercial Loan Brokers (NACLB) Conference & Expo that was recently held at the Red Rock Casino in Las Vegas. ValueXpress participated as a Platinum Sponsor of the event again this year. At the October 4-6 conference, ValueXpress exhibited during the trade show and participated on many commercial loan panels designed to provide mortgage brokers with information on CMBS conduit loans.

Jim Brett, head of underwriting, Mike Sneden, EVP, and Dennis Suh, VP, at the ValueXpress Booth at the NACLB Convention 2016.

According to Kris Roglieri, co-founder of NACLB, “I am excited to announce that our exhibitor and broker attendance has doubled since our first conference, which exemplifies that this event is a much-needed conference and association for the commercial loan broker industry.”

At the closing luncheon, Kris announced that NACLB is taking next steps to formalize into a membership organization. A Board of Directors consisting of individuals from both the loan brokerage and lending industries was announced. The Board’s first order of business will be to create a “Code of Ethics” of best practices for brokers to follow in order to maintain membership in NACLB.

Michael D. Sneden, Executive Vice President at ValueXpress, participated in the opening general session on the State of Lending Today (see our 10.5.16 News Article below) and two breakout sessions on commercial real estate lending at which panelists presented their unique loan products to attendees. Mike moderated the panels as well as discussed the CMBS conduit loan product with participants.

“While Mike was speaking, Jim Brett and I spoke with hundreds of mortgage brokers who stopped by our booth,” commented Dennis Suh, Vice President of ValueXpress. “Brokers were excited to learn about the unrestricted cash-out and non-recourse benefits of CMBS conduit loans.”

10.6.16: ValueXpress Honored with “2016 Broker Program of the Year” Award at NACLB Convention & Expo

ValueXpress was presented the “2016 Broker Program of the Year” award for CMBS conduit loans at the 2nd Annual National Alliance of Commercial Loan Brokers (NACLB) Conference & Expo. The award recognizes the firm that provides a high level of broker service in origination, processing and closing their loan product.

The award was presented by Kris Roglieri, co-founder of NACLB. He noted, “CMBS conduit loans are very complicated to originate, underwrite and close. We are pleased to give this award to ValueXpress for its efforts to simplify CMBS conduit loans for the benefit of NACLB brokers and their clients. We have received many comments from NACLB brokers that ValueXpress is responsive and knowledgeable, which has resulted in favorable feedback from NACLB borrowers. We want to recognize ValueXpress for this achievement.”

“We are honored to receive this award,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “It is the firm’s mission to bring 25 years of CMBS conduit lending knowledge to NACLB brokers and their clients. Indeed, CMBS conduit loans are complicated, so we have hired individuals who are experts in each part of the CMBS loan process, many with investment banking experience and relationships in CMBS conduit lending.”

10.5.16: Michael D. Sneden Reports on CMBS Market During Opening General Session at NACLB Convention & Expo

Bob Coleman, Editor of the Coleman Report, recorded the comments of Michael D. Sneden from the 2nd Annual National Alliance of Commercial Loan Brokers (NACLB) Conference & Expo opening general session on the State of Lending as it relates to CMBS conduit loans. Coleman said, “Today (October 5) Michael Sneden of ValueXpress presents an outstanding overview of the commercial mortgage-backed securities market. Savvy lenders should read up on this market to understand the scope of the market, and importantly, how secondary market investors impact interest rates to borrowers.”

Coleman reports “Mike predicts interest rates will remain in the 4.5%-5.0% range with volume of $75 billion in CMBS conduit loans in 2017.”


Mike’s comments include a history of CMBS conduit loan volume since the market restarted in 2010 and a briefing on the market turbulence experienced in spring 2016. Mike follows by noting that the turbulence in the spring resulted in depressed CBMS conduit loan origination in summer 2016. Since originations were reduced, a shortage of new CMBS issuance created a lack of new CMBS securities for investors. This led to a resumption of new originations currently and a projection that interest rates will remain in the 4.5%-5.0% range with volume of $75 billion in CMBS conduit loans in 2017.

9.30.16: Dennis Suh: Report from the SSA Trade Show

Dennis Suh, Vice President of Originations at ValueXpress, recently represented ValueXpress at the Self-Storage Association’s (SSA) 2016 Fall Conference & Trade Show in Las Vegas, Nevada. “The SSA trade show was a huge success, with over 2,000 self-storage professionals in attendance,” commented Suh. Attendees included owners, operators, vendors and a host of related commercial real estate professionals.

The self-storage industry is growing rapidly as demand for self-storage facilities is exceeding supply, evidenced by increasing occupancies. In 2011, the nationwide occupancy rate for self-storage facilities was roughly 82%, while at this point in 2016, the occupancy rate exceeds 90%.

“Americans tend to accumulate “a lot of stuff,’ and they need somewhere to put it,” noted Suh. “Rents at self-storage facilities are cheap, and with the rapid industry growth, a facility is likely to be conveniently located nearby.”

Self-storage is a hot product right now, even attracting significant capital from Real Estate Investment Trusts (REITs). REIT Sovern Self-Storage announced its $1.3-billion acquisition of LifeStorage early this year, and Toronto-based Brookfield Asset Management announced in January that it was acquiring an $830-million stake in Orlando-based Simply Self Storage.

“While it’s great that the big boys are investing in self-storage, my goal is to assist the middle-market, local owners grow their self-storage portfolios utilizing the CMBS conduit loan market,” explained Suh. “My meetings with these owners focused on a growth plan utilizing unrestricted cash-out loan proceeds from a CMBS conduit loan as equity for a construction loan to build a new self-storage facility or a down-payment to buy an additional facility. Furthermore, I have access to construction funds to provide a complete solution for the development of new self-storage facilities,” said Suh. For additional information, contact Dennis via email at dsuh@valuexpress.com or call him at 212-883-6487.

9.26.16: ValueXpress to Be a Sponsor of the 11th Annual Vishal Bhagat Memorial Golf Tournament

ValueXpress has committed to be a sponsor of the 11th annual Vishal Bhagat Memorial Golf Tournament, which will take place at the NorthShore Country Club in Portland (Corpus Christi), Texas on Friday, November 4, 2016 and Saturday, November 5, 2016. The event is the primary fundraiser for the Vishal Raju Bhagat Foundation, which has raised over $1.4 million for the primary purpose of juvenile diabetes research. The foundation was founded in memory of Vishal Bhagat, who died tragically in a 2006 drowning accident in Corpus Christi. Vishal’s family and friends honor his memory by continuing his noble war against diabetes.

Funds raised from the event have provided grants to leading juvenile diabetes organizations such as the Juvenile Diabetes Research Foundation, March of Dimes, American Diabetes Foundation, the Miracle Foundation, Driscoll Children’s Hospital and numerous local organizations. To participate in the event or make a donation, please contact Mahavir Bhakta at 361-779-6666.

The schedule of events includes a 4-man Scramble on Friday with awards, cocktails and dinner. Saturday will feature a best-ball golf tournament with a Gala dinner, including awards and cocktails. Prizes will be awarded for Hole in One on all par 3s, Closest to Pin and Long Drive.

Long considered the jewel of the Gulf Coast, North Shore is known for its famous stretch of holes on the back nine (13-16) set against the backdrop of the bay. Built in 1985 by Bruce Devlin and Robert von Hagge, this private course is not particularly long and there are not many trees, but winds often blow 20-40 miles/hour on good days, and the course is filled with bunkers, water hazards, and side-hill lies to challenge golfers.

9.18.16: CMBS Market Prepares for Costs Related to Risk Retention

Borrowers should expect a modest increase in loan spreads beginning in late October as the market prepares for the economic impact of risk retention rules that take effect December 24. Initially CMBS lenders projected the increase on loan spreads would be as much as 50 basis points (bp), but now market professionals believe the impact might be as little as 15 bp.

The challenge for CMBS conduit lenders is when to begin adjusting spreads. Since it takes roughly 45 days to close a CMBS conduit loan and then 15-30 days to securitize, that would suggest October 15 as a cut-off date for old pricing. But the exact timing is creating a conundrum for CMBS lenders. Some lenders are telling borrowers that spreads will rise in late October, while others are citing early November. Lenders do not want to increase spreads too soon and risk angering customers or driving away business. But they also do not want to wind up with mispriced loans in January.

Despite this short-term predicament, the good news is that the effect on borrowing rates from risk retention appears to be less than anticipated. Part of the reasoning is lenders began working early to find efficient structure to mitigate negative economic effects. For example, Wells Fargo, Bank of America and Morgan Stanley have already issued risk-retention compliant CMBS that achieved the tightest spreads since the summer of 2015. For details, see our 8.5.16 and 7.8.16 news articles.

 

9.16.16: ValueXpress Arranges Groundbreaking CMBS Conduit Loan for Office Suite Portfolio

ValueXpress has arranged a $28-million CMBS conduit loan secured by a portfolio of eight office buildings that are specifically designed and leased as office suites. The transaction is by far the largest office suite transaction completed since the restart of the CMBS conduit loan market in 2010. The properties are located in Indianapolis, Indiana, and the Dallas, Texas, suburb of Frisco. The properties were 100% occupied at closing and are owned by the Yeager Company.

The transaction was unique in that the buildings were designed specifically to be leased as small office suites. The average size of each office suite is 180 square feet (sf; 12 feet x 15 feet). All the buildings combined contain more than 700 tenants. These tenants share common amenities, including conference rooms, break rooms, office equipment, high-speed internet service and reception.

The transaction was challenging in that the lease term for tenants is month-to-month. The rating agencies had great concern regarding the stability (or instability) that month-to-month tenancy can have on the property revenue. The initial treatment by the rating agencies for rating purposes was similar to hospitality. This treatment is harsh (lease term = one night), so the rating agencies visited the sponsor to learn about the office suite concept. As a result, they viewed it more like self-storage, which has month-to-month leases and better rating treatment.

Additionally, the rents in office suite buildings appear high when viewed on a per-square-foot basis. The annual rent across the portfolio is $37.25 per sf, much higher than the typical $20-$25 per sf for traditional office space. But when looked at from a monthly rent/unit approach like apartments, the average rent/unit is a very reasonable $625 per month. We were able to secure rental comparisons from other office suite buildings for appraisal purposes and did not have to mark down rents for valuation purposes.

9.13.16: More Takeaways from the Yeager Office Suite Transaction

One of the most fascinating takeaways from the Yeager Office Suite transaction is the extraordinary demand for office suite space. It was not uncommon for new buildings in the portfolio to absorb to 100% occupancy within 90 days. Knowing that traditional suburban office buildings are struggling in many cases, all the participants in the transaction were eager to learn why the office suite concept was in such high demand.

We discovered the following:

Demographics, lifestyle and business efficiencies are driving an evolution in office market demand throughout the United States. Traditional large block space office leases are declining in many markets, particularly in suburban markets. Highly competitive business environments for companies in an economy that is not growing are forcing expense reductions in order to grow profits and occupancy costs are on the hit list.

The evolution has generally moved from a time when everyone had a nice big personal office within a large block lease that consumed all or part of a suburban office building to a time of cubicles that could squeeze more employees/sf of office space became the norm. When that was not cost-effective enough, a portion of the cubicles became “shared” among employees.

Now employees are being forced out of their suburban office block space altogether. Telecommuting is the rage, but it is not perfect. There can be tremendous distractions with the “home office” from kids/wives/husbands, no office equipment (high-speed copiers, scanners), no professional phone pick-up/reception, awkward to bring clients to meet, etc.

Providing the best of all worlds, the office suite market is growing rapidly. The concept brings employees “in touch” with local clients by being able to place one or two salespeople right into the client market. It provides for short commutes locally versus long, stressful commutes, thereby maintaining quality of life for employees who might otherwise work for a competitor closer to home. Office suites provide a professional environment with reception/professional telephone service, conference rooms, high-speed office equipment and internet and no barking dogs or other distractions.

9.7.16: Wellness Travel Is Latest Trend in Hospitality

Hoteliers often hear their guests say, “I really have a hard time staying in shape and eating properly when I travel.” Well, research points out many travelers feel this way. According to Joel Eisemann, chief development officer in the United States for Intercontinental Hotels Group (IHG), “Our research showed that 17 million travelers in the United States find it hard to stay active and eat right, and they ‘fall off the wagon’ when traveling.”

Providing wellness solutions for travelers may become one of the biggest revenue generators in hospitality in recent memory. Skift, an online travel-industry intelligence platform, shows that wellness is a $494-billion business and growing. The industry was up 12.3% between 2014 and 2015.

To capitalize on the wellness need, hotel franchisors are developing health-centric brands and incorporating wellness standards into existing brands. IHG launched its EVEN Hotels brand in 2012 as the first health-centric brand in the hotel industry. The brand's website features a woman in workout gear on its home page. Its motto: “We set out to defy the idea that travel needs to be a total disruption to your routine. While travel is always a departure from the ordinary, EVEN Hotels helps you embrace wellness and even renew your motivation by giving you choices designed to help you stay on track. Whether dropping in for a short stopover or longer stay, keep active, rest easy, eat well and accomplish more every day.”

Westin Hotels and Resorts is promoting its “For a Better You” philosophy to recognize the importance of wellness for travelers. According to Sarah Lipton, director of global brand management, Westin is “rooted in wellness, dating back to the game-changing debut of the Heavenly Bed more than 15 years ago.”

9.2.16: Dennis Suh to Represent ValueXpress at SSA Conference & Trade Show

Dennis Suh will be representing ValueXpress at the Self-Storage Association’s (SSA) 2016 Fall Conference & Trade Show. The conference, which will be held at Caesar’s Palace in Las Vegas, Nevada, begins on Tuesday, September 6 with conference and trade show registration. Concurrent education sessions begin at 1 p.m. on Wednesday, September 7, and run through 8:20 a.m. on Friday, September 9. The Trade Show is open Wednesday and Thursday 11:30 a.m.-3:00 p.m. For additional information, please visit www.selfstorage.org.

Back by popular demand this year are Roundtable Discussions. These lively sessions are always packed, and the two Roundtable Discussions to be held in Las Vegas will offer a wide variety of topics -- educational on Wednesday and exhibitor products and services on Thursday.

Dennis will be meeting with clients to discuss the benefits of CMBS conduit loans for self-storage owners during the conference. Self-storage loans have been one of the best performing asset classes in CMBS, and CMBS conduit loans for self-storage are highly sought after. As with all eligible asset classes, the CMBS conduit loan program provides for unrestricted cash-out for any purpose on a refinance and all CMBS conduit loans are non-recourse, meaning there are no personal guarantees for repayment of the loan.

“The self-storage industry continues to grow rapidly, and owners want to continue to build more units to satisfy demand,” commented Dennis. “CMBS conduit loans are really the only loan product that allows for unrestricted cash out that can be used as equity to obtain a construction loan to build additional self-storage facilities.” To visit with Dennis at the show, send him an email at dsuh@valuexpress.com or call him at 212-883-6487.

8.31.16: Kroll Releases August CMBS Trend Watch

Kroll Bond Rating Agency (KBRA) released this month’s CMBS Trend Watch. In the August edition, we note that $4.2 billion of private-label issuance priced, bringing the year-to-date total to $37.3 billion, down 45% year over year. We expect September to be a busy month in terms of deal issuance, as we are aware of seven conduits and a number of single-asset single-borrower (SASB) transactions that are slated to launch by month’s end.

At the beginning of this month, WFCM 2016-BNK1 received very positive market feedback, pricing at Swaps (S)+94 basis points (bp) for its last cash flow AAAs. Since then, conduit spreads seem to have settled around S+105 bp for last cash flow AAAs and +500 bp for BBB-. Comparable spreads for the AAAs have not been seen since July 2015, but while BBB- spreads have greatly improved from earlier this year, they remain wide compared with the year-earlier period.

On the ratings front, KBRA published presales for four deals ($2.6 billion), including the aforementioned BNK1 deal. Surveillance activity consisted of 22 transaction reviews that resulted in 218 ratings actions, including 7 upgrades and 2 downgrades.

8.25.16: Sears/Kmart Continue to Falter

Sears and Kmart continue to struggle in a retail environment in which only “best in class” retailers are able to grow sales and profits. Sales have declined for the last ten quarters, including a 7.1% decline in the fourth quarter of 2015 and an 8% decline in the first quarter of 2016.

Sears stores "now seem to be in a perpetual state of decline," Neil Saunders, CEO at retail consulting firm Conlumino, wrote in a note to clients Thursday. "The underinvestment clearly shows, and as such, they are caught in a vicious cycle of seeing lower and lower customer traffic, which further weakens the case for investment and reinvigoration."

Once one of America's leading discount retailers, Kmart raked in $37 billion in sales in its 2000 fiscal year. Last fiscal year Kmart registered only $12.1 billion in sales. That's a dramatic 67% sales plunge in a little more than a decade. Americans have likely noticed the decline in their towns. Kmart had 2,165 stores in 2000. Now it has only 979.

Both chains have reported years of losses and are continuing to survive through loans from its owner, Eddie Lampert, who bought Kmart when it was in bankruptcy in 2003 and quickly married it with Sears to form Sears Holdings. Today Lampert is the combined company's chairman, CEO and leading shareholder.

CMBS pros are concerned about the health of Sears Holdings because Sears and Kmart anchor many CMBS conduit loans, particularly Class B/C malls, which are struggling with other poor performing retailers. A potential bankruptcy and liquidation of Sears/Kmart would put addition pressure on property owners with Sears/Kmart tenants, likely resulting in higher CMBS conduit loan defaults.

8.19.16: Dennis Suh Joins ValueXpress

Dennis Suh has joined ValueXpress to serve as a vice president for the commercial loan originations group. He will focus on originating CMBS conduit loans and agency loans in the broader national markets. Dennis comes with a background in originating fixed-rate conduit loans in core markets in the Northeast, Midwest and South/Southeast. Prior to joining ValueXpress, Dennis originated and underwrote CMBS conduit loans for Barclays Capital, Inc., UBS Securities, LLC and Credit Suisse, LLC in New York City.

“ValueXpress is extremely pleased to have Dennis Suh join the ValueXpress team,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “Dennis brings with him a depth of knowledge and experience that will benefit our clients. CMBS conduit loans are probably the most complex commercial loan product out there and we at ValueXpress are successful because of our many years of in-depth CMBS conduit loan experience.”

“I am excited to bring my experience and contacts from the investment banking side of the CMBS business to my existing and new clients,” said Dennis. “Together with my talented colleagues at ValueXpress I have the ability to truly provide a ‘value-added’ proposition in terms of streamlining the CMBS loan process and negotiating the best loan structure and terms for my borrowers.”

You can reach Dennis at 212-883-6487 and dsuh@valuexpress.com.

8.16.16: CMBS Pipeline Strong for Third and Fourth Quarters

Lower interest rates and stable markets are leading to predictions for strong CMBS conduit loan originations for the third and fourth quarters of 2016. The increasing velocity of CMBS loan closings is refreshing for CMBS professionals after poor first and second quarters in terms of low volume and poor profitability.

“Recent CMBS offerings have been very profitable compared with the last six months as a steady supply of CMBS issues faced rising spreads amid tepid demand from bond buyers that sapped profitability,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “Now the reverse has occurred: Slower CMBS issuance had led to a shortage of CMBS securities, resulting in lower spreads and higher profits.”

This outcome is resulting in an interest rate bonanza for borrowers. Borrower rates, which were over 5% as recent as May, have fallen nearly 1% to 4.25%-4.50% for full-leverage cash-out refinance. Large balance, low-leverage loans in primary markets are seeing loan offers below 4.0%!

According to Commercial Mortgage Alert, $13.2 billion of CMBS transactions are in the works, an average of $6.6 billion per month compared with the $4.1-billion average for June-August. This is roughly $80 billion annualized, much higher than the $60-billion annualized pace through August.

Another reason for moving CMBS transactions out the door is so CMBS issuers can clear out loan inventory before risk-retention regulations become effective in late December.  For details on risk-retention, click here.

8.10.16: Demand for Industrial Space in New Jersey Continues to Soar

In May 2016, CBRE Group, Inc. (CBRE) reported that developers saw a need for large industrial buildings in New Jersey and responded by developing speculative (not pre-leased) projects. While speculative development is very risky, tenants responded by gobbling up the space at a rapid rate. Demand actually exceeded the supply of new buildings. CBRE noted that five leases in excess of 500,000 square feet were recorded in the first quarter of 2016 compared with four new leases of that size for the prior 24 months.

CBRE recently updated its statistics for the N.J. industrial market and found that strong demand continued into the second quarter of 2016 as demand continues to outstrip supply. CBRE reported a vacancy rate of 7.2%, the lowest level recorded since 2007.

“It’s my 30th year in the industry, and I’ve never witnessed as much tenant leasing velocity as I have in the past 12 months,” said Thomas Monahan, executive vice president at CBRE. Some of the demand is attributable to companies relocating from New York, tax incentives offered by New Jersey and growth in e-commerce. In fact, e-commerce companies were responsible for 35% of the new leases in the second quarter, according to the CBRE report.

8.5.16: “Risk Retention” CMBS Deal Prices at Tight Spreads

A new issue CMBS conduit transaction priced on Thursday, August 4 at the tightest spreads since summer 2015. The issuers, Wells Fargo, Bank of America and Morgan Stanley, priced the long-term super-senior bonds from the $871-million offering at 94 basis points (bp) over swaps. This was significantly lower than the 108 bp level achieved in the prior offering that priced a week earlier. The price tightening continues a trend of declining CMBS spreads that began at the beginning of May after spreads on long-term super-senior bonds peaked at 173 bp over swaps.

The transaction was the first deal designed to comply with risk retention rules. As of December 24, 2016, CMBS issuers -- or B-piece buyers in their stead -- are required to retain 5% of transactions for at least five years. CMBS issuers can retain a “vertical strip” encompassing 5% of every tranche, a “horizontal” 5% strip at the bottom of the capital stack, or an “L-shape” strip that combines the first two options. The rules are part of the Dodd-Frank reforms passed by Congress after the financial markets collapsed in 2007-2008. Wells Fargo, Bank of America and Morgan Stanley elected to go the “vertical strip” route for this transaction.

Dealers noted the transaction contained mostly top-tier, low-leverage loans, and therefore, the pricing may not be indicative of market spreads for more typical CMBS deals, which contain a mix of high quality and lesser quality loans with a typical average loan-to-value of 65.0% versus the 55.6% reported in the Wells transaction. The next few deals scheduled to come to market continue the theme of lower leverage/higher quality loans in the issues, so it may be a few weeks until the market gets pricing indications for a more typical higher leverage CMBS transaction.

8.4.16: Meanwhile, Tight CMBS Spreads and Low Treasury Yields Provide Great Rates for Borrowers

After long-term super-senior CMBS bonds peaked at 173 basis points (bp) over swaps in May 2016, spreads have steadily declined to 94 bp when Wells Fargo, Bank of America and Morgan Stanley priced the long-term super-senior bonds from the $871-million offering on Thursday, August 4. Rates to borrowers have declined dramatically in response. Market participants point to limited CMBS supply as a contributing factor to tighter pricing. At the end of July, only $39 billion of CMBS deals have been issued compared with $71.9 billion in the year-earlier period. In addition, bond markets in general are stable and investors continue to seek investments that can provide a decent yield in relation to risk. CMBS securities are providing a relatively good yield compared with other debt investments right now.

Typically, when CMBS spreads decline, Swap yields and Treasury yields rise to provide an overall yield “floor” for investors. Recall that the overall yield to an investor in a new CMBS issue is comprised of adding the CMBS bond spread to the Swap spread. In the Wells Fargo, Bank of America and Morgan Stanley CMBS deal, the 10-year swap rate was 1.37% and the bond spread was 94 bp (0.94%). Therefore, the yield to investors for the long-term super-senior bonds was 1.37% + 0.94% = 2.31%. This level is well below the floor of 3.0% that has generally prevailed during 2015-2016.

This outcome is resulting in an interest rate bonanza for borrowers. Borrower rates, which were over 5% as recent as May, have fallen nearly 1% to 4.25%-4.50% for full-leverage cash-out refinance. Large balance, low-leverage loans in primary markets are seeing loan offers below 4.0%!

“We expect to have very busy third and fourth quarters,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “We have not seen rates this low in over a year-and-a-half.”

8.1.16: Trepp: CMBS Delinquency Rate Moves Higher Again in July

CMBS loan delinquency rose in July to 4.76%, up 16 basis points (bp) from June, according to Trepp. The July delinquency rate is 61 bp above its multiyear low of 4.15% recorded in February 2016. The delinquency rate was negatively impacted by loans unable to pay off at maturity, thereby being classified as delinquent. As previously reported, a significant amount of CMBS loans written in 2006 at the peak of the CMBS market are maturing now. Many of these loans are not meeting current underwriting standards to generate enough loan proceeds to pay off the loan balance at maturity.

The problem worsened due to the CMBS market pullback in spring 2016. As b-buyers pushed back on lesser quality loans and market spreads moved out, making loans less profitable, lenders became increasingly conservative in terms of loan underwriting. Maturing loans that might have been approved for adequate proceeds to pay off existing debt found their loan proceeds cut to levels that required too much cash equity to close or were turned down altogether. Mezzanine lenders that were supposed to fill the gap have not participated materially in solving the problem.

Vacancy by Property Type – July 2016

Sector June
2016
July
2016
% Change
Industrial 5.95% 5.63% -0.32%
Lodging 3.25% 3.12% -0.15%
Multifamily 2.35% 2.51% +0.16%
Office 5.76% 6.23% +0.47%
Retail 5.72% 5.76% +0.04%

Source: Trepp

7.22.16: See Mike Sneden Discuss Commercial Capital Training Group

Michael D. Sneden, Executive Vice President of ValueXpress, was interviewed by Commercial Capital Training Group (CCTG). Click below to listen to what Mike has to say about CCTG:

7.18.16: Watch for Trigger Events

This week we received calls from two of our borrowers who were shocked when they received cash management trigger notices from their loan servicers. One noted that the property had just completed a 12-month period in which the property had the highest profit in its history. He said, “What’s going on here?”

Well, as it turns out, the property, a Holiday Inn Express hotel in New Mexico, was doing so well the owner elected to perform some capital improvements, including new air conditioners, carpeting and furniture. Instead of capitalizing these items, he expensed them under the repairs and maintenance expense category to the tune of $200,000! He did not highlight or exclude these items when he sent his income and expense statement to the servicer.

The servicer is not a mind reader. The servicer would have no way of knowing these capital improvements were expensed. Adding $200,000 in capital improvements to the repairs and maintenance expense category resulted in the debt service coverage falling from 1.71x to 1.25x, below the cash management trigger of 1.30x.

Last fall I wrote about the importance of submitting income and expense statements to loan servicers for CMBS conduit loans that exclude capital improvements, non-recurring items, partnership items, owner distributions/ compensation and any other items that do not reflect the ongoing routine expenses to operate the property. Including these items can artificially depress the cash flow resulting in the property not meeting the minimum net cash flow debt-service coverage ratio to avoid cash management. Cash management is a disaster for CBMS conduit borrowers.

“ValueXpress offers all of our clients who have closed CMBS conduit loans with us an optional free, ongoing review of property cash flows and an internal DSCR calculation to ensure that they don’t accidently trigger cash management,” noted Jim Brett, head of underwriting at ValueXpress. “It’s just one of many ongoing services we provide our clients post-closing, at no charge. In this instance, we contacted the servicer with the corrected data, and the servicer rescinded the cash management trigger notice.”

7.13.16: Why an Arizona Woman Sued More Than 30 Hotels at Which She’d Never Stayed!

A few years ago I wrote about predatory Americans with Disabilities Act (ADA) litigation that affected one of our clients. He paid $25,000 to settle a lawsuit brought by an attorney for a guest alleging that the ADA grab bars in the hotel shower were too high. Although the suit was without merit, the attorney for the client indicated the lowest cost option was to settle.

Well, two years later, the problem is not getting any better. Recently, Skip Descant, a reporter for The Desert Sun in Palm Springs, California, penned an article that made me shake my head.

It seems that 35 hotels in the region surrounding Palm Springs, from small independent hotels such as the Aloha Hotel – Palm Springs to large nationally franchised hotels like the JW Marriott Desert Springs Resort -- are being hit with more ADA lawsuits. The claims allege that the properties are out of compliance with the landmark 1990 federal law that has helped to create public spaces despite hotel properties being infinitely more accessible for the disabled now than decades ago.

According to Descant, the lawsuits were filed by Theresa Brooke, a disabled Arizona woman. Each lawsuit -- filed in April and May -- makes the same claim: The hotel lacks the proper pool lift. Each lawsuit requests that the hotel takes the same set of corrective measures: install a pool lift and pay $8,500 in damages plus legal fees to Brooke. According to these lawsuits, like most others of this kind, Brooke called the hotel to ask if a pool lift was available for each pool and Jacuzzi spa. If the hotel official said one was not available, a representative for Brooke was dispatched to the hotel to verify the absence of the lift.

Descant reports that officials with the hotel industry say ADA lawsuits like those filed by Brooke in the Coachella Valley amount to "extortion" enabled by unscrupulous lawyers. "It's not an illegal racket. But it's a form of legal extortion, in the legal sense," said Jim Abrams, former president and CEO of the California Hotel & Lodging Association, who now serves as legal adviser for the California Association of Boutique and Breakfast Inns.

"This is an epidemic in California, and in many, many cases all claimants want is some quick money -- $4,000, $5,000, $10,000 -- and don't really ever care if anything's ever made accessible," he added.

7.8.16: Latest Twist in Risk-Retention Structure

Rialto Capital has agreed to buy the subordinate portion of the first commercial MBS deal that will be structured to comply with impending risk-retention rules, according to Commercial Mortgage Alert. The roughly $800-million offering is scheduled to hit the market this month. It will be backed by loans contributed by Wells Fargo, Bank of America and Morgan Stanley. The three banks, which will also underwrite the offering, will retain 5% of each class, known as a “vertical strip.” Originally, it was expected that Wells would retain the entire strip itself. But the word now is that each bank will retain a share proportional to its loan contribution.

Rialto will buy the remaining 95% of each below-investment-grade class. Rialto’s purchase price translates into a 17.75% pre-loss yield. The transaction will have relatively low leverage with a weighted average loan-to-value ratio of 57%-59%.

The risk-retention rules don’t take effect until Christmas Eve 2016, but the banks are testing the structure now to get an indication from regulators about how much capital must be held in reserve against the retained bonds. The banks are hoping that the retained vertical strips will qualify for treatment as loan participations, rather than as bonds, because such debt has lower set-aside requirements.

7.5.16: Master Sales Trainer Tim Wackel Announced as the Keynote Speaker for NACLB Convention

Tim Wackel, founder of The Wackel Group, is this year's main conference keynote speaker at the National Alliance of Commercial Loan Brokers (NACLB) Convention. Tim combines more than 25 years of successful sales leadership with specific client research and he delivers high-impact programs that go beyond today’s best practices. Tim is insightful, engaging and focused on providing real world success strategies that audiences can (and will!) implement right away.

Tim has worked with some of today's most successful companies including Allstate, Philips Healthcare, Hewlett Packard, and Wells Fargo, to name a few.

Every broker and lender need sales training, even if you think you are untouchable! As society changes, especially with the continued shift toward digital in the business world, old sales strategies need some adjusting. And Tim can help!

In his NACLB keynote, Tim will cover everything from pitching to closing a lead for B2B businesses. And he will highlight some important strategies to consider throughout the sales cycle. This is definitely a keynote you will not want to miss. Sign up for the 2016 NACLB Conference here.

6.28.16: Kroll Reports on John Q. Hammonds’ Bankruptcy Effect on Its CMBS Loans

On June 28, John Q. Hammons Hotels & Resorts announced that the Revocable Trust of John Q. Hammons (JQH Trust) and its related affiliates (the affiliated group) have filed voluntary petitions in order to restructure under Chapter 11 of the U.S. Bankruptcy Code. The affiliated group includes the borrowing entities for several CMBS loans. In total, the current outstanding principal balance for ten transactions secured by CMBS loans approximates $690 million.

Kroll Bond Rating Agency rated four CMBS transactions in which two loans were involved, one of which was split across three of the four CMBS deals, so the firm is monitoring the situation to determine any ratings effect. Kroll notes that properties underlying the CMBS conduit loans are performing well.

Based on servicer-provided information for the year ended 2015, the Hammons Hotel Portfolio was secured by a $250.8-million CMBS loan and its net cash flow increased 12% since securitization. Debt service coverage (DSC) improved to 1.88 from 1.68, and the debt yield increased to 12.1% from 10.7% during the same period. The Chateau on the Lake loan had a DSC of 1.99 and a debt yield of 11.9% at securitization. Based on fiscal 2015 servicer data, the DSC increased to 2.16 and debt yield to 13.1%.

The reason for the bankruptcy was unrelated to the cash flow performance of the assets. According to several news reports, JQH Trust and the affiliated group declared Chapter 11 bankruptcy to help deal with ongoing litigation regarding a third party (JD Holdings, LLC) right of first refusal to purchase certain sponsor-owned hotel properties.

6.27.16: 10-Year Treasury Nears All-Time Low…

In the wake of “Brexit," Great Britain’s decision to exit the European Union (EU), the 10-year U.S. treasury yield had its largest single-day decline on Friday, and then on Monday, the yield fell to 1.46%, approaching its all-time intra-day low of 1.39% recorded in July 2012. At that time in 2012, investors were afraid the EU might unravel as Greece and Spain were struggling with debt loads and surging bond yields. Investors flocked into U.S. Treasuries as a safe haven. The results are the same today with investors moving into 10-year treasuries in the aftermath of Britain’s vote to exit.

Great Britain is the third-largest country in the EU by population. And its decision to exit the EU has caused considerable concern, much like what occurred in 2012 when Greece and Spain were struggling and investors were afraid the EU would unravel. Now that Great Britain has voted to leave the EU, it will no longer have to contribute billions of pounds a year to the EU’s budget.

In the United States, commercial real estate loan rates are expected to decline in the near term, as rates on commercial real estate loans are typically tied to the 10-year treasury or the 10-year swap, both of which have fallen in tandem in the days after Great Britain’s vote to exit the EU. However, offsetting the benefit of lower treasury rates could be rising loan spreads. See our 6.24.16 Market News comment for further details.

6.24.16: …While the CMBS Market Awaits Upcoming Deal to Determine Brexit Impact

With Great Britain’s decision to exit the European Union (EU), the 10-year U.S. treasury yield had its largest single-day decline on Friday, and then on Monday, the yield fell to 1.46%, approaching its all-time intra-day low of 1.39% recorded in July 2012. Investors pushing Treasury yields lower will benefit commercial real estate borrowers as interest rates on commercial real estate loans, including CMBS conduit loans, are set based on a combination of treasury/swap yields plus a loan spread. The question at this time is whether Brexit will cause loan spreads to widen, reducing or eliminating the benefit of lower Treasury rates.

The near-term answer should surface during the week of June 27. Societe Generale and Cantor Fitzgerald are leading a $736.8-million CMBS offering expected to price at the end of the week. The offering is backed by loans from SocGen, CCRE, Natixis, Benefit Street Partners and Silverpeak Real Estate Finance. Dealers started marketing the transaction on Tuesday, June 21, but held off on circulating price guidance pending the results of the Brexit referendum this past Friday, rightly expecting that the vote to exit would have a negative impact on financial markets.

The previous conduit deal priced on May 20. The long-term, super-senior AAA-rated bonds were placed at a spread of 114 basis points (bp) over swaps. The corresponding benchmark bonds in three other deals priced three days earlier at spreads ranging from 110 bp to 125 bp. CMBS pros are looking to the SGCMS transaction to establish the current pricing level.

6.15.16: Owners Scramble to Fill Big Box Retail Spaces

With the recent bankruptcy of Sports Authority and prior bankruptcies of Circuit City, CompUSA, Borders, and Linens and Things, all of which occupied stores generally 20,000-30,000 square feet, property owners are scrambling to re-lease these spaces to a smaller universe of prospects. Potential leasing candidates like Office Depot, Best Buy and Staples are downsizing, not expanding, worsening the situation.

Some owners are finding creative solutions. One example is Sprouts Center, located in Glendale, Arizona. The 61,250-square-foot shopping center was constructed in 1994 and renovated in 2005. At that time, the property was long-term leased to Sprouts Farmers Market (30,000 square feet) until 2023 and the balance of the space was leased to Office Depot (31,250 square feet) until December 2008. At the end of its lease, Office Depot vacated.

Timing could not have been worse, as 2008-2009 was a period of severe economic distress, tenant bankruptcies and little tenant expansion from nationwide retailers. So the owner of the property took another direction. Tim Crawford, the owner of a new company called Jumpstreet, contacted the owner of Sprouts Center. Crawford wanted to expand into Glendale, Arizona from Jumpstreet’s first location in Thornton, Colorado and he needed 30,000 square feet for his concept – wall-to-wall trampolines, trampoline dodge ball and other unique and fun activities. The Glendale location opened in 2009 and has been wildly successful, and now Crawford has 15 locations nationwide and is opening 2-3 new locations a year.

The owner of Sprouts Center took a chance on a non-traditional retailer and reaped the rewards. Perhaps other owners will follow. For more information on Jumpstreet, visit http://www.gotjump.com.

6.10.16: ValueXpress to Be Platinum Sponsor at the 2nd Annual National Alliance of Commercial Loan Brokers (NACLB) Conference & Expo

ValueXpress has committed to be a Platinum Sponsor for the 2nd Annual National Alliance of Commercial Loan Brokers (NACLB) Conference & Expo. The conference, which will be held at the Red Rock Casino in Las Vegas, Nevada, begins on Tuesday, October 4 with an opening cocktail reception and concludes on Thursday afternoon, October 6.

Michael D. Sneden, Executive Vice President at ValueXpress, will be participating in two breakout sessions on commercial real estate lending: on Wednesday, October 5 at 9:20 a.m. and on Thursday, October 6 at 11:00 a.m. Panelists will present their unique loan products to attendees. Mike will discuss the CMBS conduit loan product with participants.

ValueXpress will be sponsoring the keynote luncheon on Wednesday, October 5. Two possible speakers are under consideration, and both are real crowd pleasers -- exciting and dynamic. Stayed tuned for more information!

ValueXpress will be available for the balance of the conference at its booth. Jim Brett, head of underwriting at ValueXpress, will be fielding questions regarding the origination, underwriting and closing of CMBS conduit loans. “We will have a bunch of giveaways as well, so I encourage all attendees to stop by our booth, if only to grab a handful of ValueXpress logo’d golf balls for their next round,” Jim said.

“This is one of our most successful conferences that we sponsored in 2015, so we were first in line to sign up as Platinum Sponsor for the 2016 conference,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “We had at least two very happy broker-attendees last year. We completed a transaction with each of them post-conference!”

"Having taught over 200 Commercial Capital Training group (CCTG) graduates over the past year, and now closing 3-4 CMBS conduit loan deals a month with graduates, this is an outstanding opportunity for me and ValueXpress to reconnect with graduates just getting their feet wet," commented Michael D. Sneden, Executive Vice President at ValueXpress. "In addition, I will participate on CMBS conduit loan panels to share the most current trends in the CMBS conduit loan market with all interested attendees."

CCTG and BoeFly have teamed up to organize this event. It will serve as a "Class Reunion" for CCTG graduates and classmates, providing an excellent opportunity for grads to network regarding their business strategies since graduating from CCTG. For the complete conference agenda and to register, visit http://www.naclb.net.

6.6.16: Small Office and Furnished Office Suites a Bright Spot in the Office Sector

Small office space, both furnished and unfurnished, is performing well in the otherwise lackluster office market. Pioneered by Regus and newcomer wework, tenants can rent furnished or unfurnished office space for a day, week, month, or longer. The basic concept is that office building owners take large open floorplates and create individual “office suites,” typically 150-200 square feet (roughly 12 feet x 15 feet), which allow adequate space for a desk, chair(s) and storage. Some building owners provide the space unfurnished and some provide the space furnished (at a higher rental level). Most owners provide an array of shared amenities, which typically include conference rooms, break room, telephone, networking and internet services, as well as photocopying and scanning equipment.

The up-front cost to develop an “office suite” building is typically higher than a traditional open floorplate because of the additional walls, doors and internal wiring involved in the build-out. Furniture is an additional cost for developers who provide the suites furnished. Building owners are able to charge higher rent/square foot for office suites. One reason is the rent is typically quoted per week or per month, similar to a residential apartment, and although when converted to rent/square foot the amount looks high, on a rent/month basis, the rent is appealing. For example, the rent on a 180-square-foot furnished office suite in a suburban market in the southeast might be $600/month, which sounds quite reasonable, and it converts to $40/square foot, which is much higher than the $20/square foot charged for larger, traditional office space.

As larger corporations downsize their centralized office space and shift employees into “the field” to be closer to clients, the “office suite” niche should continue to grow.

6.1.16: REIT Valuations Soar

With interest rates trending down and investors scrambling to find investments that provide a reasonable amount of steady, secure income, demand for REIT stocks has risen dramatically as investors snap up shares of successful REITs. A good example is the shining star of the net lease sector, Realty Income (NYSE: O).

Realty Income is a REIT that primarily owns net-leased retail properties (roughly 80% of the portfolio). The average remaining lease term for tenants that occupy the over 4,000 properties owned by Realty Income is over 10 years. As a result, portfolio vacancy has historically been very low. The occupancy rate has not declined below 96.6% since 1992. As a result, Realty Income is able to provide steady and rising dividends to shareholders under all market conditions. The company was one of the few REITs that did not reduce its dividend to shareholders during the 2008-2009 financial crisis. As an additional benefit to income-oriented investors, the company pays its dividend monthly versus the quarterly payout typical of other REITs.

Realty Income’s success has caught the eye of many investors, including those who have not invested in REITs before. These investors are in search of investments that can provide decent, steady income, and many of these investors are retirees. As a result, the price of Realty Income stock has soared, reducing its dividend yield. In September 2015, Realty Income’s stock was trading at roughly $45.00/share. The annualized dividend at the time was $2.29/share, providing a yield of 5.1%. But through fall 2015 and spring 2016, the stock rose through the $50s as interest rates fell. The stock hit $60.00 in March and again in April, and from May onward, it has been trading in a range of $60-$65, reducing the dividend yield to a paltry 3.8% at the $62.50 mid-range price.

5.27.16: CMBS Lenders Test Risk-Retention Structures

Effective December 24, 2016, CMBS issuers -- or B-piece buyers in their stead -- will be required to retain 5% of transactions for at least five years. CMBS issuers can retain a “vertical strip” encompassing 5% of every tranche, a “horizontal” 5% strip at the bottom of the capital stack, or an “L-shape” strip that combines the first two options. The rules are part of the Dodd-Frank reforms passed by Congress after the financial markets collapsed in 2007-2008. For more on risk-retention, click here.

CMBS issuers are starting to test investors with bond structures that they believe are in compliance with the risk-retention rules. They want to verify compliance with the rules and determine the relative profit that can be achieved under various structures to see which might be most efficient.

Under the “vertical strip” plan, Wells Fargo, Bank of America and Morgan Stanley are reportedly working on a CMBS issue in which Wells Fargo has agreed to hold 5% of the face amount of each class. If the transaction is successful, the three banks have agreed to rotate the risk-retention responsibility on future deals. The ongoing feasibility of the vertical may hinge on the amount of capital the banks will be required to hold against losses.

Under the “horizontal strip” plan, b-piece buyers that currently buy the most junior portion of CMBS issues, but not 5%, are beginning to team up with investors to jointly buy the 5% horizontal strip and then presumably divvy it up internally according to their respective risk profiles. Prime Finance has set up a new b-piece platform and teamed up with LNR to comply with risk-retention. The duo purchased their first b-piece from a deal issued by Wells Fargo and Citigroup. Och-Ziff Capital, another new investor, is also teaming up with LNR to buy risk-retention complaint bonds from an upcoming deal from JPMorgan and Deutsche Bank.

5.24.16: CMBS Spreads Decline Due to Lack of Supply

CMBS spreads continue to decline as the pace of new CMBS issuance falls well behind last year. U.S. CMBS volume as of late May was $28.5 billion versus $44.1 billion at the same time last year. Volume has fallen due to significant CMBS spread widening that reversed course in the beginning of March and b-buyers kicking out a larger percentage of lower quality loans, making lenders reluctant to close these loans and battle with b-buyers to get them included in CMBS pools.

As a result, not enough CMBS bonds are available to satisfy demand, allowing dealers to tighten spreads. After peaking at 173 basis points (bp) over swaps on March 3rd, AAA-rated super senior CMBS bond spreads have steadily fallen, reaching a recent low of 110 bp on a deal led by Goldman Sachs that priced on May 17. Since then, three deals have priced, with AAA-rated super senior CMBS bonds pricing in a range of 113-125 bp, depending on deal leverage. Lower leverage deals are getting better spreads. The most recent deal, an $876-million CMBS offering led by UBS, priced its AAA-rated super senior CMBS bonds on May 20th at swaps plus 114 bp, so dealers are calling the market roughly swaps plus 115.

Subordinate bond pricing has also improved, just not as much as super senior CMBS bonds. Furthermore, prices have varied widely: The class D triple-B-minus spread was 660 bp in the UBS issue. That was up from dealer price guidance of 640 bp area. The equivalent spread was 565 bp for the Goldman deal. But both of these results are dramatic improvements from the 825 spread at which the class D triple-B-minus bonds priced on March 3rd.

5.17.16: deadmalls.com

When I first began to analyze CMBS bonds with my associate, Jim Brett, he discovered a website called deadmalls.com. There are a lot of mall loans in CMBS, and in 2008, when Jim and I began analyzing distressed CMBS for our affiliate, Country Bank, we were trying to get a handle on the difference between a good mall and a bad mall. After all, we started our work just when General Growth Properties, one of the largest owners of U.S. malls and a big CMBS borrower, filed for bankruptcy. We had to find CMBS issues with good malls and buy those bonds, while avoiding CMBS issues with bad malls.

So one day while Jim was researching on the internet, he came across deadmalls.com. It was a bit scary because a few of the malls secured by CMBS loans made it to the site where they were reviewed (I use the term ”review” loosely. The site is basically the opinions of interested reviewers, and some of the information is old). The stories of how these malls died, however, were riveting to Jim and me.

The site is pretty depressing and sobering, but very useful to follow the life cycle of some of the malls as they died. A typical theme was poor management, lack of capital investment and “the new mall across town.” I like to visit and reread some of the stories, particularly now as we watch Sears and other anchors struggle and internet shopping siphon off mall sales. Sad to say, I think deadmalls.com is a growing business.

5.13.16: How Drugstore Loans Are Viewed in CMBS

A significant amount of drugstore loans are in CMBS, and they are dominated by stores leased to the top three U.S. drugstore chains: Walgreens, CVS and Rite-Aid. All of the drugstores are corporately operated (no franchises). Few, if any, drugstore buildings are owned by the three chains. The real estate model for Walgreens, CVS and Rite-Aid is to enter into a long-term net lease (typically 20-25 years, with tenant options to renew thereafter) with a developer that secures the land and constructs the store to the specifications provided by the chain. The developer then often sells the property to investors at a price based on the annual lease payments divided by a market cap rate.

Financing newly built and leased drugstores is easy in CMBS. The chains have good credit and a 10-year CMBS loan based on a drugstore lease of 20-25 years would mean 10-15 years remaining on the lease when the loan matures, providing plenty of time before the lease ends to secure a refinancing. But as it turns out, refinancing drugstores with a maturing CMBS conduit loan into another 10-year CMBS conduit loan is not as easy as it seems because the lease will end when the CMBS loan matures or shortly thereafter, creating a default at maturity: The owner cannot refinance because there is no assurance the tenant will exercise renewal options in the lease.

How does a CMBS lender look at this risk? Primarily the lender analyzes the sales of the drugstore being financed versus chain-wide averages. If the store’s sales are well above chain-wide sales you are likely good to go. The location is likely very profitable and valuable. There is high likelihood, then, that the drugstore tenant options to renew will be exercised. If sales are below chain-wide averages, you will have difficulty getting another CMBS loan approved. To do so, you would need to have lower amortization (15-20 years) to reduce the principal balance at maturity to an amount that supports the market rent for an alternative retail use. Why? The lender is going to assume the drugstore does not exercise any renewal options and elects to vacate the premises at lease expiration.

5.10.16: Walgreens and Rite Aid Merger CMBS Underwriting Considerations

In November 2015, Walgreens entered into a contract to buy Rite Aid for $17 billion. The transaction is being reviewed by regulators as the combination of the nation’s number one and number three drugstore chains could be anti-competitive. Walgreens has indicated it has buyers lined up for unwanted Rite Aid stores, but the U.S. government may be concerned whether buyers would present viable offers. With the Federal Trade Commission blocking the combination of office supplies companies Staples and Office Depot, it appears the Obama Administration has become skeptical of big takeovers by industry rivals.

The potential combination is generally a negative for CMBS conduit lenders. While Walgreens’ superior credit will provide support to Rite Aid leases, Walgreens management noted that it would seek to merge some Rite Aid locations into Walgreens stores and viewed Rite Aid stores as “generally inferior” to Walgreens stores. As Rite Aid leases come up for renewal, Walgreens likely would not renew those leases and shut those stores.

So CMBS lenders are pulling up Google maps and plotting both Rite Aid and Walgreens locations in relation to the property being financed. Older Rite Aid stores within a half-mile or mile of a modern Walgreen store are vulnerable, particularly in small towns. Conversely, a newer Rite Aid in proximity to an older or inferiorly located Walgreens is also vulnerable as the Rite Aid could be converted into a Walgreens.

“If there is overlap, CMBS lenders are determining the superior store based on any combination of store sales, location and store age/condition,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “If you are financing the superior store, you are fine. If you are financing the inferior store, the loan will need to amortize to a level at loan maturity based on a reuse of the building. You are operating under the assumption that the store closes and needs to be repositioned for an alternative retail use at what is typically a much lower market rent and requires capital investment for the conversion.” This often means the loan must amortize on a 15- or 20-year amortization schedule to meet this criteria.

5.6.16: Self-Storage in High Demand in New York City

With tiny, expensive apartments and a lot of stuff, decluttering may be what New Yorkers talk about, but what they really do is rent more space. And self-storage companies and real-estate investors are ready and waiting to fill the demand.

New York City is packed with customers who see storage lockers as extensions of their closets. And the room for growth is evident: The self-storage space per capita in the five boroughs is 1.5-3.0 square feet, compared with 7.0-8.0 square feet nationwide, according to brokers, analysts and real estate executives.

“It’s the best storage market in the world because it has this incredible density of population,” said Tim Martin, chief financial officer of CubeSmart, a real estate investment trust that has about 30 self-storage buildings in New York City with three more scheduled to open over the next two years. “And you have a lot of people living in small spaces who move around a lot.”

Companies across the country are joining CubeSmart in making a bid to expand or break into the New York City market, despite what analysts and industry executives describe as serious drawbacks: high land prices, stiff competition from developers of more expensive residential and office space, and zoning regulations that are expected to get even tougher.

Extra Space Storage Inc. has 14 self-storage locations citywide and plans to open 4 more in Brooklyn and 1 in Queens in the next 12-18 months. Post Management Self-Storage will open four self-storage buildings in the Bronx, Brooklyn and Westchester County. New entrants, such as Orlando, Florida-based Simply Self Storage and its partner Brookfield Asset Management are trying to establish facilities in Manhattan and the surrounding five boroughs. The Canadian real estate giant has only a few self-storage sites in the metropolitan area, but it hopes to buy more, according to Brian Kingston, chief executive of Brookfield Property Partners LP, a subsidiary of Brookfield Asset Management.

“We would like to own more assets than we do currently in the New York City area,” Mr. Kingston said. “We think it’s a great market in general for real estate, and for self-storage there is an acute need.”

4.29.16: CMBS Prices Stable (and That’s a Good Thing)

CMBS spreads for the benchmark AAA-rated super senior CMBS bonds remained range bound in the vicinity of 130 basis points (bp) over swaps. A recent deal priced below that level and a new deal in the market provided price guidance at the 130 bp level. On Friday, April 22, Morgan Stanley and Bank of America priced AAA-rated super senior CMBS bonds at 125 bp over swaps, the lowest level since November 2015. This follows a pattern of tighter spreads in March and April that began with a CMBS offering led by Wells Fargo that priced on March 18 at 129 bp over swaps, an astounding 44 bp tighter than the peak level of 173 bp reached on March 3. Recent trends in benchmark AAA-rated super senior CMBS are shown in the chart below.

Market participants chalked up the better pricing to a number of factors, foremost a lack of new offerings to satisfy investor demand for CMBS. Volatility surrounding the run-up of spreads since the beginning of the year has stifled new loan originations, reducing inventory to be securitized.

“The rapid decline in spreads has resulted in a reduction in loan spreads to borrowers of approximately 50 bp, to a range of 300-325 from 350-375 prevalent just a few weeks ago,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “With 10-year Swap and Treasury rates well below 2%, all-in interest rates are around 5%, a level at which loan activity should pick up.”

4.26.16: Commercial and Multifamily Originations Flatline in the First Quarter

The first quarter of 2016 was something of a dud for commercial and multifamily originations, according to new data from the Mortgage Bankers Association (MBA). The MBA “Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations” found originations for this sector fell 38% from the fourth quarter of 2015. Among different segments, first-quarter originations for healthcare properties plummeted 62% from the fourth-quarter level, while originations for hotel properties and industrial properties each took a 57% dive. Originations for retail properties fell 46% from the previous quarter, while multifamily properties sank 39% and office properties tumbled 23%.

However, commercial/multifamily lending volumes were mostly up on a year-over-year basis, with spikes in the retail (44%), office properties (18%), hotel (3%) and multifamily (2%) segments. Decreases were seen in lending volumes for healthcare properties (down 57%) and industrial properties (down 56%).

MBA Vice President of Commercial Real Estate Research Jamie Woodwell emphasized the stronger aspects of the new data. "In the aggregate, commercial real estate borrowing and lending started 2016 in a similarly strong fashion to 2015," said Woodwell. "Borrowing backed by retail, office, hotel and multifamily properties picked up, as did lending by banks. Disruptions in the broader capital markets pushed originations for commercial mortgage-backed securities down."

4.20.16: Retail Property Cap Rates Rise in the First Quarter

The average cap rate for retail properties nationwide moved up 11 basis points (bp) between the fourth quarter of 2015 and the first quarter 2016, to 6.59%, according to a recent report from commercial real estate services firm CBRE. Still, the figure represented a 13 bp year-over-year decrease.

Retail properties located in the Eastern United States experienced the biggest quarter-over-quarter jump in cap rates, 16 bp to 6.29%, CBRE research shows. On the other hand, cap rates on retail properties in the Midwest moved the least during the same period, 4 bp to 6.84%.

Cap rates on retail properties in the South increased 5 bp to 6.68%, and cap rates on retail properties in the West moved up 8 bp to 6.23%.

In its 2016 “ViewPoint,” Integra Realty Resources (IRR) projects that over 50% of retail markets will see cap rates remain constant for 2016. About 25% of markets across the United States is predicting cap rates will decrease marginally in 2016. Among top markets expecting an increase in cap rates are Miami, Los Angeles and Atlanta. Relatively strong cap rate compression is expected in Chicago for neighborhood retail properties. IRR’s survey discovered that the Florida retail markets of Tampa, Orlando, Naples and Sarasota are expected to experience cap rate compression in 2016.

4.15.16: Watching Out for Risk Retention

With CMBS prices stabilizing at levels that provide a reasonable interest rate for borrowers, the next cloud on the horizon is risk retention.

Beginning December 24, 2016, under new Dodd-Frank federal regulations, CMBS issuers will be required to retain a 5% slice (“risk retention”) of every new CMBS deal they bring to market or designate a b-piece buyer that is willing to purchase that amount. In addition, the rule requires the investment be retained for at least five years. This rule is quite different from the way the CMBS market works currently.

There are essentially two ways to comply with the 5% risk retention rule -- the vertical slice method and the horizontal slice method. Under the vertical slice method, the investor would be required to retain 5% of the face value of each class of securities. Since a typical CMBS deal has 12-13 classes and a $1-billion face value, the investment would be $50 million spread across 12-13 bond purchases. No investors in CMBS securities do this now.

Under the horizontal method, the investor is required to retain the most subordinate CMBS class or classes that equal 5% of the face amount of securities. Typically, investors known as b-buyers do buy the most subordinate class or classes (known as the b-piece) of CMBS. Therefore, this method has feasibility; however, the 5% level is more than the amount typically purchased by b-buyers, particularly after the b-buyer sells off some of its investment, which is not allowed under the new rule. In addition, to avoid usury laws resulting from the high interest rates, b-buyers purchase subordinate bonds at a discount to face value, which is inconsistent with the rule.

Market professionals believe investors will figure out how to comply with the rule, but will want to be compensated for constraints on selling and for making larger investments than under free market rule. This will result in higher interest rates for borrowers. First out of the box to try to figure out how to manage the risk retention rule is Prime Finance (see our 4.11.16 News Article for details).

4.11.16: Prime Finance Circles First CMBS B-Piece with an Eye on Risk Retention

Prime Finance has entered the CMBS b-piece market, circling its first two subordinate bond investments from CMBS deals led by Wells Fargo and Citigroup. The deals should be announced in the next few weeks. Prime is a private commercial real estate finance company that originates primarily bridge loans on transitional income-producing properties as well as provides mezzanine loans and preferred equity. The firm also acquires performing, sub-performing and distressed debt.

Recently, the firm set up a b-piece platform with an eye toward compliance with the new risk retention rules (see our 4.15.16 News Article for details). Being the first out of the gate, Prime Finance should get a jump on its competitors in terms of any learning curve. The company will figure out and comply with the rules, and possibly book excess returns before the competition heats up.

Prime does not have a special-serving operation, so it is teaming up with LNR Partners on the two deals. LNR is the largest CMBS special servicer and active investor in CMBS b-pieces. LNR will be the special servicer of the transactions and will hold a minority stake in the transactions.

4.5.16: SBA Close to Restarting 504 Loan Refinance Program

After years of advocating on Capitol Hill by commercial real estate industry leaders, the SBA 504 Loan Refinancing Program was permanently reinstated on December 18, 2015, more than three years after it expired in 2012. Also known as the Commercial Real Estate and Economic Development (CREED) Act, the program will allow small business owners to refinance eligible business debt into a new loan through the SBA 504 program.

Since the current SBA 504 program only allows for acquisition loans, the number of loans that can be funded under the SBA 504 program will increase dramatically. One of the many key benefits of the SBA 504 program is that it is a fixed rate loan as opposed to the typical floating rate loan found in the SBA 7(a) loan program that finances the same types of borrowers. The SBA 504 Loan Refinancing Program was originally enacted as part of the Small Business Jobs Act of 2010, but after a period of growth, the program expired in 2012.

Since 2012, industry groups have been lobbying to reinstate the program permanently. The leading argument in favor of the program is studies that indicated the program operated at no cost to taxpayers. Finally, in December 2016, the program was made permanent.

However, the SBA indicated it would take approximately four to six months before the program can close its first loan. The SBA is actively working on updates to the SOP (essentially the loan underwriting and closing manual for SBA loans), which will include new forms and procedures for lenders and borrowers to close loans in the program. Based on the timeline presented by the SBA, the SOP should be issued in May or June.

4.1.16: CMBS Conduit Loan Spreads Rally (Again)

CMBS spreads tightened further this week as two CMBS issues priced at levels tighter than a CMBS offering led by Wells Fargo that priced on March 18. The benchmark AAA-rated super senior CMBS bonds from the most recent $818-million offering from Deutsche Bank and JPMorgan priced on Thursday at 129 basis points (bp) over swaps, 18 bp tighter than the Wells Fargo deal and an astounding 44 bp tighter than the peak level of 173 bp reached on March 3. Demand for the Deutsche Bank/JP Morgan CMBS issue was strong as dealers were able to price the super senior CMBS bonds inside the 132 bp price guidance. The second issue, a $771-million offering led by Citigroup and Societe Generale, also priced well; the benchmark AAA-rated super senior CMBS bonds fetched 132 bp over swaps, beating price guidance of 135 bp.

The rally has carried over into other classes of CMBS as well. The junior AAA-rated CMBS from the Deutsche Bank/JP Morgan deal priced at S+155, down 65 bp from the March 3rd peak. Class B CMBS, rated AA/AA-, priced at S+220, down 80 bp from the peak. The lowest investment grade class, rated BBB/BBB-, priced at S+600, down a whopping 225 bp from the March 3rd peak.

Market participants chalked up the better pricing to a number of factors, foremost a lack of new offerings to satisfy investor demand for CMBS. Volatility surrounding the run-up of spreads since the beginning of the year has stifled new loan originations, reducing inventory to be securitized.

“The rapid decline in spreads has resulted in a reduction in loan spreads to borrowers of approximately 50 bp, to a range of 300-325 from 350-375 prevalent just a few weeks ago,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “With 10-year Swap and Treasury rates well below 2%, all-in interest rates are around 5%, a level at which loan activity should pick up.”

3.31.16: AAHOA Trade Show in Nashville, TN a Huge Success

On March 30-31, 2016, ValueXpress exhibited at the annual Asian American Hotel Owners (AAHOA) Trade Show, which was held in Nashville, Tennessee this year. The sold-out trade show was attended by a record crowd of Asian American hoteliers ready to put recent volatility in CMBS lending behind them and get back to borrowing money.

ValueXpress Booth 374 at the 2016 Asian American Hotel Owners Trade Show

“We had a significant amount of inquiries from clients looking to complete cash-out refinancing of their hotel properties,” commented Jay Bhakta, Senior Loan Originator at ValueXpress. “Many owners were looking to use the cash-out proceeds to complete Property Improvement Plans (PIPs) required to renew franchises. For example, some noted that it could easily cost $1 million to complete the new ‘Formula Blue’ PIP required by IHG for the renewal of Holiday Inn Express franchises,” noted Bhakta.  “CMBS conduit loans, with their unrestricted cash-out provisions, are ideally suited for hotel properties requiring expensive PIPs so owners do not have to come out of pocket to pay for the PIPs.”

“In addition, we had requests for portfolio loans in which the owner gets one loan secured by a portfolio of properties, consolidating a variety of local lenders into one loan, converting recourse loans into non-recourse and obtaining cash-out proceeds for additional investments,” noted Michael D. Sneden, Executive Vice President at ValueXpress.

“In one case, the owner wished to build a new Hampton Inn property, but his local community bank wanted cash equity of 35%, or nearly $3 million, invested in the $8-million project. The owner only had $2 million cash on hand, so we are going to provide a $1-million cash-out on a Holiday Inn Express owned by the sponsor,” noted Bhakta.

3.28.16: Moody's: Oil Slump a Moderate CMBS Credit Negative

Falling oil prices represent a moderate credit negative for commercial mortgage-backed securities collateral and will cause performance to deteriorate in some metros, according to Moody's Investors Service, New York. But a number of mitigating factors should limit the harm, including limited CMBS exposure to oil metros, economic diversity in many oil metros, limited commercial real estate supply growth and generally strong property- and loan-level fundamentals.

"Oil slumps affect commercial real estate most directly by reducing demand for commercial space, typically occupied by oil-related employees," Moody's said. In markets such as Houston and North Dakota's energy-producing counties, construction driven by the oil boom inflated commercial real estate supply just as absorption began to decline. "This combined effect, on average, lowers occupancy rates and rents in energy metros, which is particularly stressful for loans with low debt-service coverage ratios or those scheduled to mature in the near term," Moody's said.

Kroll Bond Rating Agency, New York, examined Houston's performance and reported that falling oil prices shook up the nation's tenth-largest office market. Houston ended 2015 with 13.5% vacancy in office properties, up 2.6 points year over year and the largest annual increase since 1999. The U.S. office sector averages 10.4% vacancy.

3.18.16: ValueXpress Exhibiting at AAHOA Trade Show in Nashville, TN

On March 30-31, 2016, ValueXpress will be exhibiting at the annual Asian American Hotel Owners (AAHOA) Trade Show in Nashville, Tennessee. ValueXpress will be located in Booth 374 at the Gaylord Opryland Resort & Convention Center noon-6:00 p.m. on Thursday, March 30 and Friday, March 31.

“ValueXpress is an Allied Member of AAHOA and has been exhibiting at the AAHOA Trade Show for over 15 years,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “We have completed over 300 hotel loans during this period with many of those loans to AAHOA members. The trade show presents an excellent opportunity to allow hotel owners to meet personally with us to learn how we can assist them with their financing needs.”

Representing ValueXpress at the trade show will be Michael D, Sneden, Executive Vice President at ValueXpress, and Jay Bhakta, Senior Loan Originator. “This year it’s particularly important for us to talk with our clients,” stressed Jay. “There has been a bump in the road for CMBS conduit loans, our main lending product for hoteliers, that is smoothing out. We want to educate our clients on current conditions in the CMBS conduit market and let them know that CMBS conduit loans are available.”

ValueXpress welcomes the opportunity to meet with hotel owners at the trade show to explain in detail its SBA 7(a), SBA 504, USDA B&I, CMBS conduit and conventional loans for hospitality properties. Call Jay Bhakta at (601) 918-2850 for your personal appointment and be sure to stop by our booth (#374) during trade shows hours.

3.16.16: CMBS Conduit Loan Spreads Rally

After an extended period of widening spreads on CMBS bonds, spreads tightened significantly this past week. The tightening provided relief to market participants that have seen CMBS conduit lenders pull back from originating new CMBS conduit loans until the market for CMBS securities improved.

The decline in spreads was widespread across both the senior and junior classes of CMBS securities. The benchmark AAA-rated super senior CMBS bonds tightened approximately 30 basis points (bp) based on the pricing level for the most recent CMBS issue in the market, a $712.2-million offering led by Wells Fargo that was expected to price at 10-year swaps plus 143 bp or better. This level compares with 173 bp on the equivalent CMBS bonds from an issue led by Deutsche Bank that priced two weeks ago.

CMBS dealers attributed the improvement in spreads to a handful of positive events. First, a slowdown in CMBS issuance created pent-up demand for new CMBS securities. This was evident as most of the classes of the Wells Fargo were heavily oversubscribed. In addition, the general improvement in debt markets overall positively impacted the outlook for CMBS. Finally, the Federal Reserve’s decision this week to hold interest rates steady was bullish for CMBS.

“With a loose relationship of a 1 bp decline in the benchmark AAA-rated super senior CMBS bonds equating to a 1 bp reduction in the interest rate spread to borrowers, the spread tightening means a roughly 30 bp decline in interest rates to borrowers,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “Hopefully spreads will tighten further to bring the all-in borrower interest rate back down to the 5% area, which becomes appealing for borrowers requiring the non-recourse and/or cash-out features provided by CMBS conduit loans.”

3.9.16: Did You Know Kroll’s CMBS Reports Are Free?

Joseph Kelly, Senior Director at Kroll Bond Rating Agency (KBRA), recently spoke at the Regional Conference of Mortgage Bankers convention in Atlantic City, New Jersey. KBRA was established in 2010 in an effort to restore trust in credit ratings by creating new standards for assessing risk and by offering accurate and transparent ratings for structured debt transactions. KBRA was the second most active rating agency in the CMBS sector for 2015 with a 55% market share (70 deals) and is expected to remain in this position in 2016.

“Joe was on a panel discussing the state of the CMBS market and current trends in CMBS credit metrics when he caught my ear,” said Michael D. Sneden, Executive Vice President at ValueXpress. “He said ‘and by the way, all of our CMBS research, including deal pre-sale rating reports are free.’ “

“CMBS research and pre-sale reports are not free from the other rating agencies. I signed up with KBRA immediately,” said Sneden.

Anyone can gain access to KBRA research by signing up at https://www.krollbondratings.com. After you sign up, click on “Research,” then in the product drop-down tab select “CMBS.” This will take you to a treasure trove of research reports on new and older CMBS deals.

3.4.16: 5-Year Fixed-Rate CMBS Loans (No B-Buyer Approval Needed!)

ValueXpress has started origination of 5-year fixed-rate CMBS conduit loans with a partner. The loans will be held on the partner’s balance sheet until volatility in the CMBS market subsides. The 5-year fixed-rate program features interest rates in the 5.5% area and is available for all typical CMBS conduit loan assets. Loan documents will feature standard CMBS conduit loan terms, except that some loans will require recourse if it is determined that the transaction requires additional credit support, such as for large cash-out transactions. The loans will not require b-piece bond buyer approval, and therefore certainty of closing is much higher than what is available now in the CMBS market for loans that receive significant b-buyer scrutiny, such as hotels.

“Due to the enormous control b-piece bond buyers have to shape the composition of CMBS issues through kick-outs of loans they do not like, origination of CMBS loans for securitization has become a ‘best efforts’ exercise for less-desirable loans for the near term,” said Michael D. Sneden, Executive Vice President of ValueXpress. “If the b-piece buyer blesses the loan, then the lender will close it; otherwise, the lender refuses to close the loan, creating considerable uncertainty and potential wasted time and money for borrowers.”

This process is quite different than what occurred last year. At that time, when a loan was kicked out by a b-buyer, the lender closed it anyway and simply contributed the loan into the next CMBS pool. Now lenders are unwilling to take the risk that the loan would be repeatedly kicked out.

The 5-year term can be selected by the borrower as the desired term when the Term Sheet is executed. Alternatively, the borrower can proceed with a 10-year term option, and if the b-piece buyer accepts the loan, it can be closed and contributed to the CMBS pool as a 10-year deal. If the b-piece buyer rejects the loan, it can be closed as a 5-year deal as a backstop and held on balance sheet. While this may not be ideal, the program provides a reasonable alternative to no loan at all.

“Thankfully the vast majority of our loans pass the b-buyer smell test,” noted Sneden. “Therefore, this program will really serve as a backstop. But there is never anything wrong with having a back-up plan, particularly in volatile markets.”

3.2.16: Sports Authority Files for Bankruptcy

About one-third of Sports Authority stores will be shut down or sold as the company filed for bankruptcy, the company announced Wednesday morning. Sports Authority plans to close about 140 of its 463 stores over the next three months as it seeks a buyer. Distribution centers in Denver and Chicago will also close. About 3,400 of its 15,000 employees are expected to be laid off, according to DenverPost.com.

Once the nation's largest sporting goods retailer, Sports Authority has been passed by Dick's Sporting Goods, which offers a higher-end shopping experience. Online retailers such as Amazon as well as websites run by college and professional teams and leagues have also taken a big bite out Sports Authority's sales. It's now the fourth-largest retailer in the United States.

The company, which has stores in 41 states, has announced the stores that are on the chopping block. The list includes 25 stores in Texas, 19 in California, 18 in Florida and 11 in Illinois. The remaining stores could also close if the company doesn't meet the conditions of its bankruptcy, according to the Wall Street Journal.

Trepp has identified 34 CMBS loans with exposure to Sports Authority tenants. Many loans are part of larger multi-tenant retail portfolios in which Sports Authority is not the largest source of income. However a few loans have Sports Authority as the major or sole tenant, including the Sports Authority - Virginia Beach loan and the Sports Authority - Tampa loan. Both of these loans are secured by a roughly 40,000-square-foot free-standing store that would need to be re-let to another tenant, unless the lease is picked up by another retailer through the bankruptcy.

2.25.16: MBA, Trade Groups Urge Changes to CRE Risk Retention Rule

The Mortgage Bankers Association (MBA) and other industry trade groups asked the U.S. House Financial Services Committee to approve a bill that would amend the Securities Exchange Act to modify requirements for qualified commercial real estate. The rules, as written, are expected to negatively affect the CMBS market.

"Those rules are going to fundamentally impact the commercial mortgage-backed securities market, which currently holds more than $500 billion in commercial real estate loans," said MBA Senior Vice President of Legislative and Political Affairs Bill Killmer. "As finalized, we believe they could hamper the CMBS market by too narrowly defining the commercial real estate loans that qualify for a risk retention exemption. Passage of this legislation will keep the new regulatory regime from having a chilling effect on the commercial real estate finance industry, as well as the overall economy."

"CMBS provides financing to retail, office, apartments, industrial, healthcare and many other types of commercial real estate," the letter said. "If the rule is not modified before going into effect at year-end, a large percentage of borrowers across the country will not be able to refinance their loans without additional capital and higher monthly costs. Following the stress this will cause elsewhere in the system, valuations will be hurt and savers' investments will suffer as a result of the reduced liquidity in the system."

Joining MBA in the letter: the Commercial Real Estate Finance Council; the Real Estate Roundtable; the National Multifamily Housing Council; the National Association of Home Builders; the National Association of Realtors; the American Land Title Association; the National Association of Real Estate Investment Trusts; NAIOP, the Commercial Real Estate Development Association; Building Owners and Managers Association; the International Council of Shopping Centers; the U.S. Chamber of Commerce; and The Appraisal Institute.

2.19.16: Michael D. Sneden to Speak at N.J. Regional Conference of MBAs

Michael D. Sneden, Executive Vice President at ValueXpress, will participate on a panel of commercial real estate lenders at the 33rd Annual Regional Conference of MBAs to be held March 13-17, 2016 at Harrah’s Convention Center in Atlantic City, N.J.

On Tuesday, March 15th Mike will participate on the Traditional Lenders Panel moderated by Ron Shapiro, Assistant Professor in the Finance and Economics Department of Rutgers University Business School. Panelists include lending executives from leading commercial banks in the region, including Capital One, KeyBank Real Estate, TD Bank and BB&T.

“I am looking forward to sharing my observations on the current state of commercial real estate lending,” commented Michael D. Sneden. “With interest rates rising on CMBS conduit loans due to investors in CMBS securities requiring higher returns, balance sheet lenders, such as our affiliate bank, Country Bank, have a competitive advantage in the market right now in terms of lower interest rates. It will be interesting to hear if my colleagues are seeing an uptick in loans or whether intense competition for good deals is such that no one lender is capturing much additional business from CMBS borrowers.”

The conference features both a Commercial program and a Residential program. The Commercial program kicks off with a cocktail reception on Sunday evening, March 13th. The Commercial segment concludes Tuesday afternoon, at which time the Residential program kicks off with programs that run through Thursday. For additional information and to sign up, visit http://www.eventsmbanj.net/attendee-registration.html.

2.17.16: CMBS Prices Stabilize

The benchmark long-term super-senior AAA-rated bonds in an $875-million CMBS conduit offering led by Wells Fargo priced at 165 basis points (bp) over swaps, matching the level achieved in the previous multi-borrower CMBS issue from Bank of America and Morgan Stanley that priced on February 12. In addition, Morgan Stanley and UBS are currently marketing a $666-million CMBS issue that is expected to price the super-senior class in the area of 165 bp as well. Although the 165 bp level is the widest since 2011, CMBS loan originators would welcome stabilization so that loans priced today will provide adequate profit when securitized in the future. Recently, spreads have widened at a rapid pace, wiping out profits and in some instances creating losses on closed loans waiting to be securitized. Wells Fargo issued the summary chart shown below that highlights movement in CMBS spreads.

Spread Summary, as of February 17, 2016

Curent Vintage Conduit
(bp to swaps)
Level at 2/17/16 1-Day Change 1-Week Change 1-Month Change YTD Change
New Issue
AAA 3-Year
77 0 -3 -3 4
New Issue
AAA 5-Year
97 0 0 4 11
New Issue
AAA 7-Year
162 0 3 15 27
New Issue
AAA 30% 10-Year
(Super Senior)
164 0 3 15 28
New Issue
AAA 20% 10-Year
205 0 5 30 47

Some market pros, feeling better about the tone in the equities market, are predicting that a spread of 165 bp on the long-term super-senior AAA-rated bonds may prove to be the high water mark for 2016. Originators are reporting weak pipelines as borrowers have shied away from the higher CMBS loan rates so there is going to be reduced supply of CMBS in the next few months, which should help pricing.

2.10.16: A Keurig in Every Hotel Room?

In 2013, Hilton Garden Inn partnered with Green Mountain Coffee Roasters, a leader in specialty coffee and single-serve beverages with its innovative Keurig brewing technology, to upgrade its in-room coffee and beverage offering. At that time, the hotel industry was preparing for a major change in how in-room coffee service would be delivered going forward.

Now the Holiday Inn and Holiday Inn Express brands have joined with Green Mountain (now Keurig Green Mountain, Inc.) to bring K-cup coffee to its guests. As part of this new relationship, beginning in 2016, all U.S. Holiday Inn and Holiday Inn Express hotels will introduce a new in-room coffee experience featuring Keurig K130 brewers and select Keurig K-Cup coffee products. Heather Balsley, Senior Vice President, Americas brand management, IHG said, “We know that a great coffee experience is tremendously important to our guests at both Holiday Inn and Holiday Inn Express hotels.”

IHG completed guest research that found the overwhelming majority of target guests knew of and had used a Keurig brewer. With the Keurig single-cup brewing system, guests can brew a single cup at the touch of a button. Additionally, each Keurig K-cup pod is complete with a filter and fresh ground coffee sealed inside to preserve freshness.

2.5.16: Report from the 2016 MBA CREF Convention

What a difference a year can make. At the 2015 Commercial Real Estate Finance Convention (CREF), participants cheered as the CMBS conduit loan machine cranked at full tilt. Panelists suggested volume of $125 billion in CMBS originations could be easily achieved.

Well, fast forward to the 2016 CREF convention held in Orlando January 31-February 2 and a decidedly different tone was found. After CMBS loan spreads steadily marched higher during 2015, volume barely exceeded $100 billion. While headwinds will hamper CMBS, panelists reflecting on CMBS conduit loans assured that deals will get done.

“I think Chris LaBianca, Managing Director and Head of Origination for UBS Real Estate Finance, best summarized the outlook for CMBS conduit lending for 2016,” commented Michael D. Sneden, Executive Vice President at ValueXpress. LaBianca suggested that deals will get done, but at the right price based on the market’s outlook on risk. LaBianca offered that CMBS conduit loans will not see the 4.5% rates prevalent in 2015 in the short run; coupons will need to be north of 5%. Class A and B+ properties will be “fine,” noted LaBianca, but B- and C quality properties may struggle to find the leverage and terms needed to obtain competitive CMBS financing. LaBianca asserted that the benefits of non-recourse and cash-out proceeds for CMBS refinances outweigh the relatively higher interest rate compared with other commercial loan products.

Other panelists suggested that with declining profits and increased regulatory requirements, many smaller CMBS originators will exit the market. Some 35 firms originate CMBS conduit loans for securitization, but some 15 of the firms each originated less than 1% of total CMBS loans originated in 2015. Some panelists suggested that many will determine the business not profitable enough to continue.

2.2.16: What Is the Opportunity in “Formula Blue?”

In April 2015, InterContinental Hotels Group formalized Formula Blue, its latest Holiday Inn Express brand design prototype. With a design that puts sleep quality, simplicity, and ease of maintenance at the center of its concept, compliance with Formula Blue is mandatory for all future renovations/franchise extensions and new-build Holiday Inn Express properties, which is a first for the brand.

The first full Formula Blue Holiday Inn Express opened in Salt Lake City, Utah in 2015 and another 80-100 hotels opened in 2015 featuring some aspects of the Formula Blue design. Additionally, based on current license agreements, over 200 Holiday Inn Express hotels are expected to go through property improvement plans in 2016 in addition to the 150 that started in 2015. All would be required to renovate to the Formula Blue design.

So what do Formula Blue and CMBS conduit loans have to do with each other? Well, Formula Blue is expensive. According to one CMBS lender, “depending on how updated the property already is … it generally costs $10,000-$25,000/room to get to Formula Blue standards ... it ain't cheap.” That means, for a typical 75-room Holiday Inn Express, the owner would need $750,000-$1,875,000 to comply. Many owners do not have that level of capital on hand.

But with a “cash-out” CMBS conduit loan, the owner could refinance the existing property loan balance and include the costs of Formula Blue into the loan. “We have completed many CMBS loan transactions that include loan proceeds for Property Improvement Plans, primarily for Hampton Inns,” commented Jay Bhakta, Senior Loan Originator at ValueXpress. “I am pleased that we can now extend this program to my clients who need to complete Formula Blue in order to secure a long-term franchise renewal.”

1.28.16: SBA 7(a) Premiums Steady Despite Market Volatility

Given the volatility in the debt markets, we thought it worthwhile to revisit loan premiums obtained on the sale of SBA 7(a) guarantees in the secondary market. After post-crash premiums peaked at 118.75 in February 2013, pricing gradually declined during the balance of 2013. Then, throughout 2014, secondary market premiums traded within a tight range of 117.00-117.25. In 2015, loan premiums drifted down slightly to an average of 116.50, but still very healthy levels compared with price declines in other debt-related securities, making the sale of SBA 7(a) guarantees look very attractive right now, as shown in the table below.

2015 Premium*
Dec 116.00
Nov 116.00
Oct 116.00
Sep 116.00
Aug 116.75
Jul 117.00
Jun 117.50
May 117.00
Apr 117.00
Mar 116.75
Feb 116.50
Jan 116.50
Avg. Premium*
2015 Average 116.50
2014 Average 117.00
2013 Average 118.00
2012 Average 116.00
*Based on Prime + 2.75%, Quarterly Reset, 25-year loan term. 

1.22.16: CMBS Spreads Continue to Drift Wider

CMBS spreads continue to drift wider in 2016, following a pattern of wider spreads that began in the summer of 2015. Three CMBS deals in the market have released pricing guidance in the range of 155-158 basis points (bp) over swaps for the benchmark AAA-rated senior CMBS class. That level is up from the 136-140 bp range from three CMBS deals that priced in December 2015. Equivalent CMBS spreads for the AAA-rated senior class were 100-110 bp last summer. Market professionals are pointing to economic concerns in China and plunging oil prices creating volatility in debt markets, including CMBS. As a rough rule of thumb, every 1 bp increase in AAA-rated senior class CMBS means lenders must obtain a 1 bp increase in loan spread from borrowers to maintain the same level of profit. This would imply an increase in loan spreads to borrowers of 15-20 bp in January.

The pace and magnitude of spread increases in 2015 were such that borrowers did not experience much re-trading of loan spreads presented in their Term Sheets. For the most part CMBS lenders accepted lower profit margins in the hopes of making better margins on subsequent deals based on newly executed Term Sheets at higher spreads. But the higher margins never materialized as wider spreads on CMBS deals that priced through fall 2015 simply wiped out the additional spread on newly executed Term Sheets. Lenders hoped that for at least some period spreads would stabilize, but they have not.

"With spreads increasing at a quicker pace and at a larger magnitude in January, lenders are advising commercial mortgage brokers to educate their borrowers on market conditions; this way, in the event that the borrower receives a spread adjustment prior to closing, they don't feel they are being cheated," commented Michael D. Sneden, Executive Vice President at ValueXpress. "Whether a spread adjustment is warranted depends on a lot of factors, including the interest rate floor in the Term Sheet, whether the interest rate index is the higher of swap or U.S. Treasury and the initial spread level."

"A spread adjustment is not a forgone conclusion. This is just 'heads-up' market intelligence for borrowers just in case," said Sneden.

1.18.16: ValueXpress Establishes New Nationwide Relationship for SBA 7(a) Loans

ValueXpress recently established a relationship with a nationwide SBA 7(a) lender to originate SBA 7(a) loans on owner-occupied properties throughout the United States.

"We have been so active in CMBS conduit lending that our SBA 7(a) and SBA 504 platforms have fallen a bit to the wayside," commented Jay Bhakta, Senior Loan Originator for ValueXpress. "But we are still active, mostly providing SBA 7(a) loans on hotels that do not qualify for CMBS execution."

"Our mission is to be able to help our clients any way we can," said Michael D. Sneden, Executive Vice President at ValueXpress. "We do a ton of CMBS conduit loans on hotels, but we want to be able to assist clients with exterior-corridor and budget brand hotels that need financing too. In addition, we have quite a few clients who operate businesses from commercial real estate property that they own, which also does not qualify for CMBS. They are eligible for financing in the SBA 7(a) program, though, so we can help them as well."

ValueXpress has been involved with the SBA 7(a) and 504 programs since 2003. It originates SBA 7(a) and 504 loans in the New York metropolitan area with its affiliate, Country Bank. In addition, the firm maintains regional relationships with SBA 7(a) and 504 affiliates outside the New York metropolitan area.

"What is terrific about our new relationship is the nationwide footprint and aggressive appetite for hospitality," said Jay. "Many SBA lenders have moved away from hospitality so we are looking forward to completing a lot of hospitality and well as other asset classes with this new partner."

1.15.16: Wal-Mart Stores Inc. Abandons Small Store Format

Wal-Mart Stores Inc., the behemoth of suburban retail stores, has ended its growth experiment to open smaller versions of its large superstore concept in rural and suburban infill locations. The retailer will close all 102 of its Walmart Express outlets, the smaller of its two small format stores, which it launched in 2011 as a pilot program with much fanfare.

Wal-Mart's decision to abandon its smallest store concept follows an internal review of its 11,600-store portfolio that began last October. The review took into account a number of factors, including financial performance as well as strategic alignment with long-term plans. Wal-Mart designed the 10,000- to 12,000-square-foot prototype for rural communities, putting it in competition with dollar stores such as Dollar Tree and Dollar General and small format grocers like Sav-a-Lot.

The larger small format store will continue to be a part of Wal-Mart's future plans. That version, known as the Neighborhood Market, averages 38,000-40,000 square feet and targets infill and urban areas. The idea was to follow younger shoppers as they gravitated to living in downtowns rich with restaurants and other amenities but sometimes lacking the amenities that could be provided by the Wal-Mart smaller footprint stores.

Wal-Mart intends to open 50-60 Supercenters and 85-95 Neighborhood Markets in the United States in 2016.

1.8.16: 2015 CMBS Issuance Tops $100 Billion; Lenders Cautiously Optimistic for 2016

According to Commercial Mortgage Alert, CMBS issuance reached a milestone in 2015 – eclipsing the $100-billion barrier for the first time since 2007 – but only barely, finishing at $101 billion. This compares with $94.1 billion of CMBS issued in 2014, up 7%, but is far less than the $124 billion projected by market pros at the beginning of 2015.

Issuance sagged in the latter half of 2015 as CMBS spreads rose steadily. Senior AAA-rated CMBS traded at roughly swaps plus 140 basis points (bp) at the end of 2015, up from approximately swaps plus 100 bp in midsummer. Worse, the increases were relentless: Each week seemingly posted higher spreads that the week before. Lenders needed to pass through the spread increases to borrowers to make money at securitization, putting a damper on borrower enthusiasm, which resulted in some deals not closing.

Against this backdrop, CMBS originators are cautiously optimistic that CMBS conduit lending will grow in 2016. A panel of industry veterans is projecting, on average, $110 billion of CMBS conduit loan originations for 2016, up roughly 10% from 2015 and continuing a string of annual increases since 2010.

Summary of CMBS Issuance

Year
U.S. (billions)
2010
$11.6
2011
$32.7
2012
$48.3
2013
$86.1
2014
$94.1
2015
$101.0

A good portion of the optimism stems from the large block of 2016 CMBS conduit loan maturities. “Roughly $100 billion of CMBS conduit loans mature in 2016,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “Most of these loans were written in 2006 when rates were in the 5.5% area, so even with today’s rates in the 5.0% area, borrowers will see a rate reduction. Plus, many of these borrowers do not have any other option but to accept whatever is available in CMBS.”

1.5.16: CCTG Grad Lawler Rogers Talks About His Experience with ValueXpress

Recently, Lawler Rogers, a graduate of CCTG and a student of Michael D. Sneden, Executive Vice President at ValueXpress, was interviewed about his experience with his first deal with ValueXpress. Watch his interview below:

12.28.15: Self-Storage Properties Best-Performing Asset Class in CMBS

Self-Storage facilities has turned out to be the best-performing asset class in CMBS in terms of delinquency. Self-storage CMBS-backed loans historically have been good performers for several reasons. For one, self-storage properties weren’t prone to being overvalued during the peak of CMBS lending in 2006-2007 as much as other property types were (e.g., office and retail). Meanwhile, self-storage cap rates are significantly lower now than they were when the loans were initiated, allowing owners to easily refinance outstanding balances as they mature.

The sector had total delinquency of under 5% during the 2007-2009 financial crisis period, while other assets including multifamily saw delinquency rate soar past 10%. By 2013, the delinquency rate had declined to 2.31%, according to data from Dominion Bond Rating Service. For self-storage loans with original maturities in 2015, only $6.5 million are delinquent.

“These statistics are fascinating to me, so I had Jim Brett, head of CMBS analytics at ValueXpress, run some reports from our Trepp system,” commented Michael D. Sneden, Executive Vice President at ValueXpress. According to Jim’s findings, the current delinquency (more than 90 days) for the entire self-storage universe in CMBS is $13 million, representing 1.83% of all self-storage loans. Of delinquency, $2 million is post-2007 originations and the balance was originated in 2007 and prior years.

“We are working on a number of self-storage deals and are working to increase our originations of this asset class,” comment Gary Unkel, Senior Loan Originator at ValueXpress. “The buyers of subordinate CMBS (b-buyers) love self-storage and now we know why.”

12.25.15: Meet Me at the MBA in Orlando, FL

Michael D. Sneden, Executive Vice President of ValueXpress, will be representing the firm at the Mortgage Bankers Association Commercial Real Estate Finance (CREF)/Multifamily Housing Convention & Expo at the Hyatt Regency in Orlando, Florida January 31-Febraury 3, 2016. The convention is expected to attract over 3,000 commercial and multifamily professionals who will be networking with industry leaders and listening to professionals share their views on the direction of the industry.

"I have been attending CREF for over 15 years, and it is by far the best opportunity to meet my colleagues to share our past, current and future views on the commercial real estate lending markets," said Sneden. "This year, with the expected growth in CMBS conduit lending from a wave of maturing 2006-2007 CMBS conduit loans, I am looking to meet with my contemporaries who want to participate in the rewards of CMBS conduit lending. I want to see if there is a way we can work together."

"According to CMBS pros, the CMBS lending market is projected to climb to $125 billion in 2015 from roughly $100 billion in 2015," notes Sneden. "ValueXpress has been tracking the market increases and expects to increase originations 25% in 2015, and we would like to work with more colleagues as we reach our goal."

Mike will be in Orlando from Sunday, January 31 through Wednesday, February 3. If you want to get together for a drink or to chat between session presentations, please email Mike at msneden@valuexpress.com.

12.21.15: Sales Continue to Fall at Brick & Mortar Retailers

As the holiday shopping season comes to a close, it is clear that shoppers chose the Internet over a trip to the mall. Sales at brick & mortar stores fell 6.7% over the most recent weekend, while traffic declined 10.4%, according to RetailNext, which collects data through analytics software it provides to retailers. That is worse than the 5.8% decline in sales and the 8.0% drop in traffic recorded for November 1-December 14, 2015.

This follows a report from ShopperTrak, the leading global provider of consumer behavior insights. ShopperTrak recently provided its updated sales estimate for brick & mortar retail on the Black Friday weekend of November 26-29. The four dates accumulated a projected $20.43 billion in total sales, down an estimated 10.4% from a year ago.

Even last-minute shoppers like Katherine Koepsell, a lawyer who lives in Beaver Dam, Wisconsin, were shopping online instead of in brick & mortar stores. On Sunday, Ms. Koepsell realized she needed a few more gifts, so without leaving her bed she reached for her smart phone and ordered “Toy Story” stickers and Olaf-themed gloves from Amazon.com. With Amazon Prime and its $99 annual membership, members can get free two-day shipping as late as December 22 and still receive items on December 24, one day before Christmas.

“I can’t wrap my head around having to pile the whole family in the car and then fight the crowds with the stroller. And what if the store doesn’t have what you are looking for?” Ms. Koepsell said of making a trip to the mall.

12.16.15: Treasury and Swaps Stable After Federal Reserve Rate Increase

The Federal Reserve raised its key interest rate on Wednesday, December 16 from a range of 0.00%-0.25% to a range of 0.25%-0.50%. The move was widely expected. It is a sign of how much the economy has healed since the Great Recession. The central bank believes the U.S. economy is strong now and no longer needs crutches and that the move "marks the end of an extraordinary period" of low rates designed to boost the recovery from the Great Recession.

The 10-year Swap Rate, important to CMBS conduit loan borrowers because the Swap Rate is the index used to set the interest rate on CMBS conduit loans, remained stable after the announcement in the 2.15% area. CMBS conduit loan borrowers breathed a sigh of relief, as many believe there is a close relationship between Federal Reserve rate increases and CMBS conduit loan rate increases. In reality, the Federal Reserve adjusts short-term interest rates, which do not directly impact long-term interest rates, and the rate action on Wednesday proved to be the case. In fact, the 10-year Swap Rate has been remarkably stable over the past three months, ranging from roughly 2.00% to 2.30%. Stability is highly desired in CMBS conduit lending since the interest rate is set for a fixed period (typically 10 years) at closing and borrowers are subject to rate fluctuation during the 45-day loan underwriting and closing period.

Although Swap rates have been stable, interest rates have been rising for CMBS conduit borrowers. This is because the Swap rate only represents roughly half of the index to set a CMBS conduit loan rate. The other index, the Loan Spread, has been rising, resulting in an overall increase in CMBS conduit rates. For discussion on this topic, see 12.11.15: Borrowers Want to Know: Why Are CMBS Conduit Loan Spreads Going Up!

12.11.15: Borrowers Want to Know: Why Are CMBS Conduit Loan Spreads Going Up!

CMBS conduit loan spreads have increased steadily this fall and many conduit borrowers who have not completed transactions recently are surprised when they receive a Term Sheet reflecting current market spreads. A natural response is “Wow, why is this loan spread so high compared with my last deal?”

First, let’s talk about why the loan spread is important. CMBS conduit loan interest rates are fixed for the life of the loan at closing by adding two indexes together: the loan spread listed in the Term Sheet and the swap spread. The swap spread has been relatively stable over the past four months at 2.00%-2.30%, and is now 2.13% for a 10-year CMBS conduit loan.

The loan spread reflects the spread that dealers sell CMBS securities to investors backed by CMBS conduit loans. CMBS conduit loan originators must charge the borrower a spread that is more than the spread offered to CMBS bond buyers in order to make a profit. As 2015 progressed, CMBS bond buyers demanded more spread to buy CMBS securities. Borrowers can follow this trend by looking at the AAA (10-year) CMBS securities spreads in the chart below; it is not an exact relationship, but roughly a 1-basis-point (bp) increase in AAA (10-year) CMBS spreads equates to a 1 bp increase in loan spread to borrowers:

Month
(2015)

AAA
(10 Yr. Spread,
Mo. Avg)
April
90
May
87
June
95
July
105
August
115
September
120
October
125
November
135

The chart indicates a roughly 50 bp jump in AAA (10-year) CMBS spreads from May until November. So a borrower who may have closed a loan in spring 2015 and earlier at a loan spread of 250 bp that was prevalent at the time would now receive a Term Sheet reflecting a loan spread of approximately 300 bp.

… And What About a Projection on Loan Spreads for 2016?

As shown above, AAA (10-year) CMBS spreads have been trending up for many months. Initially, CMBS conduit loan originators held loan spreads to borrowers unchanged and accepted less profit, anticipating that the rise in AAA (10-year) CMBS spreads would reverse course. In addition, competition for CMBS conduit loans was fierce, and CMBS conduit loan originators did not want to lose loans to competitors. But by fall 2015, CMBS conduit loan originators began to lose money as AAA (10-year) CMBS spreads became greater than the loan spread on the underlying CMBS loans. In October and November, CMBS conduit loan originators raised spreads at a fairly rapid pace into last week.

The prospects for AAA (10-year) CMBS in the first half of 2016 may be a tug between two forces. Market professionals attribute much of the spread widening as driven by too much CMBS supply at yearend, when most investors have little remaining un-invested cash to buy CMBS securities. With fresh cash allocations for 2016, some bond dealers believe spreads will tighten. On the other hand, there are headwinds in the broader debt markets. With the unrelenting fall in the price of oil, exploration and development companies are beginning to default on their mostly junk-rated bonds. While one might ask “what do bonds related to oil-drillers have to do with commercial real estate?” cracks in one sector of the debt market can infect other sectors, as investors begin to take losses and become more risk averse across all debt markets.

Oddly, the likelihood that the Federal Reserve will increase short-term interest rates in 2016 may not be a factor in loan spreads; however, it could potentially impact swap spreads. “Despite the Federal Reserve increasing short-term rates, I don’t believe long-term rates (i.e., 10-year Swap rate and 10-year Treasury rate) will move much in the first half of 2016; I predict the current range of 2.0%-2.3% prevails,” said Michael D. Sneden, Executive Vice President at ValueXpress. That would mean interest rates to borrowers in the beginning of 2016 will largely depend on the appetite for CMBS securities.

12.3.15: CMBS Conduit Lenders Slip New Provision in Term Sheets

About six weeks ago, the 10-year Treasury rate surpassed the 10-year Swap rate. For at least the past ten years, the Swap rate had always been higher than the equivalent Treasury rate. The gap between the two indexes was typically 10 basis points (bp). Right now, the reverse is true, the 10-year Swap is 2.14% and the 10-Year Treasury is 2.26%, 12 bp higher than the swap. Since CMBS conduit lenders historically set interest rates on CMBS conduit loans based on the Swap rate, switching to the Treasury as an index would provide higher spreads. Better yet, how about the best of both worlds? Well that’s what happened: See if you can tell the difference between the old provision and the new provision, and what it would mean to the interest rate to the borrower based on the Swap rate and Treasury rate listed above.

Old provision:
The greater of (1) the sum of (a) the 10-year offered side swap rate and (b) 300 bp and (2) 5.0%.

New provision:
The greater of (1) the sum of (a) the 10-year offered side swap rate (or Treasury rate, whichever is greater) and (b) 300 basis points and (2) 5.0%.

Needless to say, we at ValueXpress are negotiating out this new provision before our borrowers execute their Term Sheets for a CMBS conduit loan.

11.27.15: Wave of CMBS Maturities Is Here!

The significant amount of CMBS conduit loan maturities in 2016-2017 will provide an unprecedented opportunity for CMBS conduit loan mortgage brokers to increase their origination volume.

“Recently, Jim Brett, our CMBS bond analyst and head of CMBS conduit loan underwriting at ValueXpress, performed a sort through our Trepp database of all existing CMBS conduit loans. He wanted to quantify the amount of loans maturing in the 2016-2017 time frame,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “The results are impressive.”

The large amount of loan maturities stems from the aggressive underwriting and high property values prevalent in 2006-2007 that resulted in record CMBS origination levels of $198 billion in 2006 and $228 billion in 2007. The three-year period of 2005-2007 was the only one in which U.S. CMBS loan originations exceeded $100 billion. Since most of the loans have a 10-year term, the majority is maturing in 2016-2017.

The results of Brett’s search are provided in the table below:

Year
Maturing CMBS Loans (billions)
2016
$106
2017
$122

“Throughout 2015, we have been mining the Trepp database to find well-performing CMBS conduit loans and get in touch with owners to help them navigate through a CMBS conduit loan refinance,” commented Sneden. “We completed many CMBS conduit loan refinances of maturing CMBS loans in 2015, but we expect the pace to accelerate in 2016 and 2017.”

“Depending on property location, we are assigning these maturing loans to our local field offices or to CCTG graduates to make personal contact with owners,” noted Brett. “Although we are in the age of the internet with less 'personal interaction,' CMBS conduit borrowers still want to meet 'face-to-face' to build trust and confidence that their deals will get done.”

11.24.15: Wells Fargo – “Underwriting Metrics Slip in 2015”

Wells Fargo recently reported that, in its opinion, CMBS conduit loan underwriting “looked decidedly weaker in 2015” with only Debt Service Coverage Ratios (DSCR) improving. DSCR improvement was primarily a function of low interest rates that were prevalent for the majority of 2015. However, other key credit metrics, including debt yield and full- and partial-term interest-only periods (IO), showed deterioration compared with 2005 CMBS credit metrics, according to Wells. The Wells research summarized the key credit metric results for 2015 CMBS compared with 2005 vintage CMBS as follows:

11.18.15: Rooftop Amenities Are the Rage

The rooftop is now the hottest place to be. These versatile and attractive spaces are one of the newest, most coveted amenities hitting the multifamily market. The emerging spots provide a trendy atmosphere where residents will want to spend most of their time enjoying skyline views -- leading to opportunities for extra revenue and an increased likelihood that renters will renew their leases.

The main driver behind the rooftop craze is the view. On a communal rooftop deck, residents can enjoy a spectacular skyline view while swimming, grilling, or exercising, without having to pay top dollar for a penthouse unit. Add great weather, lounge seating and rooftop cocktails and a “Zen-like” relaxation environment is created to wind down from a stressful week.

Taking cues from the resort industry, developers are striving to make this new “must-have” space as sensational as possible. Everything from pools to putting greens is making its way onto multifamily rooftops. While the most common features include outdoor lounge spaces with TVs or movie projectors, grilling areas, fitness centers, fire pits, and gardening areas, some rooftops are offering more unique amenities, such as dog parks, wine bars and yoga studios.

“I recently toured a new apartment community in Montclair, N.J. called Valley & Bloom,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “The apartments were very nice, but what really caught my attention was the rooftop view of New York City and the Freedom Tower at One World Trade Center. The view was spectacular and the space, decked out with comfortable seating, bar and grilling station, was very inviting. The leasing agent noted that once prospects see the rooftop space, the deal is sealed!”

Rooftop View at Valley & Bloom, Montclair, NJ

11.13.15: Swap Rate Falls Below Treasury Rate - CMBS Borrowers Benefit

Typically, Swap Rates are more than the equivalent Treasury Rate, but recently the relationship has reversed: The Swap Rate is currently lower than the equivalent Treasury Rate. This relationship is important to CMBS conduit loan borrowers because the Swap Rate is the index used to set the interest rate on CMBS conduit loans. The lower the Swap Rate, the lower the interest rate that the borrower receives.

Historically, the 10-Year Swap Rate (the rate used to fix the rate for CMBS conduit loans with a 10-year term) has traded roughly 10 basis points (bp) more than the 10-Year Treasury rate. But in September, the 10-Year Swap Rate went below the 10-Year Treasury rate for the first time in five years and is roughly 10 bp lower than the 10-Year Treasury rate. This has turned out to be a bonus for borrowers. For example, a month ago with the 10-Year Treasury hypothetically at 2.0%, the Swap Rate would have been 2.10%; add a loan spread of say 250 bp, and the interest rate would have been 4.60% (2.10% + 2.50%). Today, the hypothetical Swap Rate is 1.90%, 10 bp below the 10-Year Treasury rate. This results in an interest rate of 4.40% (1.90% + 2.50%), a significant 20 bp swing in favor of the borrower.

This phenomenon is not lost on CMBS issuers as the inversion is reducing profits. Market pros are wondering if it’s time to go back to using the Treasury rates as the basis for pricing loans instead of swap rates. The idea increasingly has been discussed among the CMBS bankers. It seems that the root of the inversion is relatively low demand for Treasuries and corresponding increased demand for swaps. If the imbalance fades, it is likely the discussion to switch to Treasury-based pricing will disappear, but if the gap widens, dealers may take action.

11.9.15: Future Apartment Rents to be Determined by Computer Software?

Many local apartment owners are following an industry trend by switching to algorithm-based leasing software. It calculates the price of a unit based on a number of factors -- and the rate can unexpectedly peak and valley.

"Prices change daily," said Dorna Davani, leasing consultant with Chartwell-owned The Lakes at Myrtle Park in Bluffton, South Carolina.

Chartwell recently started using YieldStar, a popular revenue management software by Texas-based RealPage. YieldStar calculates the rate of an apartment based on a number of factors. The most significant factors are supply and demand in the local market and current and future occupancy rates. It's the type of dynamic pricing that airlines, hotels and online retailers such as Amazon.com have used for years. After analyzing many factors, the software produces the highest feasible cost, which fluctuates often and sometimes dramatically, in real time for a seat on an airplane or for a hotel room.

When applied to apartments, the rental rate produced by dynamic pricing methods is sometimes beneficial to the consumer. The quoted rent can plummet when demand is low and supply is high. But at apartment communities that use this type of revenue management software, the cost to lease can jump unexpectedly when units are in high demand, leaving current and potential tenants in the lurch -- especially in a seller's market, when rental rates are already very high.

Response from renters has been neutral thus far, but leasing agents noted that daily rental prices don't move very significantly or very frequently. Agents estimate the YieldStar price for units change about every three days, and it's usually no more than $50 lower or higher than the prior price.

11.4.15: Investors Sue CMBS Servicer over Fees for Apartment Sale

Four investors in Stuyvesant Town Peter Cooper Village located in New York City are suing CWCapital and Wells Fargo, looking to prevent CWC from reaping an alleged “windfall” of more than $560 million from the $5.3-billion sale of the property to the Blackstone Group and Ivanhoe Cambridge. The plaintiffs are investors in the CMBS securities that financed the prior owner’s acquisition of the property from MetLife Insurance Company in 2006. The buyer, Tishmam Speyer, defaulted on the loan underlying the CMBS securities owned by the plaintiffs in 2010.

According to the lawsuit, CWCapital reportedly believes it can collect up to $566 million upon the sale and payoff of the defaulted CMBS loan, largely due to a contractual clause in the CMBS trust servicing agreement that entitles the firm to 3% of the property’s debt because the sales price is much greater than the $3-billion mortgage.

The four plaintiffs are suing to prevent CWCapital from receiving that money, arguing it should go to the investors instead. “Under the relevant contracts, those specific funds are required to be deposited into segregated accounts and used to offset losses suffered by Plaintiffs and other investors in the commercial mortgage backed securities (“CMBS”) trusts that hold the senior loan secured by the real estate,” the complaint reads. In other words, the profits from the Stuyvesant Town Peter Cooper Village loan payoff should go to offset losses on other loans contained in the CMBS pool.

“It will be interesting to see how this saga turns out,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “CWCapital did an extraordinary job in recovering 100% of the principal balance of the loan, which at some point was $2 billion under water. It deserves to be paid for the recovery effort.”

10.30.15: Don’t Let This Trigger Hurt You

Most CMBS conduit loans have a protection for lenders in the event property cash flow decreases significantly during the loan term. The protection is in the form of a cash management account that is in the name of the lender and the borrower. When the property is performing in accordance with the underwritten debt-service coverage, property cash flow (rents) passes through the cash management account and is routed directly to the borrower’s operating account. Under normal circumstances, the borrower hardly knows that the cash management account exists because it is not used.

If the property cash flow falls below a certain debt-service coverage ratio (DSCR), typically in the 1.20x area for two consecutive quarters (using a trailing 12-month operating period to smooth out any seasonality), the loan servicer “triggers” cash management, which is miserable for borrowers. Cash flow that previously passed through the cash management account and routed directly to the borrower’s operating account no longer does so. Instead, the servicer keeps the cash and puts it in escrow in one of three “buckets.” The first is a principal and interest bucket in the amount of the next mortgage payment. The second is a tax and insurance bucket for those escrows. And the third is a reserve bucket for the monthly replacement reserve. Essentially, the servicer is now making the mortgage payment for the borrower. The servicer no longer relies on the borrower to make it.

“Borrowers can create a cash management trigger by mistake if they are not careful in submitting accurate property operating statements,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “Borrowers must make sure that the operating statements submitted to the loan servicer do not contain non-property-related expenses and capital expenses. In addition, one-time expenses should be footnoted so the servicer can make proper adjustments to the cash flow before applying the debt-service coverage test.

“ValueXpress offers all of our clients who have closed CMBS conduit loans with us free, ongoing review of property cash flows and an internal DSCR calculation to ensure that they don’t accidently trigger cash management,” noted Jim Brett, head of underwriting at ValueXpress. “It’s just one of many ongoing services we provide our clients post-closing, at no charge.”

10.26.15: New Regulations May Affect Small CMBS Lenders

Regulation AB, a new regulation adopted by the Securities and Exchange Commission (SEC) and effective November 24, may have an adverse effect on small CMBS lenders. Regulation AB requires a senior CMBS executive employed by the lead lender in the securitization to assume personal liability for each securitization by certifying that all deal information supplied to investors is accurate. The measure, intended to force issuers to more closely scrutinize collateral and raise their credit standards, carries no criminal liability, but could leave signers vulnerable to civil lawsuits by investors or to SEC charges of civil violations of securities law.

The rub is smaller CMBS lenders that contribute a relatively small proportion of loans to a securitization may not have to provide the certification, as the certification is made by the chief executive of the securitization’s depositor, which is typically the lead manager or co-managers of the deal. That creates additional risk for the lead manager or co-managers that they may not want to take. As a result, some lead manager or co-managers may simply tell the small CMBS lenders that they do not want them to contribute loans to their CMBS issues, potentially leaving the small lenders out in the cold.

Many market professionals believe a solution may be found once lead managers get to see the rule in practice. Some may determine the benefits to the securitization of the additional collateral outweigh the additional certification risk. Some managers may seek additional compensation for certifying to the risk. Most will request small lenders to indemnify the lead manager against any losses resulting from a false certification. Other market participants hope the rule may result in smaller CMBS lenders leaving the market, reducing competition.

“What is good is the rule has no impact on ValueXpress,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “We have long-standing relationships with our CMBS partners that have spanned many, many years, and our partners know the quality of our loans are exceptional. We are continually pressed to find more loans for CMBS securitizations.”

10.18.15: Be Truthful in Your Disclosures Please

In CMBS conduit lending, all lenders require sponsors and their borrowing entities to complete a disclosure form. Typical questions include whether the sponsor has ever defaulted on a commercial loan, been involved in litigation, filed for bankruptcy, or been convicted of a crime. Some sponsors believe that not disclosing these matters, particularly those that occurred many years ago, is a better course of action, thinking they are not likely to be discovered. Some sponsors think that providing full disclosure and an appropriate explanation is a burden that puts the loan at risk of being declined.

“Well, I can unequivocally state that answering any of the questions incorrectly on the disclosure form is a huge mistake and jeopardizes the closing of the loan on subsequent discovery. The risk of the loan not closing on discovery is well in excess of the risk of disclosing up front and working through an adequate explanation of what happened,” commented Michael D. Sneden, Executive Vice President at ValueXpress.

“Many borrowers do not appreciate a few things,” commented Jim Brett, head of underwriting at ValueXpress. “First, searches today are unbelievably thorough. One of the questions is whether the sponsor has been convicted of a misdemeanor. In three instances, the sponsor marked no. Subsequently, a DUI, which is indeed a misdemeanor, showed up in searches, one of which was from 34 years ago. This did not derail the deal, but proves the point on the intensity of searches today. Rest assured, any non-disclosed item will be found!”

Second, borrowers fail to understand that, within reason, credit blemishes that either were (1) not related to the subject property, (2) one in which a lender default did not cause a loss, or (3) litigation that was subsequently settled, for example, are generally acceptable in a CMBS transaction. In addition, disclosure allows the borrower to put its best foot forward when it comes to an explanation; with two sides to every story, disclosing up front provides an opportunity to provide a supporting opinion versus a defensive position when a non-disclosed event surfaces and the borrower has to back-pedal.

The moral of the story is to tell the truth up front, and explain in detail what and why it happened.

10.16.15: Charley Lobetti Joins ValueXpress

Charley Lobetti, a 20-year veteran in commercial real estate lending, joined ValueXpress effective October 1. Charley is primarily responsible for commercial loan originations focused on CMBS conduit loans in what is known as the East-South-Central United States, including the states surrounding Tennessee and Kentucky. Charley is based in Knoxville, Tennessee.

"Charley brings an outstanding breadth of experience to the ValueXpress team. He has a history in commercial lending in the community banking sector, where he originated, underwrote and arranged participations with a network of seven community banks in Tennessee and surrounding states. He assisted many business and real estate owners in obtaining financing,” commented Michael D. Sneden, Executive Vice President at ValueXpress.

“In addition, Charley has been active in the capital markets, through the origination of CMBS conduit loans, loans for contribution into Collateralized Debt Obligations (CDOs) and Variable Rate Demand Notes (VRDN). Charley has also originated commercial real estate loans for insurance companies and pension funds.

"I am very excited to be working with Mike, Gary, Jim and the rest of the ValueXpress team," said Charley. "ValueXpress has an excellent reputation in the market for service. My prior work demanded hand holding to achieve a good borrower experience. And ValueXpress is known for that kind of personal touch."

"I am particularly energized to originate CMBS conduit loans, given the resurgence of the product and the ability to provide unrestricted cash out to owners of underleveraged properties or to those in which the sponsor created value through leasing or rehabilitation," said Charley. "I will be hitting my home turf of Tennessee and Kentucky to kick off, then work the balance of the surrounding states in anticipation of originating a significant amount of CMBS conduit loans."

10.12.15: Will Flooding Affect CMBS Conduit Loans in South Carolina?

About $5.62 billion of loans in commercial mortgage-backed securities (CMBS) could be adversely affected by recent record flooding in South Carolina. President Obama declared a state of emergency covering the entire state and ordered federal aid to help the recovery, according Morningstar Credit Ratings.

The top five metropolitan statistical areas (MSAs) -- Charleston; Columbia; Greenville-Mauldin-Easley; Myrtle Beach-Conway-North Myrtle Beach; and Hilton Head Island-Beaufort -- account for roughly 75% of the state’s total CMBS exposure. The top two, Charleston and Columbia, represent nearly 45% combined.

According to the National Weather Service, the hardest-hit swath of South Carolina stretches from the capital of Columbia, in the middle of the state, all the way to the coast, from Georgetown south to Charleston.

The agency also reported that Columbia received more than 7 inches of rain overnight on October 3-4, while North Myrtle Beach accumulated more than 15 inches of water in the past few days, and Charleston received 11.5 inches of rain on Saturday, October 3, making it the wettest day on record for the city.

The Coastal Grand Mall in Myrtle Beach is the largest CMBS loan in South Carolina at $123.6 million and roughly 11.6% of the GS 2014-G24 CMBS deal. The mall’s website states that it was open with regular hours on October 6. Three retail properties in the Charleston-North Charleston MSA and a Marriott on Hilton Head Island, all of which were reported as open for business, round out the five largest CMBS loans in South Carolina.

Morningstar said it had not yet received any reports of damage to any individual CMBS properties, but the company added that it will monitor these loans closely.

10.7.15: Interest-Only Periods Can Be Helpful in CMBS Conduit Loans

Unlike many commercial loan programs, CMBS conduit loans can provide for partial interest-only loan payments as well as full-term, interest-only loan payments for lower leverage loans. This structure provides for higher cash flow after debt service to the sponsor, and it can be particularly useful in situations when rents are expected to increase in the future, which would allow for amortization payments that would be difficult now.

We recently had a situation in which a sponsor agreed to expand at its own expense a ShopRite food store to 50,000 square feet from 40,000. In consideration, ShopRite executed a 15-year lease extension. However, ShopRite only agreed to a significant rent increase reflecting the landlord’s investment in the expansion after 24 months. This put the sponsor in a bit of a dilemma as his existing loan was maturing and he wanted to get credit for the ShopRite lease through additional loan proceeds, but this diminished cash flow after debt service until the higher ShopRite lease payments kicked in.

The solution was to provide a 24-month interest-only period at the beginning of the new loan. After 24 months, the loan would pay based on a 30-year amortization schedule. The increased rent from ShopRite is more than the amortization portion of the loan, so cash flow after debt service will actually increase despite the amortization payments that will begin in month 25.

“Some people complain that CMBS conduit loans are inflexible, but here is an example where conduit loans can be structured to solve a problem,” commented Michael D. Sneden, Executive Vice President at ValueXpress.

10.2.15: Keep Those Old Surveys Handy

All CMBS conduit loans require ALTA/ACSM Land Title Surveys, the standards of which are created by the American Land Title Association and National Society of Professional Surveyors. These standards, which provide for the minimum details that must be included on survey drawings for a property to be acceptable for a CMBS conduit loan, are considered to be high in the real estate surveying business. Such surveys can be both costly and time consuming, particularly if the survey is drawn from scratch. In addition, information included in the property survey is dependent on information in the title report, which can also be another long-lead item that is not delivered until the approaching closing date.

All this spells potential for high costs and a delay in closing. But borrowers can mitigate this risk. Since most CMBS conduit loans are refinances, the scheduled CMBS closing is not the first time a property has been mortgaged. If the property is currently mortgaged, it is likely the property was previously surveyed.

It is very important that borrowers keep copies of prior surveys in a safe place. In most instances, the firm that completed the prior survey can update it at a much lower cost than a surveyor starting from scratch. To find out who the prior surveyor is, look for the firm’s contact information in the title block on the actual survey, then give the company a quick call. Such an update can sometimes be completed in a week versus the typical three-week turnaround for a new survey. Furthermore, the prior survey can be used to get the zoning consultant started on their report.

The bottom line is that keeping the old survey in a safe place can really help when it’s time to do a CMBS conduit loan in terms of quicker closings and lower costs.

9.30.15: CMBS Issuance Slows a Bit

Commercial Mortgage Alert surveyed 14 market pros, and those pros projected that CMBS issuance in the United States would soar 32% to $124 billion in 2015. That lofty goal may not be within reach based on results through the third quarter of 2015.

Some $23.1 billion of U.S. transactions priced from July through September, down from an average of $27.2 billion for the first two quarters this year and from $28.1 billion in the year-earlier period. Volume was unexpectedly low in September, when only $7.1 billion of transactions priced. Through September, U.S. CMBS issuance was $77.6 billion, up from $68.9 billion a year earlier. If that 13% growth rate continues, volume for the full year will be $106 billion, well below the $124-billion average prediction by the panel of CMBS specialists at the beginning of the year.

Dealers said issuance in August and September was negatively impacted by volatility and a general widening of spreads. As bond values gyrated, lenders re-priced loans that hadn’t been rate locked. Extended negotiations with borrowers caused loans to either close more slowly than expected or fall by the wayside, reducing projected pool sizes. Loans that did not close may resurface as closed loans in the fourth quarter, boosting results, but not likely enough to approach the levels predicted by industry pros at the beginning of the year.

“The choppier the market gets, the more deal sizes come down, because loans aren’t closing,” said one CMBS veteran.

9.24.15: DSTs Replacing TICs as “Crowd Owner” of Choice

The alphabet soup of commercial real estate lending and the capital markets includes the main product itself: CMBS, or Commercial Mortgage-Backed Securities. And more!

Prior to the 2007-2008 economic crises, the preferred structure for borrowing entities in which the owner of the entity consisted of a large group of individuals was the TIC, or “Tenants-in-Common. A TIC is a form of ownership for holding title to real estate with more than one party. The TIC structure generally provides for an investment vehicle that permits participants to enjoy the risks and rewards of real estate ownership without participating in the ongoing management of a property. The TIC marketplace is comprised of sponsors who facilitate the sale of tenant-in-common interests in which unrelated investors each own undivided interest in a property. TIC borrowers actively utilize the CMBS market because of the non-recourse feature of CMBS conduit loans.

More recently, a new structure, a DST, or “Delaware Statutory Trust,” has become popular and may replace the TIC structure on future group transactions. A DST is a separate legal entity created as a trust under the laws of Delaware in which each owner has a “beneficial interest” in the DST for Federal income tax purposes and is treated as owning an undivided fractional interest in the property. On the surface, the structure appears to be similar to the TIC structure, but the DST eliminates a flaw in the TIC structure when it comes to decision-making on behalf of the TIC.

Individual co-investors in a TIC Investment Property structure must vote unanimously on all major investment decisions. It can be impossible to get all of the individual TIC Investment Property co-investors to agree on major decisions. The individual co-investors or beneficiaries in a DST, however, are not permitted to vote. Therefore, concern that a single co-investor or beneficiary might hold up the process is eliminated. Based on this benefit, it is expected that DSTs will be the vehicle of choice for group ownership in the future.

9.18.15: Federal Reserve Leaves Rates Unchanged

The Federal Reserve left short-term interest rates unchanged after weeks of market-churning debate, putting off an historic move to end an era of ultra-cheap credit amid worries about weak growth overseas. While Central Bank officials don’t believe recent global economic and market turbulence will throw the U.S. economy off track, they want to be sure before they push rates higher.

“In light of the developments that we have seen and the impacts on financial markets, we want to take a little bit more time to evaluate the likely impacts on the United States,” Fed Chairwoman Janet Yellen said Thursday at a press conference following a two-day policy meeting.

The decision left uncertain for a while longer just when the Fed would raise its benchmark rate, which has been near zero since December 2008. Most of the policy makers at the meeting, 13 of 17, indicated they still expect to move this year, but that was down from the 15 who held that view in June. The Central Bank has two more scheduled policy meetings this year, in late October and mid-December.

“The 10-year swap rate, a CMBS conduit loan index that affects interest rates, reacted positively on the news,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “The rate fell from 2.30% to 2.17% on the news and declined further to 2.12% on Friday, September 15, which is significant, reducing rates on prospective loans by 18 basis points.”

9.14.15: CMBS Prices Improve as Demand Picks Up

After a summer in which CMBS bond demand was relatively weak, resulting in widening of spreads, the first deal to price after Labor Day flew off the shelf. The deal, a $757.3-million multi-borrower offering by UBS and Bank of America, priced the benchmark class at 117 basis points (bp) over swaps, lower than initial price guidance of 120-122 bp and inside the 120-bp level achieved on the comparable class of the previous conduit issue, which priced in August.

The issue featured an unusually low 59.2% loan-to-value ratio and high-quality top five loans. The largest loan in the issue has a principal balance of $72,884,027 and is secured by Charles River North, an eight-story medical office condominium containing 354,594 square feet of space located in Boston, Massachusetts. The space is 100% occupied by Massachusetts General Hospital under the terms of a long-term lease that expires in 2029. Massachusetts General Hospital is rated AA by Fitch and S&P. The second-largest loan is a $70-million loan secured by a 26-story, 441,922-square-foot Class B office building located on 5th Avenue in New York City. The third-largest loan is a $70-million loan secured by a 341-room full-service Westin Hotel located in Austin, Texas.

“This CMBS offering has terrific credit metrics compared with recent offerings,” said Michael D. Sneden, Executive Vice President at ValueXpress. “With spreads widening during the summer and a great credit profile against a backdrop of generally deteriorating underwriting, we thought it would be a great opportunity to buy some bonds. But others had the same idea and the AAA-rated AS Class that we purchased was four times oversubscribed so we only received a fraction of our order and the yield was 10-15 basis points lower than we anticipated.” 

9.9.15: ValueXpress to Co-Sponsor the 10th Annual San Antonio Hotel Owners Association Charity Golf Tournament at Hyatt Hill Country Resort

On Wednesday, October 28, ValueXpress will be co-sponsoring the 10th Annual San Antonio Hotel Owners Association (SAHOA) Golf Tournament at the Hyatt Hill Country Golf Club in San Antonio, Texas. About 100 golfers are expected to hit the links to play in a scramble competition, following longest drive and closest-to-the-pin competitions. The event features lunch, dinner and a Texas Hold ‘Em tournament after the awards dinner.

Funds raised from the event have been used to support Bal Sohum Parivar of USA in its mission to promote the welfare of the poor and needy in India through educational opportunities. SAHOA provided funds to adopt 20 children through Bal Sohum Parivar of USA in addition to providing funds to assist in the building of a home in Nepal. Other charities that have received funds from this event include JDRF, ALS, March of Dimes, Ronald McDonald House and the San Antonio Food Bank. To participate in the event or make a donation, please contact Anand Bhakta at anand@remhospitality.com.

9.4.15: Many Thanks to Our Foot Soldiers

One definition of a foot soldier is “a person who does active and difficult work for an organization or cause.” Well, ValueXpress wants to thank our “foot soldiers,” namely our CCTG graduates, who are grinding away in the field to secure deals.

“I have been teaching how to originate CMBS conduit loans at Commercial Capital Training Group (CCTG) for about two years now,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “About six months ago, I added a 30-minute intensive on how to read and utilize Trepp servicing reports to secure refinancing assignments for borrowers with maturing CMBS conduit loans. The resulting business from our CCTG grads is impressive.”

Trepp is a leading provider of servicing data for all CMBS conduit loans. Its reports include loan maturity data, interest rates and property income and expenses on each individual loan. “With the income and expense data, we perform a ‘quick and dirty’ loan sizing and valuation exercise in class to determine the approximate amount of loan the property will qualify for, which usually includes some cash out,” said Sneden. “Then we do a mock sales pitch to the potential borrower using the data in the Trepp report and an offer to complete a comprehensive loan sizing and property valuation with no obligation by the borrower to proceed. But typically, once the potential borrowers see the quality of the financial analysis, they pick the CCTG grad to proceed with the loan.”

“We give each graduate five Trepp reports (leads) for CMBS conduit loans that are maturing within the next 12 months that are located within 30-minutes of their office,” said Jim Brett, Senior Loan Underwriter at ValueXpress. Then these “foot soldiers” hit the road, visiting the property and speaking with owners using Trepp data to secure the refinancing assignment.

“We at ValueXpress do not even remotely have the ability to visit properties or speak locally with owners all over the United States to win their CMBS refinance business, but the graduates can and will do it for our mutual benefit, and we are grateful for the resulting business,” said Sneden. 

9.1.15: Life Insurance Companies Increase Commercial Real Estate Lending

Slowly and steadily, life insurance companies are increasing their commercial real estate lending. Market participants expect the industry’s current expansion to run for at least two or three more years, signaling a further pickup in life company lending volume.

“It’s a robust environment,” said David Hendrickson, managing director with JLL’s Capital Markets Group. “Life insurance companies still have a need to place money in real estate and have still been very cautious in that. The underwriting is solid. And life companies certainly aren’t being too aggressive, where it creates some kind of worry in my mind that things are getting overheated.”

The Mortgage Bankers Association’s quarterly survey found that life companies’ loan volume rose 29% year over year during the first half of the year. That increase kept pace with commercial banks, which likewise boosted originations 29%, and edged out a 22% uptick in CMBS volume. (Of note, Fannie Mae and Freddie Mac loans surged 177%.)

MetLife, for example, generated $6.7 billion in commercial real estate lending volume during the first half of the year. That puts the financial services giant on track to exceed last year’s total volume of $12.1 billion, which was, in turn, an uptick from $11.5 billion in 2013. For its part, Lincoln Financial Group has grown its commercial real estate loan portfolio from $6.9 billion in 2011 to more than $8 billion as of the first half. That amounts to a 17% increase in the face of plentiful prepayments.

“Based on life company experience, the performance of commercial real estate has been really, really good,” said Donald Dibble, senior vice president for Lincoln Financial Group’s mortgage and real estate operations in Greensboro, North Carolina. “In the life company space, there has been a little bit of windfall, or a positive carry cost, from the standpoint of risk-based capital. Risk-based capital that’s being held by life companies went down substantially in the last year.”

8.26.15: ValueXpress to Be a Sponsor of the 10th Annual Vishal Bhagat Memorial Golf Tournament

ValueXpress has committed to be a sponsor of the 10th Annual Vishal Bhagat Memorial Golf Tournament, which will take place at the North Shore Country Club in Portland (Corpus Christi), Texas on Friday, November 13, 2015 and Saturday, November 14, 2015. The event is the primary fundraiser for the Vishal Raju Bhagat Foundation, which has raised over $1.1 million for the primary purpose of juvenile diabetes research. The foundation was founded in memory of Vishal Bhagat, who died tragically in a 2006 drowning accident in Corpus Christi. Vishal’s family and friends honor his memory by continuing his noble war against diabetes.

Funds raised from the event have provided grants to leading juvenile diabetes causes such as the Juvenile Diabetes Research Foundation, March of Dimes, American Diabetes Foundation, the Miracle Foundation, Driscoll Children’s Hospital and numerous local organizations. To participate in the event or make a donation, please contact Mahavir Bhakta at budgetinn77@yahoo.com.

The schedule of events includes a 4-man Scramble on Friday with awards, cocktails and dinner. Saturday will feature a best-ball golf tournament with a Gala dinner, including awards and cocktails. A car will be given away for a hole-in-one on the spectacular water view par 3. Long considered the jewel of the Gulf Coast, North Shore is known for its famous stretch of holes on the back nine (13-16) set against the backdrop of the bay. Built in 1985 by Bruce Devlin and Robert von Hagge, this private course is not particularly long and there are not many trees, but winds often blow 20-40 miles/hour on good days, and the course is filled with bunkers, water hazards, and side-hill lies to challenge golfers.

8.21.15: Big Box Redevelopment Can Be Successful

ValueXpress was recently engaged by the owner of two retail properties, a retail power center in Dover, Delaware and  a neighborhood shopping center in Wilmington, Delaware to obtain a CMBS conduit loan to refinance the two existing CMBS conduit loans that are maturing at the end of the year. As always, we sat with the client to explain the process and gather the required diligence. Then, back in the office, we prepared an extensive loan package that would allow CMBS lenders to provide Term Sheets.

In completing property diligence, we discovered that the Dover property was formerly a single-tenant Lowe’s Home Improvement Center. As we often hear with “big box” single-tenant retailers such as Lowe’s, Wal-Mart and K-mart, Lowe’s packed up at the end of its lease and headed down the street to a larger building. Often in these cases the former building sits vacant for a long period of time before reuse. Sometimes the building never finds a new purpose.

So it was nice to find out about a successful redevelopment of a former single-tenant building. After Lowe’s moved, the owner had the property rezoned from single-tenant retail to multi-tenant retail and secured new ten-year leases with Best Buy, Michael’s Stores and Office Depot. The owner then sold the successful redevelopment to our borrower in 2005.

Our diligence also discovered another successful redevelopment in the Dover market, just down the street. The former North Dover Walmart is being redeveloped into Dover Towne Center. This redevelopment has seen strong demand, with preleasing that includes six national tenants and Outback Steakhouse on a pad site. Ross Dress for Less, Petco, Shoe Carnival, Ulta Beauty and Five Below have signed leases at the new Dover Towne Center. All of the leases range between 10 and 20 years, plus options for extensions.

“These discoveries during diligence were great testament to the strength of the Dover retail market, which allowed for strong competition by CMBS lenders to provide the financing for these properties,” said Michael D. Sneden, Executive Vice President at ValueXpress.

8.18.15: CMBS Prices Continue to Weaken, But Rebound Expected

CMBS spreads reached a two-year high amid high levels of issuance and volatility in world capital markets. The long-term, super senior bonds from the most recent offering, led by Wells Fargo and Societe Generale, priced at a spread of 120 basis points (bp) over swaps. This level was the same as the prior CMBS deal led by JP Morgan and Barclays the week prior. And it was the highest spread since July 2013. Spreads on long-term, super senior CMBS have moved higher each month since early June, when deals priced in the 85-87 bp area. Spreads moved up as the month progressed, reaching 100 bp on June 30 and increasing to 110 bp in late July/early August.

Traders blamed the spread widening on a variety of factors. A recurring theme from CMBS issuers was the high level of issuance during July and August, which many said was too much for the market to absorb. With trading desks thinned by summer breaks, not enough buyers were available for all the bonds without a price break. In addition, the CMBS market tends to weaken in times of market uncertainty and volatility. The Greek debt crisis, China’s devaluation of the yuan, the fall of oil prices and the timing of a Federal Reserve interest rate increase have created uncertainty and volatility in the CMBS market.

But there is sentiment that prices will reverse course in September, particularly if the capital markets calm. Traders will be back at their desks, and given that CMBS still provides a compelling risk-adjusted yield, buying should pick up.

“The rise in yields on CMBS has not gone unnoticed at our affiliate, Country Bank, and it has green lighted a jump back into CMBS investing after being out of the market over a year due to low yields,” commented Jim Brett, head of CMBS research at ValueXpress. “It’s likely other investors will catch on to the compelling value proposition and buy, eventually reducing spreads.”

8.12.15: Best to Jump on Long Lead Items for a CMBS Loan

An important skill set that ValueXpress brings to CMBS conduit lending is experience. The firm has now arranged over 400 CMBS conduit loans with a principal balance in excess of $1.5 billion. Processing CMBS conduit loans efficiently to create a good experience for both the borrower and lender is a challenge. CMBS conduit loans are inherently more complex and cumbersome for borrowers versus traditional bank financing, and therefore, it is imperative that ValueXpress brings its experience to the table to help borrowers through the process.

Over time, we have learned what holds up transactions that can lead to borrower frustration. Once the Term Sheet is executed we jump on long lead items within hours:

This is just an example of a few areas in which our experience can help borrowers through a new process quickly and efficiently!

8.7.15: ValueXpress Help Extends Past Closing

Many mortgage brokers pretty much disappear after loan closing, moving on to the next closing. However, post-closing, CMBS conduit loans generally require more servicing documentation than other types of commercial loans on a quarterly basis. This data, mainly financial reporting, can overwhelm borrowers. In addition, the process to obtain funds from reserve accounts requires more documentation. Adding difficulty, if the borrower’s servicing documentation is not current, the servicer generally will not release funds from the reserve accounts. All this adds up to a high level of servicing frustration for smaller borrowers who are not prepared to submit servicing documentation in a timely and complete fashion.

Having studied and negotiated the loan documents on hundreds of CMBS conduit loans, ValueXpress is intimately familiar with all of the servicing requirements for a CMBS conduit loan. At closing, we extend the offer to all our borrowers to assist them in understanding and completing servicing documentation at no cost for as long as it takes them to understand and complete the quarterly reporting package and reserve draw documentation on their own.

“Part of the financial reporting package requires the borrower to prepare a debt-service calculation on a rolling 12-month basis within 30 days of quarter-end,” said Jim Brett, Senior Underwriter at ValueXpress. “Many borrowers do not know how to complete this calculation, so we will provide them with a model that performs the calculation. They can use that model each quarter for the life of the loan.”

“I had a client who could not navigate the paperwork to get a draw from his FF&E reserve account for a recent $50,000 restaurant renovation at his hotel. I helped the controller export a report from QuickBooks that, together with copies of the paid checks, enabled him to get the funds released,” said Michael D. Sneden, Executive Vice President at ValueXpress. “Now the borrower can use the same process over the life of the loan for future FF&E reimbursements.”

8.4.15: Risk Retention Rules for CMBS Not Far Away

On October 22, 2014, the federal regulatory agencies responsible for implementing regulations under Dodd-Frank risk-retention rules for CMBS transactions finalized the rules. In a nutshell, the rules will effectively apply to the riskiest 5% of each CMBS issue. With CMBS issues averaging roughly $1 billion, the rules will affect $50 million of each deal. The rules go into effect on December 24, 2016. The most risky portion of CMBS issues affected by the rules is purchased on a competitive basis by a handful of high yield investors, commonly referred to as the B-piece buyer. It is anticipated that the rules will have a negative effect on CMBS prices as the B-piece buyer will be required to purchase a higher percentage of CMBS from each CMBS deal either directly or perhaps by teaming up with another investor. In addition, the B-piece buyer must retain the bonds for a minimum of five years.

“Any type of regulation that makes the B-piece buyer alter his investment methodology is going to negatively impact CMBS prices,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “The question is how much?”

Since only 5% of the CMBS structure is affected, perhaps the impact will be muted, particularly if the B-buyer can team up with another investor with the risk-return profile that matched the portion of the 5% investment that the B-piece does not want. What’s more uncertain is the effect of the five-year hold requirement, as there are not many investments today that have a mandatory holding period requirement.

7.28.15: SBA 7(a) Authorization Level Increase Passed by Congress

In an unusually fast approval for Congress, the SBA 7(a) authorization level was increased to $23.5 billion effective July 28, 2015. This ended a short-lived program shut down that began on July 23, 2015. In a program release notice, Ann Marie Mehlum, Associate Administrator for Capital Access, explained the reopening of the SBA 7(a) program to lenders:

“The purpose of this notice is to announce that a bill to increase the lending authority for the 7(a) loan program to $23.5 billion for FY 2015 was passed by Congress and signed by the President. As a result, effective this afternoon, SBA is again able to guarantee 7(a) loans this fiscal year. Requests in the existing queue will be funded first, followed by new loan guarantee requests, which will be processed as usual.

SBA is evaluating the additional provisions of the new law and will be providing further guidance as necessary. We appreciate the patience of our borrowers and lenders and look forward to continuing to serve the small business community through the 7(a) loan program.”

“My guess is Congress was looking for any bipartisan bill that could get approved at a time in which the citizens of this country are not happy with the ability of our lawmakers to get anything done,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “This self-supporting, job creating program thankfully was a no-brainer for both parties and the President.”

7.24.15: SBA 7(a) Program Shuts Down

The SBA 7(a) loan program has reached its authorized ceiling of $18.75 billion for the fiscal year ending September 30, 2015 and therefore has shut down until the new fiscal year begins on October 1, 2015 or until Congress increases the authorization level. Even though the 7(a) program operates with zero subsidy from the federal government, Congress must still provide an authorization level each year. With a robust lending environment, the ceiling has been reached. On July 23, Ann Marie Mehlum, Associate Administrator for Capital Access, explained the closure:

“This notice is to inform all stakeholders and interested parties that the 7(a) program has reached its FY 2015 loan guaranty program limit. As a result, SBA is forced to suspend its 7(a) small business lending until the start of the new fiscal year on October 1, 2015, or until such time as the 7(a) loan authority is increased by Congress. All loan applications submitted through delegated or non-delegated authority as of noon (EDT) today will be processed as usual.

SBA continues to work closely with our partners in the House of Representatives and Senate to address this challenge. While a solution is not yet finalized, we are hopeful that Congress will soon increase the 7(a) program’s lending authority, ensuring that entrepreneurs and businesses can continue to rely on the program to secure the credit necessary to start or expand their business.

SBA recognizes that any lapse in the 7(a) loan program would impact thousands of entrepreneurs and businesses who rely on the program to overcome their inability to otherwise secure the credit necessary to start or expand their business.  SBA is working with Congress to avoid a suspension by raising the statutory loan cap, but there can be no assurance as to the timing or likelihood of a legislative solution.”

“It’s sad that a self-funding program for small business owners who are creating most of the jobs in this country can’t get enough authorization to continue annually uninterrupted,” commented Michael D. Sneden, Executive Vice President at ValueXpress.

7.20.15: PKF Hospitality Research Issues U.S. Lodging Forecast

The outlook for the U.S. lodging industry continues to be extremely strong, according to the recently released June 2015 edition of PKF Hospitality Research’s (PKF-HR, a CBRE company) Hotel Horizons®. The report forecasts that U.S. hotels will continue to enjoy revenue per available room (RevPAR) growth more than twice the long-run average (up 7.2% in 2015 and 6.8% in 2016). The slowdown in 2016 should not worry hoteliers because growth in the average daily room rate (ADR) will drive the increase in RevPAR, which ultimately is more profitable for hoteliers.

The June 2015 Hotel Horizons® forecast has not changed much from the March 2015 forecast. In March 2015, PKF-HR forecast RevPAR growth of 7.3% for 2015 and 6.5% for 2016. The consistency of the forecasts is an indication that the U.S. lodging industry is now in that part of the business cycle where performance is highly predictable. Predictable performance means different things for each participant. Operators can efficiently schedule their staff. Owners can more confidently project their cash flows. Investors and lenders can make their investment decisions assuming a relatively low-risk environment.

While the outlook for the industry has not changed much, current events are always evolving and need to be taken into consideration. During the first quarter of 2015, lodging demand grew at a very healthy 4.2%. However, this was less than the PKF-HR forecast of 5.1%.

The over estimation of first-quarter 2015 demand growth can be attributed to a combination of economic and non-economic factors. Extreme winter weather had a negative impact on hotel performance in Boston, New York and Chicago. Low oil prices have suppressed gasoline prices, but impaired local economies in the North and South Central regions of the country. Finally, the surge in the value of the U.S. dollar has hurt exports and caused some contraction in manufacturing. Fortunately, we have yet to see any significant declines in inbound overseas travelers.

7.15.15: Apartment Construction Is Booming

When Jess Eymann moved to Denver fresh out of college she considered buying a condo, but ultimately decided to rent an apartment instead. "There's just not a lot out there to buy. Properties that I looked at weren't really what I was looking for," she said. Eymann's decision to rent instead of buy mirrors a nationwide trend that is fueling a cross-country boom in apartment living.

The apartment industry as a whole contributed $1.3 trillion to the U.S. economy in 2013, along with more than 12 million jobs, according to a recent study conducted by economist Stephen S. Fuller of George Mason University's Center for Regional Analysis for the National Multifamily Housing Council and the National Apartment Association.

Nationwide vacancy in the second quarter of 2015 has held at 4.2% for six quarters and appears to have bottomed out, said Ryan Severino, senior economist and director of research at Reis, a commercial real estate market service. This is their lowest point in two decades.

The low vacancy rate has led to sky-high rents and an explosion of apartment construction that so far cannot keep pace with demand.

"Developers are really building apartments about as fast as they can," according to Cary Bruteig, owner of Denver-based Apartment Appraisers and Consultants. "There are so many properties under construction that the shortage of labor is preventing the completions from occurring as fast as they normally would."

The surge in apartment living coincides with the drop in home ownership in America. In the final quarter of 2014, home ownership dropped to the lowest rate, 63.9%, in 20 years. With home construction lagging, apartment building is taking its place as a leading economic driver, according to Fuller's study. It found that the economies of 17 major metropolitan areas across the country each received between $1 billion and $5 billion from apartment construction in 2013 alone.

7.10.15: ValueXpress-Sponsored Team Wins Cricket Tournament

PanAm “A” defeated Corpus Christi “A” in the 2015 Bhakta Invitational Cricket Tournament held in Dallas, Texas on July 2-6. ValueXpress sponsored PanAm “A” as well as was a tournament sponsor.

Over 600 participants and guests attended the event. Matches were played at two locations: McKinney and Irving, Texas. PanAm “A” moved easily through the brackets, while Corpus Christi “A” played extremely well against its opponents, setting up an exciting final match. For those unfamiliar with cricket, scoring in cricket matches involves two elements -- number of runs scored and number of  " wickets lost by each team. In the final, PanAm scored 176 runs and lost 8 wickets. Corpus Christi “A” scored 114 runs and lost 8 wickets.

“What an exciting tournament to sponsor,” commented Jay Bhakta, Senior Loan Originator and ValueXpress representative at the tournament. “Cricket is a huge sport in our community, and it was an honor to be a part of the spectators cheering on the teams. And to be a sponsor of the winning team? Well, that was icing on the cake!”

7.7.15: Anil Vasani Joins ValueXpress

Anil Vasani, a 20-year veteran in commercial real estate lending, joined ValueXpress effective July 1. Anil is primarily responsible for commercial loan originations focused on CMBS conduit loans in the Mid-Atlantic States, including New York, New Jersey, Pennsylvania and states south to Georgia. Anil is based in Edison, New Jersey.

"Anil brings an outstanding breadth of experience to the ValueXpress team. He has a history in commercial lending, where he assisted many business owners in obtaining financing, primarily through SBA and conventional sources, for hotel and gas station owners, franchise business owners, including over 300 Dunkin Donuts and similar franchise transactions,” commented Michael D. Sneden, Executive Vice President at ValueXpress.

“In addition, Anil has been active in placing income-producing loans for office buildings, retail centers and apartment complexes, as well as over 100 hospitality loans. Anil has a significant address book of Asian-American borrowers who fit the CMBS conduit loan profile, and we intend to grow that aspect Anil’s business,” said Sneden.

"I am very excited to be working with Mike, Jim and the rest of the ValueXpress team," said Anil. "ValueXpress has an excellent reputation in the market for service. My prior work demanded hand holding to achieve a good borrower experience. And ValueXpress is known for that kind of personal touch."

"I am particularly energized to originate CMBS conduit loans, given the resurgence of the product and the ability to provide unrestricted cash out to owners of underleveraged properties or those in which the sponsor created value through leasing or rehabilitation," said Anil. "I will be hitting New Jersey and New York to kick off, then work the balance of the Mid-Atlantic in anticipation of originating a significant amount of CMBS conduit loans."

7.1.15: Current Loan Applications Require “A Conversation with the Borrower”

The loan spread in many CMBS conduit loan term sheets executed by borrowers in the past few weeks is not at levels that can be closed profitably, leaving lenders and mortgage brokers in a quandary as to what to do. Loan spreads have moved out anywhere from 10-20 basis points (bp) as the pricing for CMBS securities has weakened recently on a variety of bad economic news, including Greek debt default, collapse of the Chinese stock market and debt challenges in Puerto Rico, all of which has made buyers of bonds, including CMBS buyers, jittery. As a result, with a lot of CMBS supply, dealers are widening spreads to sell all the bonds. Here is a snapshot of super-senior AAA-rated benchmark CMBS spreads provided by a partner:

Deal Name Size (mm) Px Date Sr AAA
MSBAM 2015-C23 1,073 06/05/15 87
COMM 2015-LC21 1,221 06/12/15 92
WFCM 2015-C29 1,177 06/19/15 95
CGCMT 2015-GC31 723 06/24/15 95
MSC 2015-MS1 775 06/25/15 93
WFCM 2015-NXS2 914 06/30/15 100
COMM 2015-PC1 1,463 07/01/15 107

Each bp increase in the super-senior AAA bonds equals roughly a one-point increase in spread to the borrower to maintain the same profitability. Hence, if the market has moved from S+87 to S+107, which is a total of 20 bp, that means term sheets written when prices were S+87 are under water by 20 bp today, to maintain the same profit.

“Since we are active in the buy-side of CMBS securities, we are familiar with how all this works and we are advising our clients exactly where their loans spreads sit in the market. This way, there is no shock should their spread be adjusted to market levels at closing,” commented Michael D. Sneden, Executive Vice President at ValueXpress.

6.26.15: The Power of Unrestricted Cash Out and Non-Recourse Keeps CMBS Conduit Lending Active

While the recent rise in the Swap rate indexes used to set interest rates for CMBS conduit loans has slowed rate-sensitive borrowers from closing loans, the rise has not deterred borrowers who use the CMBS conduit loan as a tool to extract excess equity in their real estate assets.

“Whenever I discuss the suitability of a CMBS conduit loan for a potential borrower, the first thing I ask is (1) whether they are seeking to obtain cash-out proceeds above an existing mortgage through a refinance and (2) how important a non-recourse feature is for both purchase and refinance scenarios,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “I ask these questions because they are the two greatest competitive advantages that CMBS conduit loans offer over other commercial loan products.”

Particularly powerful is the unrestricted cash-out element of CMBS conduit loans. Borrowers can take cash up to the maximum loan-to-value without any restrictions on the use of funds. “One of the most aggressive competitors for CMBS conduit lenders is community banks that specialize in commercial lending,” said Sneden. “However, they are not keen on unrestricted cash-out proceeds distributed to the sponsor for purposes unrelated to the asset being financed. We recently completed a hotel refinance that was a $7.5-million cash-out secured by a property that was previously unencumbered. The best offer from a community bank on that hotel refinance was $4.0 million.”

The conduit loan rate was higher than the community bank rate, but it did not matter, as the proceeds, together with another $500,000 in sponsor cash, was to be utilized to construct another hotel for $8 million. The CMBS conduit loan rate was still less than the rate on a construction loan and much less hassle.

“We probably provided over $100 million of cash-out proceeds through CMBS conduit loans in the past 12 months,” noted Gary Unkel, Senior Loan Originator at ValueXpress. “While rising interest rates are a concern, our focus is on locating clients who have excess equity and helping return the equity through a cash-out CMBS conduit loan. Those borrowers tend to be less rate sensitive and still think 5% is really not that bad.”

6.22.15: Michael Sneden Discusses Commercial Capital Training Group at NACLB Convention

Michael D. Sneden, Executive Vice President at ValueXpress, was interviewed by Commercial Capital Training Group (CCTG) at the National Association of Commercial Loan Brokers annual convention at the Red Rock resort in Las Vegas, Nevada. Here’s what Mike has to say about CCTG and the convention:

6.17.15: JPMorgan Preps Clients for Direction of Interest Rates

Recently, JPMorgan sent a notice to its clients that did not mince words regarding its thoughts on the direction of interest rates:

As the U.S. economy continues its expansion, we believe that U.S. interest rates will begin to rise. Many important indicators have shown notable strength of late, including unemployment, housing starts, household formation and consumer confidence. While that strength is a positive indicator for the health of the overall U.S. economy, it does also further our conviction that the Federal Reserve will likely begin to raise its policy interest rate later this year. We expect longer-term rates will follow. If that happens, these changes would have implications for both investors and borrowers.

JPMorgan continued to talk about the bond market and liquidity:

Some components of the post-2008 crisis financial services reform, which have accomplished many good things, have also in part contributed to bond markets that are less liquid. We expect that the combination of rising interest rates and less liquid bond markets may create an environment in which the ability to sell bond positions is more difficult.

The increase in interest rates has been a hot topic in 2015. The linking with bond market liquidity is an interesting twist, with higher volatility implications. “As a result, we continue to encourage borrowers to act on their real estate financings before the Federal Reserve makes a move to lift rates,” commented Michael D. Sneden, Executive Vice President of ValueXpress.

6.12.15: 10-Year Swap Rate (Swap) Index Breaks 2.5%; Borrowers Distressed

After trading in a range of 1.85%-2.25% since January 2015, the 10-year Swap Rate began a steady ascent in May that accelerated in June. The first week of June saw the 10-year Swap Rate rise from 2.23% on Monday to 2.48% on Friday, leaving borrowers shell-shocked. The market worsened the week of June 8, as the 10-year Swap hit 2.55% on Thursday, June 10 before settling down at the close on Friday at 2.43%. Whether the 2.55% level represents a short-term peak or just a temporary breather in a march to higher levels is anyone’s guess. After three months of relatively stable fixed-income markets, the volatility in June is an unwanted surprise.

Market participants suggest that rising rates can be traced to worries about a Greek bond default, a strong unemployment report on Friday, June 8 and uncertainty regarding the Federal Reserve policy meeting outcome on June 16-17.

The unrelenting rise in loan rates is depressing CMBS borrowers as CMBS loan spreads are not declining, and in fact, they are poised to increase (see our 6.11.15 News Item), leading to higher-than-expected rates on loans under application. Furthermore, borrowers considering a CMBS refinance to secure an attractive long-term fixed rate are backing away now that rates are approaching 5.0%, after enjoying rates in the 4.25%-4.50% area for most of 2015.

“We are still active in CMBS refinancings in which there is a large cash equity return to the borrower that helps absorb the higher rate, opportunistic refinances (i.e., discounted payoffs, or payoffs of debt acquired by a third party) and loans refinanced at maturity,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “But the discretionary borrower looking for a rock-bottom rate is gone. That borrower is often opting for a community bank loan; those institutions are slow to adjust their loan rates to current market conditions, providing banks with a current competitive advantage over CMBS in terms of rate.”

6.11.15: Meanwhile, CMBS Prices Begin to Weaken, Borrower Spreads to Widen

Two CMBS conduit deals were being marketed during the week of June 8, a $1.3-billion offering by Deutsche Bank, CCRE, Ladder Capital and KeyBank, and a $1.2-billion offering by Wells Fargo, Rialto Mortgage Finance, Silverpeak Real Estate Finance, Walker & Dunlop and NCB.

Price guidance on the Deutsche Bank deal for the benchmark AAA-rated super-senior class was being pitched at a spread in the 89-basis-point (bp) area over swaps. That mirrored the level achieved on the long-term, super-senior bonds in the previous conduit issue, a $1.1-billion offering by Bank of America, Morgan Stanley, CIBC and Starwood Mortgage that priced on June 5. But that spread was slightly wider than the 85-87 bp range in the six previous conduit deals.

Dealers attributed the spread widening to heavy supply. “There are a lot of new issues coming out, and the investors know it too,” said one CMBS salesman. “I don’t think they’re going to give issuers much of a break in that regard.” Many dealers believe spreads will move wider, into the 90-95 bp range, as the typically slower summer months may find buyers on vacation.

The other investment-grade classes appear to be holding steady. The junior AAA-rated class of the Bank of America/Morgan Stanley deal priced at 117 bp over swaps, within the range of 115-125 bp range in recent deals. The AA-rated class B priced at 140 bp over swaps, below the recent range of 150-165 bp in recent deals.

“Borrowers are likely to see a 5 bp increase in loan spreads if the upcoming calendar of CMBS deals price the benchmark AAA-rated super-senior class at levels greater than 90 bp over swaps,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “Should the class B/C/D CMBS widen, that could add another 5 bps to loan spreads, creating higher all-in rates to borrowers when the higher 10-year swap rate is also factored in.”

6.8.15: Two Self-Storage Titans Plan to Merge

SmartStop Self Storage Inc. has entered into a definitive merger agreement under which it will be acquired by Extra Space Storage Inc. The merger is expected to close during the latter half of 2015. SmartStop stockholders will receive $13.75 per share in cash, which represents a total purchase price of $1.4 billion. Extra Space will pay $1.29 billion, and the remaining $120 million will come from the sale of certain assets by SmartStop at or prior to the closing.

SmartStop, formerly known as Strategic Storage Trust Inc., was initially formed in 2007 as a public, non-traded real estate investment trust (REIT) with the objective of providing regular income to its investors with the potential for growth through appreciation of its assets. SmartStop raised approximately $568 million of equity capital from investors, and during its approximately eight-year operating period, SmartStop consistently provided investors with cash distributions at an annual rate equal to 7% of investment (based on a $10-per-share offering price). On consummation of the merger, SmartStop will have achieved its final objective, a successful liquidity event for its stockholders.

Extra Space Storage Inc., headquartered in Salt Lake City, Utah, is a self-administered and self-managed REIT. The company owns and/or operates over 1,100 self-storage properties in 35 states, Washington, D.C. and Puerto Rico. The company is the second-largest owner and/or operator of self-storage properties in the United States and is the largest self-storage management company in the United States.

5.29.15: New Risk Weight Rules Hurt Banks Investing in CMBS

New risk weight rules, known as Basil III, are having a significant negative impact on banks’ required capital allocation for investment in CMBS securities rated below AAA. Previous to impending Basil III capital rules, CMBS securities rated from AAA to AA- had a 20% risk weighting. When Basil III is fully implemented AAA-rated CMBS will remain at roughly a 20% risk weighting, but CMBS rated AA+/AA/AA- will see their risk weighting increase from 20% to anywhere between 50% and 200%, requiring banks to set aside 2.5-10.0 times more capital to support investment in AA+/AA/AA- CMBS. This will make CMBS rated AA+/AA/AA- much less attractive as investments for banks. This rule will primarily affect Class B and Class C CMBS securities, which are rated AA- and A, respectively. Class A CMBS securities, currently rated AAA, will be unaffected.

“We manage a $75-million CMBS securities portfolio for the benefit of our affiliated bank, Country Bank,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “The portfolio is 35% AAA-rated and 65% AA- rated. The AA-rated CMBS risk weighting increased from 20% to an average of 80%. Given that portfolio loans are 100% risk weighted in general, and yield approximately 100 basis points more than AA+/AA/AA- CMBS, the bank is likely to sell its AA+/AA/AA- CMBS and reinvest in portfolio loans with better yield and effectively the same use of bank capital.”

5.26.15: CMBS Delinquencies Continue to Decline

The CMBS delinquency rate for U.S. commercial real estate loans in CMBS declined a significant 0.17% from April to 5.40% in May, according to Trepp. In the last 25 months, the delinquency rate has fallen 22 times and is now 87 basis points (bp) lower than the year-ago level. The May decrease is the biggest drop since November 2014, when the Trepp CMBS delinquency rate fell 34 bp.

In May, $1.2 billion in loans became newly delinquent, which put 23 bp of upward pressure on the delinquency rate. Almost $700 million in loans were cured in May, which helped push delinquencies 13 bp lower. CMBS loans that were previously delinquent but paid off either at par or with a loss totaled over $1.2 billion in May. Removing these previously distressed assets from the numerator of the delinquency calculation helped move the rate down 24 bp.

Percentage of 30-plus Days Delinquent

Month Percent
May-15 5.40%
Apr-15 5.57%
Mar-15 5.58%
Feb-15 5.58%
Jan-15 5.66%
Dec-14 5.75%
Nov-14 5.80%
Oct-14 6.14%
Sep-14 6.03%
Aug-14 6.10%
Jul-14 6.04%
Jun-14 6.05%
   
3 Months Ago 5.58%
6 Months Ago 5.80%
12 Months Ago 6.27%

Here are the numbers by property type:

5.22.15: Are REIT Stocks Impacted by Increased Interest Rates?

The debate on the potential impact of rising interest rates on REIT stocks continues. Since a Real Estate Investment Trust (REIT) must pay out at least 90% of its taxable income as a dividend to investors, REIT stocks are relatively high-yielding investments. Investors are debating the sensitivity to interest-rate changes in an attempt to predict whether REIT stock prices will fall if interest rates increase as expected.

Conventional wisdom suggests that higher rates are generally bad for REITs, since less-risky income from alternative income-generating assets such as Treasury Securities would become more attractive as Treasury yields approach REIT yields. Analysts that study the relationship between Treasury rates note that over the past 15 years data indicates a strong inverse relationship between REIT stock prices and interest rates. These analysts strongly believe that interest-rate increases are likely to result in REIT stock price declines, such that an appropriate “risk” margin is maintained between the less-risky Treasury yield and the more-risky REIT dividend yield.

The opposite camp says that increases in interest rates will be reflective of a strong economy that will allow REITs to raise rents and increase dividend payouts at a pace to maintain the margin between the less-risky Treasury yield and the more-risky REIT dividend yield. However, many economists do not see a near-term growth rate that is robust enough to allow REITs to increase dividends at the pace required to maintain current stock prices in a rising rate environment.

5.15.15: ValueXpress Sponsors 12th Annual Bhakta Open

ValueXpress was a sponsor of the 12th Annual Bhakta Open Golf Tournament that took place on Saturday, May 8, 2015 and Sunday, May 9, 2015. This year's Bhakta Open was held in Palm Springs, California at the breathtaking La Quinta Resort & Club – PGA West TPC Stadium Course and PGA WEST Nicklaus Tournament Course. ValueXpress sponsored the first hole on each course. About 100 golfers took to the links under sunny skies and a delightful breeze to play in an individual competition. The golf course was in excellent condition and greens played fast.

True ball strikers’ golf courses, the Nicklaus Tournament Course and the Stadium Course are both very forgiving off the tee and extremely demanding around the greens. Without a doubt, the courses are a “must play” for a great test of golf and for the magnificent desert setting.

“We are pleased to sponsor this event because it brings together the Bhakta family, many of whom are clients of ValueXpress. We have financed many of their hotel properties,” commented Jay Bhakta, a Senior Loan Originator at the ValueXpress Jackson, Mississippi office and 15-year ValueXpress veteran.

5.11.15: Mid-Year CMBS Issuance on Track

With an expected increase in CMBS issuance for the next six weeks, CMBS volume appears to be on track to hit $56 billion for the first six months of 2015, up 38% from $40.6 billion recorded in the first half of 2014. That would keep full-year volume on pace to reach the $125 billion forecast by industry pros at the beginning of the year. While the annualized pace would appear to be short of $125 billion, the second half of the year is typically more active than the first, putting the goal of $125 billion within reach.

The direction of interest rates will likely play a role in whether CMBS volume continues strong in the second half of 2015; with the Federal Reserve apparently willing to push interest rate increases into the latter part of 2015 or perhaps even into 2016, the balance of 2015 could remain extremely busy. In addition, CMBS spreads have remained quite stable, providing confidence to borrowers that their interest rate at closing will remain within a tight range during the 45- to 60-day period it takes to process a CMBS conduit loan.

However, should any significant volatility in the fixed-income market negatively affect CMBS spreads and/or Swap rates, there could be an increase in loan rates to borrowers that would slow down originations to the point where $125 billion in full-year originations is not achievable. But for now, it’s full steam ahead.

5.6.15: Cap Rates Continue to Compress

Going-in capitalization rates compressed nationally across all product types and classes in 2014, according to Integra Realty Resource. This national trend was strongest with respect to Class A Industrial product as well as Class A CBD Office assets. As these assets classes’ capitalization rates contracted in 2014, they passed Community and Neighborhood Retail as investors’ sixth and seventh most preferred asset classes, respectively, continuing to trail the four multifamily sectors as well as Regional Malls in terms of the strength of their capitalization rates.

Average Going In Cap Rate
2014
2013
Urban Multifamily - Class A
5.52%
5.76%
Suburban Multifamily - Class A
5.67%
5.87%
Urban Multifamily - Class B
6.38%
6.38%
Suburban Multifamily - Class B
6.50%
6.53%
Regional Mall Retail
6.83%
7.01%
CBD Office - Class A
7.05%
7.37%
Industrial - Class A
7.11%
7.50%
Community Retail Center
7.17%
7.26%
Neighborhood Retail Center
7.33%
7.41%
Suburban Office - Class A
7.43%
7.68%
Flex Industrial
7.79%
8.01%
CBD Office - Class B
7.84%
8.00%
Suburban Office - Class B
8.06%
8.23%
Lodging - Full Service
8.13%
8.31%
Lodging - Limited Service
8.78%
8.96%

 

5.1.15: Maturing CMBS Loan Leads Effective Tool for CCTG Grads

For more than two years now, Michael D, Sneden, Executive Vice President at ValueXpress, has been training Commercial Capital Training Group (CCTG) students how to successfully originate CMBS conduit loans. One of the most successful tools the new grads are using to close loans is leads provided by ValueXpress for maturing CMBS conduit loans.

The greatest amounts of CMBS conduit loans closed were in 2005 ($166 billion), 2006 ($198 billion) and 2007 ($228 billion). Most of these loans have a 10-year term and therefore will be maturing in 2015, 2016 and 2017, respectively. It is logical that the majority of the maturing CMBS conduit loan borrowers will refinance into a new CMBS conduit loan, likely with some cash out and a better rate. Knowing which loans are maturing, where they are located and reaching out to their owners early can reap big rewards for brokers who originate new CMBS conduit loans for the maturing loans.

That’s where the CCTG grads and ValueXpress become a very effective team. ValueXpress subscribes to a service that provides information on every CMBS conduit loan ever written, including maturity date, interest rate and property cash flow. For each CCTG grad, Jim Brett, head of CMBS analytics at ValueXpress, does a sort of high performing properties with CMBS conduit loans maturing in the next 6-12 months and provides leads to grads within a 50-mile radius of their offices. The grads hit the road to meet with borrowers, and ValueXpress provides the analytics, processing and closing support to get the loans closed.

“We simply don’t have the manpower to visit every single borrower across the United States who has a maturing CMBS conduit loan,” said Sneden. “But the local CCTG grads do have that opportunity, and as a result, we are closing one to two loans a month with grads using this approach.”

4.28.15: Who Holds the Most Commercial Loans?

The winner is commercial banks, which held $1.67 billion in commercial real estate debt at year-end 2014, according to data from the Federal Reserve Board. The amount of commercial real estate debt held by banks represents 49.5% of the $3.38 billion of total outstanding loans. CMBS is a distant second, with 12.6% of the commercial loan market, followed by insurance companies (10.9%), federal agencies (7.1%) and agency CMBS (5.1%). Of commercial real estate debt, 14.9% was categorized as Other.

The nation’s largest banks increased their holdings of commercial real estate loans by 6.6% in 2014, after adding 4.7% in 2013, which was the first substantial gain since the downturn. Meanwhile, loans in CMBS declined 1.2% as new originations did not keep pace with CMBS maturities. But the big year-over-year gainer was agency CMBS, with a healthy 16.5% increase in outstanding loans at year-end 2014. The loser for 2013 in addition to CMBS was federal agencies, primarily HUD multifamily programs, which saw a 1.1% decline in commercial loans outstanding.

Banks are expected to continue growing balances in 2015, as most of the problem loans from the 2008-2009 financial crises have been resolved, and with net interest margins compressing, banks need to grow their commercial loan balances to increase or even maintain earnings. For 2015, $125 billion in CMBS originations are forecasted, which should lead to some modest growth after subtracting maturing CMBS loans and troubled CMBS loans that are resolved and paid off. Federal agency loans will still be pressured by leaders in Washington, D.C. who want to reduce the involvement of government in commercial lending.

Overall Holders of Commercial Real Estate Debt on December 31, 2014

Total
$, Billions
%
Banks
$1674.50
49.5%
CMBS
$424.90
12.6%
Insurers
$369.10
10.9%
Federal Agencies
$240.80
7.1%
Agency CMBS
$171.40
5.1%
Other
$503.00
14.9%
TOTAL
$3383.70
100.0%

Source: Federal Reserve Board

4.21.15: GE Selling Most of GE Capital to Blackstone and Wells Fargo

General Electric (GE) is selling most of the real estate and other remaining assets of its GE Capital unit, the financial arm that was once the largest part of the company. The company expects to get $26.5 billion from various buyers, including Blackstone Group (BX) and Wells Fargo (WFC). But as an indication of the decline in value of those assets in recent years, GE will take a $16-billion after-tax charge related to the transaction. Still, investors cheered the news, sending shares up 8% in morning trading, the best one-day move for the stock in six years. GE shares have lagged the broader market during most of the bull market of recent years.

The sale will free some cash for GE to repurchase $50 billion of its shares, which helped move the stock in trading. GE will hang onto some financial units that support its remaining industrial business, such as its aircraft leasing unit and the parts of the business that finance sale of its energy and healthcare equipment. But it will now focus on industrial businesses, such as making jet engines and electrical turbines. The company has been moving away from its financial business: It spun off its retail lending and credit card business in the IPO of Synchrony Financial (SYF) last July and its Genworth Financial (GNW) life and mortgage insurance unit a decade ago.

“GE was not much of a force in CMBS,” noted Gary Unkel, senior originator at ValueXpress. The firm was 24th in the league tables in 2014, contributing only $580 million in loans to securitizations, less than 1% of the market total. So GE was already effectively out of the market relative to CMBS conduit loans.

4.17.15: Will Fannie/Freddie Multifamily Loan Limits Create Opportunity for CMBS

The Federal Housing Finance Agency (FHFA) has set a cap of $30 billion each in multifamily loan purchases for Fannie Mae and Freddie Mac for 2015. With both agencies off to a great start through the first quarter of 2015, the government-sponsored agencies could reach their respective caps well before yearend. With interest rates predicted to remain at low levels in the near term, there is no slowdown in sight for lending activity for Fannie’s and Freddie’s multifamily loan products. Worried about the cap, lenders that sell multifamily loans to Fannie and Freddie are involved in discussions to lobby the FHFA to increase the limits, perhaps by up to $5 billion each. Another reason for lenders that sell to Fannie and Freddie to lobby for an increase is the potential that Fannie/Freddie will increase their interest rates to slow originations, making it harder for multifamily loan sellers to compete for multifamily loans.

Multifamily CMBS conduit loans secured by multifamily properties compete directly with Fannie and Freddie lenders that originate and sell loans to Fannie and Freddie. The loan structure offered by CMBS and Fannie/Freddie originators is virtually identical. However, Fannie and Freddie lenders generally have a rate advantage of about 0.25%. A 10-year term/30-year amortization deal in CMBS that is priced at 4.25% today is priced at roughly 4.0% with a Fannie or Freddie lender. As a result, CMBS tends to get the Fannie/Freddie rejects with credit issues, underwriting challenges, poor property quality and the like.

“If Fannie and Freddie are out of the picture, this would open up a whole slew of business for the period they are out of the market,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “Our product is just slightly less competitive on rate, so I believe we would be able to capture the majority of the business that would have gone to Fannie Mae and Freddie Mac for the period they are shut out of the market.”

4.13.15: Is Credit Quality Eroding for CMBS Conduit Loans

Last March we reported on deteriorating credit quality based on data provided by the rating agency Kroll. At that time, Kroll reported gradual deterioration over the prior year in underwriting standards for the 20 largest loans in Kroll-rated transactions, particularly at the lower end of the range.

Another review recently by the rating agencies has spurred additional discussion on the topic. There is widespread belief that credit quality continues to deteriorate, but there is disagreement among originators, CMBS investors and rating agencies on the severity of the decline. From a rating perspective, the agencies are seeing their stressed LTVs, one of their key metrics of credit quality, continue to escalate. Moody’s reports that the average stressed LTV for deals it rated last year was 111%, up from just 84% in 2010. More worrisome is that the 111% stressed LTV is not far from the peak level of 114% reached in 2007, at the height of aggressive underwriting.

But originators counter with the fact that no “pro-forma” loans are underwritten today versus in 2006-2007 when loans were underwritten based on rent projections that in hindsight did not pan out and ended up being some of the worst performing. All CMBS conduit loans today are written based on income in-place. Originators also point out that the average LTV of current CMBS pools is in the 65% area, reasonably below the 70% peak in 2007. Finally, an important underwriting metric, debt yield (property net cash flow divided by the loan amount), while declining, is still above a 10% average versus the 8.9% recorded in 2007.

So the trend is still in the direction of deterioration. according to the rating agencies, but not yet to dangerous levels, according to CMBS originators.

4.6.15: SBA Guarantee Premiums Remain at Attractive Levels

It has been a while since we reported on the sale of SBA 7(a) loan guarantees, primarily because pricing has not moved much over the past year. After post-crash premiums peaked at 118.75 in February 2013, pricing gradually declined during the balance of 2013. Then, throughout 2014, secondary market premiums traded within a tight range of 117.00-117.25. That trend has continued into 2015. Stable credit markets and no movement in interest rates have contributed to a steady market for SBA 7(a) loan guarantees. With the Federal Reserve continually moving forward the time frame for interest rate increases, secondary market premiums may remain in the range of 117.00-117.25 for the balance of 2015.

2015 Premium*
Mar 117.25
Feb 117.00
Jan 117.00
2014 Premium*
Dec 117.00
Nov 117.00
Oct 117.00
Sep 117.00
Aug 117.00
Jul 117.00
Jun 117.00
May 117.00
Apr 117.25
Mar 117.25
Feb 117.00
Jan 117.25
Avg. Premium*
2014 Average 117.00
2013 Average 118.00
2012 Average 116.00
*Based on Prime + 2.75%, Quarterly Reset, 25-year loan term.

4.3.15: Franchise Expirations Becoming a Headache for CMBS Conduit Hotel Loans

The buyers of the most risky CMBS securities, sometime referred to as the “b-buyers,” have laid down some pretty strict guidelines for the remaining minimum term for franchise agreements on hotels to be eligible for CMBS conduit loans. As the buyers of the most risky CMBS securities, the b-buyers have the right to “kick out” a handful of loans from CMBS pools, and they have basically told CMBS conduit loan originators not to bother putting hotel loans in the pools if the franchise agreement has less than five years remaining because they are going to automatically kick them out.

Historically, CMBS conduit loans secured by hotels with franchise agreements with five years or less remaining on the term simply had to structure a collection of a Property Improvement Plan (PIP) reserve either at closing, over the loan term, or a combination that resulted in a reserve at franchise renewal of approximately $7,500/room for limited service hotels and $15,000/room for full-service hotels. These levels generally were sufficient to cover 100% of the costs to complete a mandated PIP to gain franchise renewal.

But sometimes just having the cash on hand does not guarantee a franchise renewal. For instance, the owner of a 15-year-old Holiday Inn Express was denied a franchise renewal despite having the cash on hand to complete the PIP, being in good standing with the franchise and having great guest satisfaction scores. What happened? Another multi-unit operator of Holiday Inn Express properties offered to build a new, larger Holiday Inn Express in the same market, so he got the franchise.

The former Holiday Inn Express converted to a Quality Inn. Revenue declined 40%, the owner defaulted on his loan, and the lender foreclosed. This story is not unique. Hence, the b-buyers’ requirement for five-plus years remaining on any hotel franchise agreement to be eligible CMBS!

4.2.15: 10-Year Swap Rate Falls Below 2.0%, Again

On Thursday, April 2, the 10-year swap rate once again fell below 2.0%, after Labor Department data showed U.S. employers added the fewest jobs in March in more than a year. The rise of 126,000 jobs was well below expectations for a gain of 245,000 forecast by economists. Prior to Thursday, the 10-year swap rate had risen to trade in a range of 2.07%-2.35% during February and March, after touching a 2015 low of 1.82% on January 30.

The weak jobs report is clouding the timing of the Federal Reserve's interest rate hike, which would be its first in nearly a decade, and for now, policymakers must watch that the U.S. economy's surprising recent weakness does not signal a more substantial slowdown. As a result, the 10-year swap rate may trade around 2% for longer than anticipated.

In sympathy, the benchmark AAA-rated class of CMBS has risen in excess of 90 basis points (bp) over swaps from 86-88 bp as the decline in the 10-year swap rate requires dealers to increase spreads to provide CMBS investors a minimum return. However, CMBS conduit originators are not passing this increase to borrowers, at least not yet, as intense competition is holding rate increases to borrowers in check and CMBS conduit originators are earning less profit.

“The surprise decline in the 10-year swap rate and the potential for a longer period before borrower rates increase are a boon to borrowers as rates are declining to the 4% level for a 10-year fixed-rate CMBS conduit loan,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “This has helped a few procrastinators who are moving a little slower than expected.”

3.28.15: CMBS Volume Strong in First Quarter of 2015

U.S. CMBS issuance soared 33% in the first quarter of 2015 compared with the same period in 2014, according to Commercial Mortgage Alert. Volume totaled $27 billion for the January-March quarter, up from $20.4 billion a year earlier. Volume would have been higher, but a number of CMBS transactions slipped into the second quarter.

Single-borrower deals accounted for an unusually large proportion of first-quarter issuance at 46.0% versus 26.7% in full-year 2014. That in part reflected the fact that conduit deals weren’t big enough to absorb some giant mortgages. The share of conduit deals slipped to 48.8% from 61.2%. And overall conduit issuance declined to $13.2 billion from $14.8 billion in last year’s first quarter.

“Some originators see brisk originations through May, then some softening; however, our origination pace at ValueXpress continues to exceed last year’s pace by a wide margin,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “It looks like the first half of 2015 should total about $200 million, up 50% from last year’s first half.”

3.20.15: Report from the National Alliance of Commercial Loan Brokers (NACLB) Annual Conference and Expo

Over 300 loan brokers and lenders gathered at the Red Rock Hotel and Casino in Las Vegas, Nevada for the first annual National Alliance of Commercial Loan Brokers (NACLB) conference on Sunday, March 8. The conference was organized by Commercial Capital Training Group (CCTG) and BoeFly. The buzz at the conference? It exceeded all expectations of both the lenders and the participating brokers.

“Kris Roglieri, founder of CCTG, and David Nayor, COO of BoeFly, did an outstanding job organizing this event,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “Usually first-time events encounter a number of snags, but this conference ran perfectly, right from the moment when Kris and David quickly moved to take the opening cocktail event to a beautiful outdoor space from the less-exciting exhibit hall.”

“I am extremely pleased that ValueXpress stepped up to be a Platinum Sponsor of this event,” stated Sneden. “Our investment in this conference will pay off in spades, and we look forward to an opportunity to sponsor at the Platinum level again next year, particularly since Kris and David expect to double participation from both loan brokers and lenders.”

“While Mike was moderating the Real Estate Lending panel, our booth was five deep with brokers who wanted to learn more about CMBS conduit lending. Most were very excited about the unrestricted cash out and non-recourse features of CMBS conduit lending,” commented Jim Brett, Senior Underwriter at ValueXpress. “In addition, we received loan requests from other participating lenders who wanted to refer to us their bank clients that either were seeking cash-out refinances or were interested in non-recourse loans.”

“I was very pleased when Terry Luker received the honor of ‘Rookie Broker of the Year’ as I am guessing a transaction that we completed with him -- Lees Condos Apartments in Bowling Green Kentucky -- was helpful in Terry winning this award.”

3.18.15: CMBS Market Update – Prices Steady

The benchmark bonds in a $1.3-billion conduit offering led by Deutsche Bank and Cantor Fitzgerald priced at 86 basis points (bp) over swaps on Wednesday, March 18, matching the second-tightest level so far this year. The spread on long-term, super-senior bonds has pretty much hovered between 86 bp and 88 bp since late February.

Earlier in the year, the benchmark AAA-rated class had ballooned in excess of 90 bp over swaps as the decline in the 10-year swap rate required dealers to increase spreads to provide CMBS investors a minimum return. This pattern reversed course in recent weeks, as the 10-year swap rate moved from a low of 1.82% on January 30 to 2.35% on March 6. The swap rate then began to decline once again, to 2.13% by March 18, when Deutsche Bank and Cantor Fitzgerald priced its CMBS offering.

Most classes in the Deutsche deal (COMM 2015-CCRE22) priced in line with guidance. But dealers encountered buy-side resistance on two subordinate classes. The double A-minus notes went for 147 bp, after being shopped at the 140-bp area, and the triple-B-minus paper fetched 340 bp, up from price talk of 330-335 bp.

3.11.15: . . . and the AAHOA Trade Show in Long Beach, CA Is Next for ValueXpress

On April 23-24, 2015 ValueXpress will be exhibiting at the annual Asian American Hotel Owners Association (AAHOA) Trade Show in Long Beach, California. ValueXpress will be located in Booth 559 at the Long Beach Convention Center noon-6:00 p.m. on Thursday, April 23 and noon-5:00 p.m. on Friday, April 24. The entire four-day event will showcase nationally known guest speakers, educational workshops featuring industry leaders, and more than 400 hospitality-related vendors offering the very latest products and services for the hospitality industry.

“ValueXpress is an Allied Member of AAHOA and has been exhibiting at the AAHOA Trade Show for over 15 years,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “We have completed over 200 hotel loans during this period with many of those loans to AAHOA members. The trade show presents an excellent opportunity to allow hotel owners to meet personally with us to learn how we can assist them with their financing needs.”

“This year it’s particularly important for us to talk with our clients,” stressed Jay Bhakta, a senior loan originator at the ValueXpress Jackson, Mississippi, office and active AAHOA member. “Many hoteliers are not fully aware that the CMBS conduit loan market is aggressively seeking quality hospitality loans from owners of hotels. In addition, with the increase in SBA loan limits to $5 million, hoteliers have more options than ever to secure financing for their hotels.”

“CMBS conduit loans for hotels provide for unrestricted cash out up to 70% loan-to-value, have no personal guarantees and right now feature 10-year fixed interest rates in the 4.5% area. These rates are at the lowest levels in the 20-year history of CMBS conduit lending,” said Bhakta.

ValueXpress welcomes the opportunity to meet with hotel owners at the trade show to explain in detail its SBA 7(a), SBA 504, USDA B&I, CMBS conduit and conventional loans for hospitality properties. Call Jay Bhakta at 601-918-2850 for your personal appointment.

3.6.15: CMBS Prepayments on the Rise

Prepayment of CMBS conduit loans, primarily through defeasance, hit $20.9 billion in 2014, driven largely by refinancing that allowed borrowers to pocket cash well in excess of the defeasance cost.

The majority of CMBS conduit loans are prepayable with a penalty after an initial lock-out period, typically 24 months. Thereafter, the loan can be prepaid under defeasance or yield maintenance, depending on how the loan documents were negotiated. Defeasance is a fairly complicated procedure, but a number of firms provide all the services to defease a loan to have the property released from an existing CMBS conduit loan to be sold or refinanced. A good resource for understanding and calculating defeasance penalties is defeasewithease.com.

“I have been telling my colleagues not to automatically assume that a client will not refinance their property because of the high cost of prepayment,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “With the increase in cash flow and value for commercial real estate, owners with substantial equity in their properties who need cash for other purposes may consider refinancing with a large cash out well in excess of the prepayment penalty to get their hands on the cash for other purposes.”

“I recently refinanced a client of mine that I provided a $14-million CMBS conduit loan for eight years ago,” commented Gary Unkel, Senior Loan Originator at ValueXpress. “With 20 months still remaining until the loan was open to prepayment without penalty, I assumed that my borrower would wait until then. But I received a call from the fellow indicating that his partner wanted to be bought out, hence a need to complete the transaction now, as the equity in the property even after the defeasance penalty provided 100% of the cash to buy out the partner.”

3.2.15: ValueXpress Establishes CMBS Conduit Relationship in Canada

“I was recently asked by one of my Commercial Capital Training Group (CCTG) students whether we provided CMBS conduit loans in Canada,” said Michael D. Sneden, Executive Vice President at ValueXpress. “I said we did prior to the market crash, but we haven’t done any since.”

That conversation spurred me to contact a former colleague that originated Canadian CMBS conduit loans in the past to see what he was up to. He said, “I am with one of the few active CMBS conduit lenders in Canada, so let’s do some business.”

The firm is a leader in Canadian real estate debt and equity markets providing conventional commercial loans and mezzanine financing in addition to CMBS conduit loans. The firm has completed a number of CMBS transactions since the restart of the U.S. CMBS securitization market in 2010. Most U.S. investors in CMBS probably do not realize that bond losses in Canada are a fraction of those experienced in the United States, and yet, Canadian CMBS yields are higher than U.S. CMBS yields, attracting savvy investors looking for extra yield with lower risk.

Canadian CMBS conduit loans are structured similar to U.S. CMBS, with a preference for 5-year loan term versus 10 year and lower loan-to-values, preferably in the 60%-65% range.

“After the conversation with my Canadian colleague, I told the CCTG grad, who is based in Toronto, to get his selling shoes on and hit the pavement in search of suitable transactions,” noted Sneden.

2.25.15: CMBS Lenders Beginning to Differentiate Among Oil-Related Markets

We recently closed and continue to actively work on new CMBS conduit hospitality loans in Corpus Christi, Texas. Hotel owners are puzzled by all the concern about the potential decline in room demand as owners simply are not seeing it. January and February 2015 were both up in terms of revenue over the comparable 2014 periods. Nearly all project the first quarter of 2015 will be an improvement over 2014.

Why is there no effect?

One Corpus Christi hotel owner put it this way: “At this point there is only limited data to support a thesis that crude oil extraction, commonly referred to as “exploration and production,” will be see a disproportionate downward trend in hotel room sales in contrast to transportation, refining and refined product storage. Oddly, the low price of oil may create an increase in the consumption of gasoline in the United States, straining refining capacity. According to the most recent Refinery Utilization and Capacity report released on January 29, 2015, refineries are running at 92% of capacity in Corpus Christi, with the Texas Gulf Coast operating at 94.4%. These levels are near the peaks experienced in 2006, before the financial crisis, and suggest that expansions and other projects to at least marginally increase production will be pursued. In addition, dollars will be spent to ensure refineries stay on line as it has also been reported that refining profitability is up. So I see no impact and possibly a positive impact from lower oil prices on my hotel business.”

2.20.15: Excitement Builds for National Alliance of Commercial Loan Brokers (NACLB) Annual Conference & Expo

The first National Alliance of Commercial Loan Brokers (NACLB) Annual Conference & Expo at the Red Rock Casino in Las Vegas, Nevada is rapidly approaching. Preparations are in place to make this one of the top commercial loan brokerage events of the year. The conference begins on Sunday evening, March 8th with an opening cocktail reception and concludes on Tuesday afternoon, March 10.

Michael D. Sneden, Executive Vice President at ValueXpress, will be moderating two breakout sessions on commercial real estate lending, the first on Monday, March 9 at 11:00 a.m. and the second on Tuesday at the same time. Panelists during the sessions will include lending experts from Bloomfield Capital Partners, Prime Commercial Lending, Kennedy Funding and Zions Bank. The lenders will present their unique loan products to attendees. Mike will be presenting the CMBS conduit loan product to participants.

Furthermore, ValueXpress will be sponsoring the luncheon on Monday, March 9th that will feature conference keynote speaker Jeff Cochran. Jeff is a principal with Shapiro Negotiations Training and he will be sharing “The Power of Nice,” a negotiating methodology to get what you want while helping the other side get what they want in a negotiation.

ValueXpress will be available for the balance of the conference at its booth, where Jim Brett, head of underwriting at ValueXpress, will be fielding questions regarding the origination, underwriting and closing of CMBS conduit loans. “We will have a bunch of giveaways as well, so I encourage all attendees to stop by our booth, even if only to grab a handful of ValueXpress logo’d golf balls for their next round,” Jim said.

Commercial Capital Training Group (CCTG) and BoeFly have teamed up to organize this event. The event will serve as a "Class Reunion" for CCTG graduates and classmates, providing an excellent opportunity for grads to network regarding their business strategies since graduating from CCTG. For the complete conference agenda and to register, visit http://www.naclb.net.

2.16.15: CMBS Borrower Loan Rates Off Record Lows with Swap Increases

Everyone involved in the origination and underwriting of CMBS conduit loans or the creation and selling of CMBS securities backed by the loans is keenly aware of the swap market. The swap rate is integral to the interest rate charged CMBS conduit loan borrowers and a key factor in the profitability of the sale of CMBS securities.

So CMBS conduit loan originators gleefully watched the 10-year Swap rate steadily decline from a near-term peak of 2.42% at the end of December 2014 to a low of 1.82% in the first week of February 2015. Since the interest rate charged borrowers on CMBS conduit loans consists of the swap rate plus the loan spread, a watchful eye was also on loan spreads to see if they would increase, wiping out the benefit of the declining swap spread. But loan spreads, determined by the market for CMBS securities, generally remained flat. So the majority of the decline in the swap rate resulted in lower loan rates for CMBS borrowers.

“The decline in the swap rate in the beginning of February resulted in CMBS conduit loan rates below 4% for full-leverage, 10-year fixed-rate loans,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “These are amazing rates! Rates under 4% for large, 50% LTV loans are common, but sub-4% for highly leveraged, small balance (< $10 million) conduit loans is a first in the history of CMBS lending.”

Alas, the sub-4% rates were short lived. After bottoming in the first week of February, stronger economic news lifted the 10-year Swap rate to 2.20% in mid-February, increasing CMBS conduit loan rates well above 4% once again for full-leverage, 10-year fixed-rate loans.

2.12.15: Apartment Rents Rise in 2014 Amid Strong Demand, But Is the Party Over?

Reis reports that apartment rents grew by 0.6% nationally during the fourth quarter of 2014, a bit of a slowdown from the pace observed during 2014’s second and third quarters. Nevertheless, the trend in rents is up. Annual rent growth for apartment rents was 3.5% in 2014. This the best performance in the apartment market since 2007, and apartment easily remains the best performing property type in this respect.

Yet again, rents reached record‐high nominal levels during the fourth quarter. Although an improving labor market with more jobs and faster wage growth should provide landlords with more leverage to increase rents, over time this will be stymied by the sheer number of new units coming on line, thereby increasing competition in the market. Although rent growth should remain positive for the next five years, the rate of growth is anticipated to slow, even as new units come on line with rents that are higher than the market average.

The national vacancy rate was unchanged at 4.2% during the fourth quarter of 2014. This follows the previous quarter's slight 10-basis-point increase in vacancy, which was the first increase since the fourth quarter of 2009. Although vacancy did not continue to increase this quarter, the unchanged vacancy rate shows that the days of excess demand are likely over.

Demand had a surprising rebound during the fourth quarter to 45,027 units, the highest quarterly figure since the fourth quarter of 2013. This is an important point, even as construction increases in 2015 and beyond, demand will remain robust due to the large number of young renters in the United States. However, as we mentioned last quarter, this is the beginning of an up cycle in vacancy, and demand will struggle to keep pace with the significant amounts of new construction that should come on line over the next few years.

2.6.15: Report from the 2015 MBA CREF Convention

The CMBS conduit loan machine is cranking full tilt, according to participants at the 2015 MBA Commercial Real Estate Finance Convention (CREF) held recently in San Diego, California. This year's CREF panelists suggested volume of $125 billion in CMBS originations should be easily achieved if rates remain close to current levels. But the panel was concerned about deteriorating underwriting standards and competition compressing profit margins, a recurring theme from last year.

Opinions on what is expected in 2015 in the CMBS market, both on the origination side and securities side of the business, were shared by Chris LaBianca, Managing Director at UBS; Brian Furlong, Managing Director at MetLife; Ted Borter, Managing Director at Goldman Sachs and Jeff Fastov, Managing Principal at Square Mile Capital Management on the panel, "The State of CMBS Lending: The Capital Markets Perspective."

It was widely recognized that credit standards continue to weaken. From a bond buyer’s perspective, Brian Furlong said he was somewhat comforted by the increasing levels of subordination that rating agencies are requiring on CMBS bond classes to reflect worsening credit. “I think the rating agencies are actually doing a pretty good job this time around increasing subordination,” commented Furlong. “This is exactly opposite from the 2005-2007 period, in which subordination remained relatively unchanged as credit metrics fell, as the rating agencies were unwilling to adjust levels upward in fear of losing market share. We are very comfortable that the ratings reflect the appropriate risk at the top of the bond stack (senior AAA-rated CMBS).”

At the below investment grade CMBS credit spectrum, Jeff Fastov, an experienced investor in the CMBS "b-piece" market, said, “The b-piece bond buyers are also providing pushback on deteriorating loan underwriting as they become more active in “kicking out” loans that they feel are poorly underwritten or reflect weak collateral. This is generally providing a floor on how far underwriting can deteriorate.”

All the panelists concurred that the reported 36 active conduit programs are more than required to serve the CMBS loan origination market and are contributing to profit compression. “The large amount of active programs is terrific for borrowers,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “Borrowers are able to pit one program against another in terms of pricing and structure to get the best possible deal.”

2.3.15: Fixed-Fee CMBS Loan Programs Continue to Expand

“A colleague of mine for over 15 years announced the formal launch of a new fixed-fee CMBS conduit loan origination platform at the 2015 MBA Commercial Real Estate Finance Convention (CREF) held in San Diego, California,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “I was particularly excited as this industry pro ran the small-balance, fixed-fee program at one of the leading CMBS conduit lenders for over 10 years, and we were able to complete a significant amount of transactions in this program prior to the financial crisis,” said Sneden.

One of the negatives of CMBS conduit loans is high transaction costs, which have increased significantly since the restart of CMBS conduit loan lending in 2010. Prior to the financial crisis, a borrower typically incurred transaction costs for third-party reports and searches of about $25,000 on a typical $5-million CMBS conduit loan or even less, say $12,500-$15,000, in a fixed-fee program. But since 2010, transaction costs have risen to $40,000-$50,000 for that same loan, as generally all the service providers are charging more. Compounding the issue is that few fixed-fee CMBS programs resurfaced after CMBS lending resumed in 2010.

However, with competition fierce and conduit lenders needing to find a niche or some level of differentiation, fixed-fee CMBS programs are now starting to aggressively emerge. The new fixed-fee program caps all transaction expenses at $25,000, essentially 50% less than current uncapped levels. The program is for all traditional CMBS conduit loan assets except hotels (apartments, manufactured housing communities, office, retail, industrial and self-storage). The program is eligible for loan amounts from $1 million-$10 million.

“This program will be well suited for borrowers concerned with the high costs of obtaining a CMBS conduit loan, and we expect to originate significant volume for this program,” commented Gary Unkel, Senior Loan Originator at ValueXpress.

2.2.15: Join the Mortgage Action Alliance

“If you only take away one thing from this year’s MBA convention, please join the Mortgage Action Alliance,” David H. Stevens, President and CEO of the Mortgage Bankers Association said in his opening remarks at 2015 MBA Commercial Real Estate Finance Convention (CREF) held last week in San Diego, California.

Stevens went on to describe that the MBA’s voice was instrumental in encouraging Congress to reauthorize the Terrorism Risk Insurance Act (TRIA) on January 12, 2015. However, Stevens commented, “A loud powerful voice from industry is absolutely critically important. The most concerning thing about our Call to Action on TRIA was that it showed how few of you are members of the Mortgage Action Alliance.”

The Mortgage Action Alliance (MAA) is a voluntary, non-partisan and free nationwide grass roots lobbying network of real estate finance industry professionals, affiliated with the Mortgage Bankers Association. MAA is dedicated to strengthening the industry's voice and lobbying power in Washington, D.C. and state capitals across America. Get involved with MAA to play an active role in how laws and regulations that affect the industry and consumers are created and carried out by lobbying and building relationships with policymakers.

“It only takes a moment to get started. It’s free, and you do not have to be a member of MBA to enroll,” said Michael D. Sneden, Executive Vice President of ValueXpress. “Please enroll now at Mortgage Action Alliance.

1.23.15: Please Don’t Pay Up-Front Fees to Brokers on CMBS Conduit Loans

We recently received an email from a CMBS conduit loan borrower who wanted us to forward important information to our clients to protect them. The client is seeking a CMBS conduit loan in an oil-related market for a limited service hotel and received a quote for a higher-than-market LTV (most borrowers know CMBS conduit loans for hospitality is capped at 70% LTV) and a very attractive spread. The quote was on the broker’s letterhead and requested $10,000. The borrower, excited about the terms, sent in the deposit to the broker. The borrower was then shocked when the Term Sheet provided by the CMBS conduit lender was received at 70% LTV in addition to a “re-trade on our original terms” (borrower’s quote). After flimsy excuses on the re-trade and uncertainty on the return of the $10,000 deposit, the sponsor felt he was cornered into proceeding. The loan was turned down in loan committee. The sponsor then turned to ValueXpress to complete his transaction. And we will.

The sponsor sends the following message: “PLEASE DO NOT PROCEED WITH ANY CMBS CONDUIT OFFER UNLESS THE PROPOSAL IS ON THE LENDER’S LETTERHEAD AND YOU HAVE PERFORMED DILIGENCE ON THE LENDER’S CAPABILITIES.”

ValueXpress does not win every deal and we are not always the lowest price, but we never take any money up front and we always deliver our loan proposals on the Lender’s letterhead. Also, we always have deposits paid directly to the investment bank. In addition, if there is ever any concern on the performance, we can get the investment banker on the phone to discuss any concerns that a borrower might have.

1.19.15: Meet Me at the MBA in San Diego, CA

Michael D. Sneden, Executive Vice President of ValueXpress, will be representing the firm at the Mortgage Bankers Association Commercial Real Estate Finance (CREF)/Multifamily Housing Convention and Expo at the Manchester Grand Hyatt in San Diego, California February 1-4, 2015. The convention is expected to attract over 3,000 commercial and multifamily professionals who will be networking with industry leaders and listening to professionals share their views on the direction of the industry.

"I have been attending CREF for over 15 years, and it is by far the best opportunity to meet my colleagues to share our past, current and future views on the commercial real estate lending markets," said Sneden. "This year, with the expected growth in CMBS conduit lending from a wave of maturing 2005-2007 CMBS conduit loans, I am looking to meet with my contemporaries who want to participate in the rewards of CMBS conduit lending. I want to see if there is a way we can work together."

"According to CMBS pros, the CMBS lending market is projected to climb to $125 billion in 2015 from $95 billion in 2014," notes Sneden. "ValueXpress has been tracking the market increases and expects to increase originations 25% in 2015. And we would like to work with more colleagues as we reach our goal."

Mike will be in San Diego from Sunday, February 1 through Tuesday, February 3. If you want to get together for a drink or chat between session presentations, please email Mike at msneden@valuexpress.com.

1.13.15: S&P Gets a Time Out

In its first enforcement action against a major rating agency, the Securities and Exchange Commission (SEC) accused S&P of fraudulent misconduct, saying S&P loosened standards to drum up business in recent years. The agreement requires S&P to pay more than $58 million to the SEC, $12 million to New York and $7 million to Massachusetts.

S&P said in a statement that it did not admit or deny any of the charges. It's likely the first in a line of settlements between S&P and government agencies. In 2013, the Justice Department and attorneys general from other states filed civil lawsuits against the company for misrepresenting risks in the years leading up to the financial crisis.

As part of its agreement with the SEC, Standard & Poor's Ratings Services, a division of McGraw Hill Financial, will take a one-year "time out" from rating commercial mortgage-backed securities.

While the settlement ends the regulator’s case against S&P as a company, the SEC is now pursuing civil charges against one individual -- Barbara Duka, S&P’s former CMBS chief. The SEC is alleging that Duka led a “scheme” to water down S&P’s rating methodology to win business without disclosing the change to investors. It also contends that Duka, who left S&P in March 2012, obscured the change from senior management.

1.9.15: Another Solid Year for ValueXpress

ValueXpress completed 35 CMBS conduit loan transactions in 2014 with a principal balance of over $225 million. Average loan size approximated $7 million. Hospitality loans were most prevalent, but transactions were completed for every CMBS conduit loan asset class -- multifamily, retail, office, self-storage and hospitality.

"2014 was a fairly typical year for us," commented Michael D. Sneden, Executive Vice President of ValueXpress. "In periods of market stability, our originations are typically in the $200-million area, with average loan size of about $5 million, and we close three to four loans a month. We continue to successfully focus on the small balance ($3-$15 million) market to lend our expertise to borrowers and intermediaries who are not terribly experienced in the CMBS conduit loan origination process."

"We expect 2015 to be more of the same: $200 million-plus in originations, mostly refinancing of maturing loans or cash-out refinancing of existing loans," noted Gary Unkel, Senior Originator at ValueXpress. "The large pool of maturing CMBS conduit loans in 2015 will provide an opportunity to refinance those loans into another CMBS conduit loan."

"In 2015, we also expect to increase CMBS conduit loan originations from the graduates of Commercial Capital Training Group (CCTG), in which ValueXpress is the preferred CMBS conduit loan partner," commented Sneden, an educator at the school. "The school graduated over 120 professionals in 2014 who are now pounding the pavement for CMBS conduit loans for ValueXpress to process."

1.6.15: Market Awaits New CMBS Deals to Clarify Pricing

On December 12, UBS, Deutsche Bank, CCRE, KeyBank and others priced the benchmark AAA-rated class of a $825-million multi-borrower CMBS conduit offering at 90 basis points (bp) over swaps, above the upper end of the 85-87 bp range that was prevalent in November. On the same day, Ladder Capital, Wells Fargo, RBS and others priced the benchmark class of a $1.138-billion multi-borrower offering at 85 bp over swaps, an unusually wide difference between the deals. Market participants posited that the Ladder Capital deal was better underwritten, but the exact reasoning was unclear. To further cloud the market, JPMorgan, Barclays, Credit Suisse and others priced the benchmark class of the last multi-borrower CMBS conduit offering for 2014 on December 16 at 95 bp over swaps, creating a very wide range of outcomes between the deals.

With no other CMBS deals pricing since December 16, it is unclear where the benchmark class would price today, creating uncertainty in quoting terms to borrowers on new deals. Many lenders believe (hope) that the market will settle back in the 85 bp over swaps area, but in the meantime, they are adding some additional spread to borrower quotes in case the market for the benchmark class is higher. The recent decline in the 10-year swap rate has also created additional uncertainty, as many CMBS investors require a minimum return, and if the swap declines, bond spreads must increase to maintain minimum yield requirements.

The market should become clear once new multi-borrower CMBS conduit offerings price. The first deal to announce may be an offering by Morgan Stanley, Bank of America and CIBC in which pre-marketing materials have been distributed in anticipation of the deal being announced in mid-January with pricing shortly thereafter.

1.1.15: Industry Pros Bullish on 2015 CMBS Originations

With relatively low interest rates, strong market appetite for CMBS securities and the beginning of a period of high CMBS conduit loan maturities, originators are predicting strong CMBS conduit loan growth in 2015. Forecasts are for approximately $125 billion in conduit lending in the United States compared with $94 billion closed in 2014.

"With approximately $73 billion in CMBS conduit loan maturities occurring in 2015 (see our 12.12.14 post, “Mountain of CMBS Conduit Loan Maturities Presents Origination Opportunity”), together with incremental originations from other sources, this level of business for 2015 looks readily achievable," commented Michael D. Sneden, Executive Vice President at ValueXpress. "We have a very full first-quarter pipeline of about $65 million, up 25% from a year ago, so we appear to be paralleling growth in the overall CMBS market."

If interest rates remain at today's attractive levels, which are now in the 4.0%-4.5% range for 10-year CMBS conduit loans, the $125-billion projection for 2014 might actually be exceeded. The actions of the Federal Reserve on interest rates in 2015 may play a role; if the Fed does not increase short-term interest rates until later in 2015 or if the increase in short-term rates does not result in an increase in long-term rates, 2015 could be a blockbuster year.

Headwinds that might negatively impact 2015 CMBS conduit origination totals include the decline in oil prices dampening loans in oil-related markets, an increase in either the swap rate or CMBS bond yields resulting in interest rates over 5% to borrowers and global dislocations.

12.26.14: Caution Flag Out for Hotels in Oil-Related Markets

CMBS conduit loan originators are concerned about lower oil prices negatively affecting room demand for hotel properties in markets where demand is highly dependent on robust oil exploration and production activities. While the impact of declining oil prices should affect markets differently, right now, all markets are being painted with a broad-brush level of apprehension.

Estimates vary, but North American shale oil breakevens are around $65 per barrel. With North American oil trading below $60, some drilling projects are likely to be shut down until prices improve. Workers and support personnel from those projects will be sent home, reducing hotel room demand.

As the biggest U.S. oil producer, Texas has the most jobs directly tied to production. But those jobs comprise a smaller share of overall employment than oil payrolls in second-place North Dakota, according to the Bureau of Labor Statistics. Wyoming has the highest concentration of overall employment tied to oil. With less-diversified employment bases, hotels located in Wyoming, North Dakota and third-place Oklahoma may experience a disproportionate decline in hotel demand. Although Texas is well diversified and impact on its major cities of Houston, San Antonio, Dallas and Austin will likely be muted, smaller communities closer to the oil-rich Eagle Ford and Permian basins may see a noticeable decline in hotel demand.

“The impact of lower oil prices on hotel demand is somewhat hard to predict; less-populated areas with mostly exploration and production oil activities are likely to be hit the hardest. Diversified cities and areas with high “midstream” and “downstream” oil activities such as refining, oil storage and oil pipelines could actually fare quite well as demand rises from lower-priced gasoline,” commented Michael D. Sneden, Executive Vice President at ValueXpress.

12.21.14: Economic Outlook and Product Offering Update

One of our CMBS conduit lending partners provides us with a regular forecast of its views on the economy and its expected impact on CMBS conduit lending. We have completed close to $500 million in transactions since the restart of CMBS conduit lending in 2010 with this partner, so we like to share their views with our readers. This publicly traded firm continues to aggressively originate and contribute fixed-rate CMBS conduit to securitizations, but it also provides a complete suite of capital market loan products. Here is what the company has to say:

12.17.14: More First Mortgage/Mezzanine Combos Expected in 2015-2017

The significant amount of CMBS conduit loan maturities in 2015-2017 will provide an unprecedented opportunity for CMBS conduit loan mortgage brokers to increase their origination volume in the upcoming years (see our 12.12.14 post), but not without some challenges.

“I went back to Jim Brett, our CMBS bond analyst and head of CMBS conduit loan underwriting at ValueXpress, to dive once again into Trepp to determine CMBS conduit loans maturing in 2015-2017 that report DSCR below 1.20x,” said Michael D. Sneden, Executive Vice President at ValueXpress. “These loans will be challenged to refinance for the full balance due at maturity because the property does not provide enough cash flow to support the minimum DSCR of 1.25x required in CMBS to pay off the full loan principal at maturity.”

Jim reports that roughly 30%, 40% and 45% of the maturing loans in 2015, 2016 and 2017, respectively, report DSCR < 1.20x. But there is some hope for loans with DSCR of 1.10-1.20x, a CMBS first mortgage/mezzanine combo.

The way this product works by example is a traditional 10-year first mortgage of, say, 70% on a maturing, well-located, multi-tenant office building is underwritten at regular CMBS conduit loan rates of, say 4.5% today. Then a mezzanine loan is modeled on top of the first mortgage, up to 85% LTV and a 1.10x minimum DSCR, with a coupon of 11%.

Now 11% on the surface sounds awful. But to sell it, the borrower is presented with a seamless, blended Term Sheet with the combined 85% principal amount that looks like one loan at one rate. The rate is computed by blending: 70% divided by 85% times 4.50% plus 15% divided by 85% times 11% equals 5.35% roughly. Any real estate veteran should realize that 5.35% for 85% leverage is really quite attractive.

“We will be further sorting Trepp to isolate those properties with loans maturing in 2015-2017 with DCSR between 1.0x and 1.20x to present them this CMBS first mortgage/mezzanine combo as a way to refinance overleveraged properties,” commented Sneden.

12.12.14: Mountain of CMBS Conduit Loan Maturities Presents Origination Opportunity

The significant amount of CMBS conduit loan maturities in 2015-2017 will provide an unprecedented opportunity for CMBS conduit loan mortgage brokers to increase their origination volume in the upcoming years.

“Recently, Jim Brett, our CMBS bond analyst and head of CMBS conduit loan underwriting at ValueXpress, performed a sort through our Trepp database of all existing CMBS conduit loans to quantify the amount of loans maturing in the 2015-2017 time frame,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “The results are impressive.”

The large amount of loan maturities stems from the aggressive underwriting and high property values prevalent in 2005-2007 that resulted in record CMBS origination levels of $166 billion in 2005, $198 billion in 2006 and $228 billion in 2007.  This three-year period was the only one in which U.S. CMBS loan originations exceeded $100 billion. Since most of the loans have a 10-year term, the majority is maturing in 2015-2017.

The results of Jim’s search are provided in the table below:

Year Maturing CMBS Loans (billions)
2015 $73
2016 $106
2017 $122

Given CMBS conduit loan originations of $86 billion in 2013 and just shy of $100 billion in 2014 with significantly lower CMBS conduit loan maturities, volume in the 2015-2017 period is poised to easily exceed $100 billion in each year.

“The only caveat are those properties that are not performing at levels that support refinancing the maturing loan balance,” commented Sneden. “Those loans will require mezzanine financing in conjunction with the CMBS first mortgage and/or fresh equity to avoid default.”

12.8.14: Is Radio Shack “Toast”?

I have fond memories of buying obscure electronic devices and parts at the Radio Shack in Brunswick Square Mall in East Brunswick, N.J., where I grew up. Do you remember when headphones made your head doubly large and the plug-in was the size of your index finger? Well, back in the day, only Radio Shack had the double index finger plug-in that would let you hook up your buddies’ ‘phones to the same turntable so you both could listen to T. Rex on vinyl pound out “Bang a Gong” at the same time…

Alas, times have changed.  Selling $2.99 plug-ins does not cut it anymore. The company’s effort to shift into sales of wireless devices with T-Mobile in 2009, Verizon in 2011 and subsequently AT&T did not improve financial results as customers found it easier to buy phones and contracts directly from the phone companies. By 2012, financial results were in steep decline, and by 2013, rumors of bankruptcy were surfacing. In 2014, the company announced the closure of 1,100 stores, almost 20% of its 5,200 U.S. locations. The move was subsequently blocked by its creditors. By September 2014, the company reported it was running out of cash, despite a $250-million investment from private equity funds.

For CMBS conduit and other commercial lenders in the retail sector, Radio Shack may follow the footsteps of other failed retailers that were subsequently liquidated and closed like Linens N Things, Circuit City and Borders, to name a few. The bright side is Radio Shack stores average 2,500 square feet, and closures are not likely to have a major vacancy impact on the shopping centers and malls in which they are typically located.

12.3.14: CMBS Delinquency Posts Significant Decline in November

The CMBS delinquency rate for U.S. commercial real estate loans in CMBS declined significantly in November, to 5.80%, reversing an 11-basis-point (bp) increase reported in October, according to Trepp. The November delinquency rate was the largest drop in ten months and the reading was the lowest level in five years.

Loans liquidated with losses totaled just over $700 million in November. Removing these resolved loans resulted in 13 bp of downward movement in the delinquency rate. Loans that cured reduced delinquencies by 22 bp, but this was mostly offset by loans that were newly delinquent. New delinquencies added about 18 bp to the delinquency rate.

Period % 30 Days
or More Delinquent
Nov-14 5.80%
Oct-14 6.14%
Sep-14 6.03%
Aug-14 6.10%
Jul-14 6.04%
Jun-14 6.05%
May-14 6.27%
Apr-14 6.44%
Mar-14 6.54%
Feb-14 6.78%
Jan-14 7.25%
   
3 Months Ago 6.10%
6 Months Ago 6.27%
12 Months Ago 7.30%

Here are the numbers by property type:

11.28.14: Flood of CMBS Deals May Put Downward Pressure on Pricing

A flood of CMBS deals slated to price before year-end may result in lower CMBS bond prices if investors do not have the appetite to buy all of the supply. Many CMBS buyers, including insurance companies, are provided annual allocations for fixed-income investments such as CMBS, and once those targets are reached, the investors must sit on the sidelines until a new allocation is provided for the following year.

The timing for potential reduced buying by investors is during a period of robust CMBS issuance prior to year-end. According to Commercial Mortgage Alert, ten CMBS deals were announced prior to Thanksgiving. Three of the deals were conduit offerings totaling $3.4 billion, one of which priced on November 18. Pricing held up well on the $875-million offering led by Wells Fargo and RBS, but it weakened by the time UBS priced its deal on Tuesday, November 25 (see 11.25.14 post “Spreads Widen on Recent CMBS Offering”).

An additional $10 billion in CMBS deals is in the works for December, including $5.6 billion in conduit deals. It’s unclear whether the weakened pricing of the UBS deal reflected reduced trading staff for Thanksgiving or other factors. Some investors questioned the collateral quality in the deal and others noted that transactions including UBS loans tend to price wider than other deals. Market direction on pricing should firm up when the next deal prices in the beginning of December.

11.25.14: Spreads Widen on Recent CMBS Offering

On November 23, UBS, Deutsche Bank, Jeffries, Cantor Fitzgerald, KeyBank and Pillar priced the benchmark class of a $1.275-billion multi-borrower CMBS conduit offering at significantly wider spreads than the previous offering on November 18 from Wells Fargo, RBS, Rialto Capital and other loan contributors. The benchmark AAA-rated super-senior class priced at 92 basis points (bp) over swaps, up 3 bp from price guidance and 7 bp wider than the spread on the long-term, super senior class of the Wells Fargo/RBS deal that priced at 85 bp over swaps. Prior to the UBS/Deutsche Bank deal, new issue super-senior spreads were in the area of 85-86 bp over swaps.

The other investment-grade classes in the UBS/Deutsche priced even wider. The junior AAA-rated class priced at 132 bp over swaps, up 7 bp from price guidance and 12 bp wider than the spread on the junior AAA-rated class of the Wells Fargo/RBS deal. The AA-rated class B priced at 162 bp over swaps, also up 7 bp from price guidance and 17 bp higher than the equivalent class in the Wells Fargo/RBS deal.

Dealers were unsure about which event or combination of events may have contributed to the wider pricing. First, talk was that many trading desks were thin during Thanksgiving week. In addition, the UBS/Deutsche team deals tend to price wider of other conduit deals. Last, there was some concern about collateral, including the third-largest loan consisting of an older portfolio of less-than-fully occupied mobile home parks and self-storage facilities.

11.19.14: Moody’s Warns on CMBS Loan Underwriting

Moody’s recently reported further deterioration of CMBS conduit loan underwriting using its internal loan-to-value (LTV) metrics. The experts at Moody’s Investors Service track the principal amount of CMBS loans compared with the property’s value based on applying an appropriate capitalization rate (cap rate) to the income produced at the properties. The average CMBS loan was 112.2% of the value implied by that income in the third quarter, according to Moody’s. That’s up from 108.3% in the second quarter.

“Transactions in our fourth-quarter transaction pipeline signal that credit quality is likely to slip further, to an average Moody’s LTV in excess of 113% ,” according to Moody’s. “At the rate that conduit loan leverage is increasing, Moody’s LTV will exceed its pre-crisis peak of 118% well before its 10th anniversary in third-quarter 2017.”

However, not all the underwriting news is bad. Bond rating agencies are also demanding that fewer CMBS bonds get the highest AAA rating. Credit enhancement levels for AAA-rated CMBS bonds are nearly double those in 2006 and 2007, which means they are more protected from potential losses, according to Fitch Rating, Inc. “CMBS originators on the whole are using more sensible assumptions… a positive development compared to what took place between 2006 and 2008,” said Huxley Somerville, managing director for Fitch.

11.14.14: On the Road Again … This Time to Lubbock, TX!

“Our mission at ValueXpress, particularly for first-time CMBS conduit loan borrowers, is to make a complex loan process as painless as possible,” explained Michael D. Sneden, Executive Vice President at ValueXpress. “This enables borrowers to keep up with the fast-paced underwriting and closing process to get their loans closed within 45 days. Quick closings reduce the risk of interest-rate increases, help meet time-sensitive payoff dates and get cash-out proceeds into borrowers’ hands quickly for reinvestment.”

“The ability to achieve these goals is challenged by portfolio transactions. The work multiplies with each additional asset, but the timeline of 45 days remains the same,” commented Jay Bhakta, Senior Loan Originator at the ValueXpress Jackson, Mississippi office and 15-year ValueXpress veteran. “That is why we always go on site to complete the diligence for portfolio transactions.”

The most recent foray for Jay and Mike was to Lubbock, Texas, to complete the diligence on a $21-million, four-property hotel portfolio for Henry Patel. Henry fit the mold of a typical ValueXpress CMBS conduit borrower. First-time CMBS borrower? Check. Involved with other businesses that stretch resources? Check. A desire for a quick closing? Check.

“Jay and I spent a week with Henry and his team. We worked 10- to 12-hours days, and by the time we left for the airport on Friday, the diligence checklist was 95% complete,” commented Sneden. “We ordered surveys, requested comfort letters, filled out Wells Fargo Cash Management forms and got property insurance squared away. And that was in addition to the standard 50 items on the property checklist. Importantly, we were able to get 5 years of monthly operating data for all 4 properties (20 P&Ls) to the appraiser on Thursday so he could meet the delivery timetable.”

“We had a great time and Henry was very appreciative,” said Jay. “I know this because Henry kept the refrigerator stocked with beer all week!

11.11.14: Freddie Mac Announces Small Balance Multifamily Loan Program

Freddie Mac, a government-sponsored enterprise (GSE) that buys mortgages for pooling and sale as mortgage-backed securities has announced a new small balance multifamily loan acquisition program. The program, dubbed Small Balance Loan (SBL), kicked off during Freddie Mac’s seller/servicer conference in New Orleans, LA on October 9-10.

The program provides approved sellers/servicers with a dedicated platform to originate and sell loans secured by smaller rental properties. The program is similar to Fannie Mae’s multifamily Small Balance Loan program and should provide small balance apartment borrowers with more options for attractive, non-recourse, fixed-rate loans. The Freddie Mac program is eligible for apartment properties with five or more units and with loan amounts of $1 million-$5 million. This compares with Fannie’s loan limits of $750,000-$3 million ($5 million in certain metropolitan markets).

Freddie Mac’s nationwide program provides for 5-, 7- or 10-year fixed-rate terms with amortization up to 30 years. Partial- and full-term interest-only periods are available for low-leverage loans. Maximum loan-to-value is 80% and the minimum debt-service coverage ratio is 1.25x. The program has a net worth requirement equal to the loan amount and a liquidity requirement of nine months of principal and interest. The property must provide a minimum of 90% occupancy over the prior three months. These tests are identical to those found in the Fannie Mae Small Balance Loan program. Take a look here for a summary of the Freddie Mac Small Balance Loan program options and requirements.

11.4.14: Limited Amount of Assisted Living Loans Found in CMBS 2.0

“I have wondered many times why assisted living properties can’t seem to make it into CMBS transactions,” noted Jim Brett, head of Underwriting at ValueXpress. “It seems the risk profile is similar to hotels, so applying underwriting standards somewhat more conservative than hotels, perhaps 65% LTV and 1.60x DSCR, ought to work.”

With the aging U.S. population, housing for senior citizens is growing and in demand, boosting assisted living occupancies. Approximately two-thirds of assisted living residents paid for services with private funds, lessening the concern for government cutbacks. Many facilities are newer, state-of-the art, like this facility under construction in Bluffton, South Carolina:

“So I rifled through Trepp to see if maybe CMBS conduit lending has expanded to more assisted living transactions, but it has not. Take a look at what I found.”

Assisted Living Transactions, 2010-2014

Year # of Loans
2010 0
2011 2
2012 0
2013 0
2014 0

Source: Trepp

The first of two transactions in 2011 was an $8-million assisted living facility located in San Leandro, CA underwritten to a 1.98x DSCR and a 69% LTV. The second loan was a $15,500,000 loan secured by an assisted living facility underwritten to a 2.44x DSCR and a 45% LTV.

“I asked one of our investment bankers about assisted living, and he said ‘Mike, if you have a private-pay, 50%-60% LTV deal on a well-occupied, newer facility in a major metro, we will take a look at it. Otherwise, there is not much appetite here,’ ” said Michael D. Sneden, Executive Vice President at ValueXpress.

10.31.14: ValueXpress to be a Keynote Sponsor at the 2015 National Alliance of Commercial Loan Brokers Conference

ValueXpress will be among the sponsors of the first National Alliance of Commercial Loan Brokers (NACLB) Annual Conference & Expo at the Red Rock Casino in Las Vegas, Nevada. ValueXpress will be sponsoring the luncheon on Monday, March 9th that will feature the conference keynote speaker. The conference begins on Sunday evening, March 8th with an opening cocktail reception and concludes on Tuesday afternoon, March 10.

Over 250 of the nation's top commercial loan brokers will be attending this event to meet with the top lenders and service providers that cater to the commercial brokerage community. The program will include over 16 educational breakout sessions ranging from small business lending to income-producing commercial real estate finance and many other commercial loan products. These breakout sessions will focus on current trends affecting each loan product, enabling participants to tailor their marketing strategy using cutting-edge market intelligence from this conference.

Commercial Capital Training Group (CCTG) and Boefly have teamed up to organize this event. The event will serve as a "Class Reunion" for past CCTG graduates and classmates, providing an excellent opportunity for grads to network regarding their business strategies since graduating from CCTG. For more information and to register, visit http://www.naclb.net/registration.

"Having taught over 200 CCTG graduates over the past year and now closing 3-4 CMBS conduit loan deals a month with them, this is a outstanding opportunity for me and ValueXpress to reconnect with graduates just getting their feet wet," commented Michael D. Sneden, Executive Vice President at ValueXpress. "In addition, I anticipate I will participate on CMBS conduit loan panels to share the most current trends in the CMBS conduit loan market with attendees."

10.28.14: Commercial/Multifamily Mortgage Bankers Originations Up!

Third-quarter 2014 commercial and multifamily mortgage loan originations were 16% higher than a year earlier and 18% higher than in the second quarter, according to the Mortgage Bankers Association's (MBA) Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations.

"Commercial real estate borrowing and lending continued at a strong clip in the third quarter," said Jamie Woodwell, MBA's Vice President of Commercial Real Estate Research. "Low rates, coupled with growth in property incomes, property values and sales transactions, have pushed year-to-date commercial and multifamily mortgage originations 5% above last year's pace."

The 16% overall increase in commercial/multifamily lending volumes compared with the third quarter of 2013 was driven by increased originations for industrial and multifamily properties. The increase included a 41% increase in the dollar volume of loans for multifamily properties, a 22% increase for industrial properties, an 11% increase for office properties, an 11% increase for retail properties, a 4% increase in hotel property loans, and a 43% decrease in healthcare property loans.

Among investor types, the dollar volume of loans originated for Government Sponsored Enterprises (or GSEs -- Fannie Mae and Freddie Mac) increased 118% from last year's third quarter. There was a 47% increase for CMBS loans, a 1% increase for life insurance company loans, and a 16% decrease in dollar volume for commercial bank portfolio loans.

Among investor types, year-to-date 2014 versus year-to-date 2013, loans for CMBS increased 28%, loans for commercial bank portfolios increased 14%, originations for GSEs increased 3%, and loans for life insurance companies decreased 1% year-to-date 2014 versus year-to-date 2013.

"CMBS had a strong showing in the third quarter, outpacing life and community bank originations," commented Michael D. Sneden, Executive Vice President at ValueXpress. "However, Fannie Mae and Freddie Mac remain formidable competitors in the multifamily space as evidenced by strong production in the third quarter."

10.19.14: SBA 7(a) Loan Volume Rises in Fiscal Year 2014

SBA 7(a) loan volumes continued to grow modestly, continuing a two-year growth pattern since 2012, according to a report by Charles H. Green, although fiscal 2014 (October 1, 2013 through September 30, 2014) was a year without noteworthy economic growth and lenders facing a number of changes in the banking landscape as well as changes to the SBA Standard Operating Procedures (SOP). In fiscal 2014, $19.19 billion of SBA 7(a) loans were approved, up 7.4% from the $17.86 billion approved in fiscal 2012 (see the graph below). For SBA 7(a) loans > $150,000, the amount approved increased to $17.33 billion from $16.42 billion, up 5.5%. The average loan size of $378,737 in fiscal 2014 was lower than the average of $385,078 in fiscal 2013.

10.17.14: Treasury and Swap Rates Go on a Wild Ride!

Everyone involved in the origination and underwriting of CMBS conduit loans or the creation and selling of CMBS securities backed by the loans is keenly aware of the swap market. The swap rate is integral to the interest rate charged CMBS conduit loan borrowers and a key factor in the profitability of the sale of CMBS securities.

So market players were glued to their trading screens this week as the 10-year swap rate, which typically parallels movement in the 10-year Treasury bond, closed at 2.21% on Wednesday after falling to nearly 2.0% intraday while the Dow was in the process of shedding 400 points before the stock index recovered at the end of the trading day. Wednesday was the culmination of a relatively rapid decline in the 10-year swap rate from 2.78% 30 days ago.

Market professional believe investors have grown increasingly nervous about slowing global growth. While the U.S. economy remains healthy, investors are concerned about earnings growth this year and next because of the slowdown in Europe and, to a lesser degree, China. As a result, investment is flowing out of stocks and into Treasury securities, driving yields lower and swap rates along with them.

The rapid stock and bond market movement is wreaking short-term (hopefully) havoc on CMBS bond prices. Prior to Wednesday, the most recent CMBS offering to price was an $842-million deal from Citigroup, Starwood, 5 Mile and Goldman Sachs on Friday, October 10. The super-senior AAA-rated bonds priced at swaps plus 87 basis points (bp), within the 82-88 bp range seen in the past few weeks. However, dealers believe the next deal up, a $1.2-billion transaction by Deutsche Bank, UBS, Cantor Commercial Real Estate and Natixis, will have to carry a wider spread, perhaps in the mid-90s to provide an adequate yield to investors.

As a result, CMBS shops are struggling to figure out where to price new loans. The consensus is that most firms have compensated by widening their quotes 10-15 bp for plain-vanilla, CMBS conduit loans.

10.14.14: Will Declining Oil Prices Affect CMBS Conduit Loans in North Dakota?

After declining gradually for three months, oil prices suddenly tumbled almost $4 on October 14. It was the largest single-day decline in more than a year, and it brought the price of Brent crude, an international benchmark, to $85 per barrel. At its peak in June, a barrel cost $115. Oil professionals estimate an $80 level where the economics of drilling and fracking in the United States provide only a modest return on investment and only break even in the $70 area.

Should the price of oil continue to slide, producers may begin to slow and possibly reverse employment gains in oil producing areas. A work force reduction in locations primarily dependent on oil employment could have a negative impact on CMBS loans in those areas.

How much CMBS exposure is there in oil-related areas and how much is directly dependent on oil employment? Let’s take a close look at an example: Williston, North Dakota, located in the south central portion of the state. According to the 2000 census, the population of Williston approximated 12,500 versus an estimated 20,000-plus today. Williston sits atop the oil-rich Bakken formation and oil production has fueled the city’s growth.

In 2013 and 2014, 14 CMBS conduit loans with a principal balance of $144 million were originated in Williston, no small sum. Of the loans, 8 were secured by apartment complexes, 4 were secured by hotels and 2 were secured by manufactured housing communities. All of the assets classes depend heavily on a stable population. Based on this one small sample, it’s pretty easy to see that if oil-related employment was reduced in any significant way, these loans would likely to struggle to perform.

10.6.14: Alleged Orlando Loan Originator Fraud Paralyzes USDA Secondary Market

Similar to the SBA 7(a) program, the U.S. Department of Agriculture (USDA) operates a loan guarantee program to promote business growth in rural areas of the country. The most popular program is the Business and Industry (B&I) Guaranteed Loan Program. The purpose of the B&I Guaranteed Loan Program is to improve, develop, or finance business, industry, and employment as well as improve the economic and environmental climates in rural communities.

The agency that operates the program provides 80% government guarantees for loans of $5 million or less, 70% for loans between $5 million and $10 million, and 60% for loans exceeding $10 million. These guarantees can be sold to investors in the secondary market at large premiums.

The program has been rocked by an alleged fraud perpetrated by a Florida loan originator, Nik Patel, who authorities say fraudulently sold $150 million in loans representing 25 transactions to an unidentified Milwaukee company. The FBI alleges he sold the loans as being guaranteed by the USDA when they were not. The FBI believes Patel submitted, among other things, fabricated loan guarantee forms falsely reflecting that the USDA guaranteed a portion of the loans’ principal amount.

Companies that invested in these loans have been scrambling to assess the damage as, ultimately, community banks that invest in the USDA-backed loan market could end up with enormous losses should no one be willing to make investors whole. A flurry of lawsuits will likely surround this situation and the lack of oversight that could have allowed it to happen.

10.3.14: 2014 CMBS Volume on Pace to Exceed Last Year

After tracking slightly behind last year’s pace, an active third quarter allowed year-to-date CMBS issuance to exceed last year for the first time. According to Commercial Mortgage Alert, worldwide third-quarter CMBS issuance totaled $71.2 billion, up from $69.0 billion a year earlier. Based solely on U.S. issuance, the third quarter totaled $68.9 billion, up 14% from $60.5 billion for the 2013 period.

At the beginning of the year, market participants projected worldwide CMBS issuance of roughly $100 billion. With roughly $21 billion in deals scheduled for the balance of the year the full-year total could approximate $90 billion, just shy of estimates, but exceeding last year’s $86.1 billion.

“Based on our pipeline, we may see full-year CMBS issuance surpass $90 billion,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “We have over $150 million in transactions scheduled to close between now and the end of the year, and since our full-year volume is expected to be just under $300 million, you can see the fourth quarter is overweight compared with prior quarters. I suspect other originators are experiencing the same effect. However, it’s unclear how much of this volume will make it into CMBS issues before year-end, but those that don’t make it should help produce a great start in 2015.”

9.29.14: Franchise Expirations an Issue for CMBS Conduit Loans

The buyers of the most risky bonds in the CMBS structure (commonly referred to as the b-buyer) have the right to review all the loans in a CMBS pool in which they buy the bonds in the riskiest position. As part of the review, the b-buyer has the opportunity to “kick-out” of the pool or request price adjustments for a limited number of loans they are not comfortable with in the pool. As a result, loan originators are acutely focused on making sure loans closed are well underwritten to avoid the potential for a kick-out or price adjustment.

Given that hospitality is generally considered riskier than other commercial assets, hotel loans get much scrutiny. Recently, b-buyers have increased their scrutiny of franchise expiration dates for franchised limited- and full-service hotels. Data have supported that the probability of default is high and cash recovery amounts are low from foreclosed hotels that have lost their franchises. Therefore, b-buyers have concerns for franchised hotels that have less than five years remaining in their franchise agreements and those agreements that have cancellation rights within a five-year window. They are actively kicking those loans out.

Previously, as long as the loan was structured with a Property Improvement Plan (PIP) reserve, either at closing or over time such that the reserve accumulated to $7,500/room (roughly $500,000 on a typical 65- to 70-room limited-service hotel) prior to the franchise expiration, b-buyers were satisfied. However, many older franchised properties are not being renewed at all, making the reserves somewhat useless as alternative franchises are often not available in the market.

“Now we either have to get early renewals or show that the property is consistent with current brand standards in order to get deals done with franchise expirations less than five years away,” commented Jay Bhakta, a senior loan originator at the ValueXpress Jackson, Mississippi office.

9.21.14: Update on Apartment Vacancy Rates

Reis reported that the apartment vacancy rate of 4.1% was unchanged in the second quarter of 2014. In the second quarter of 2013 (a year ago) the vacancy rate was 4.3%. And the rate peaked at 8.0% at the end of 2009.

Vacancy was unchanged during the second quarter at 4.1%, a slight worsening from the first quarter. Over the last 12 months the national vacancy rate has declined 20 basis points (bp), slightly below the pace of the last few quarters. We have been anticipating this slowdown in vacancy compression as demand moderates while supply growth accelerates. The national vacancy rate now stands 390 bp below the cyclical peak of 8.0% observed right after the recession concluded in late 2009. However, at 4.1%, the national vacancy rate remains low by historical standards. The only time vacancy in the United States was lower was during the dot.com boom-and‐bust days of 1999 and 2000.

Demand remained relatively strong during the second quarter as the sector absorbed 35,102 units. This is down slightly from last quarter's 40,853 units absorbed, but was the largest figure for a second quarter since 2011. Year to date, net absorption is tracking ahead of last year's pace, indicating that demand remains resilient even after more than four years of an apartment market recovery.

9.19.14: It's a Split Decision for CMBS

In an interesting twist to the structure of CMBS conduit offerings, the junior AAA-rated class of some recent offerings has split ratings for the first time. The junior AAA-rated class is the second most senior class of CMBS, a notch below the AAA-rated super-senior class, which provides 30% subordination protection against losses (that is, the pool of loans underlying the CMBS offering must experience 30% in losses before this class experiences any principal loss). The junior AAA-rated class has historically been rated triple-A by all agencies (usually two or three) on a deal and the subordination levels were reconciled among the agencies to a single level in the range of 20%-24%, depending on the characteristics of the underlying loans in the pool.

It's important for issuers to obtain the lowest subordination possible within a class. Lower subordination improves profitability; however, with the perceived deterioration of loan quality in more recent CMBS issues, one agency, Moody's, has insisted on higher levels of subordination for the junior AAA-rated CMBS to be awarded an AAA rating, perhaps as high as 27%-28%. At first, issuers circumvented the problem by bypassing Moody's and utilizing other rating agencies. But investors complained, resulting in split ratings on deals.

In the latest deals, all of which priced in September, issuers accepted an "Aa1" rating from Moody's on the class in question. The transactions are WFRBS 2014-C22, WFBRS 2014-C23, JPMBB 2014-C23, COMM 2014-UBS5 and COMM 2014-LC17.

Based on the limited sample, it's difficult to tell which option is more favorable for issuers in terms of profit. While issuers are grappling with whether to use Moody's on the junior triple-A class, some industry pros said the problem could become moot before long. They predict issuers will eventually have no choice but to lift the 30% subordination level for super-senior classes if loan underwriting standards continue to slide.

9.15.14: Judge Rejects Lawsuit Motion in AAHOA Rift

A federal court judge has ruled against individuals seeking to remove the entire Asian-American Hotel Owners Association (AAHOA) Board of Directors. In a recent ruling, Judge Harold Murphy rejected the plaintiffs’ motion citing long-standing law the showed the plaintiffs had not met the legal requirements of the actions they were requesting. The plaintiffs, a group of nine AAHOA members, alleged the current Board had engaged in theft, embezzlement and corruption, as well as general misuse of the association's funds.

This action comes on the heels of a confrontation that resulted in physical contact, police reports and medical attention between current AAHOA Chairman Pratik Patel and past Chairman Alkesh Patel at the association's annual conference in Philadelphia in March. These two actions, in conjunction with the announcement that long-time President Fred Schwartz will be leaving his position after 18 years of service, cast uncertainty on an organization that has been a unified proponent for hoteliers in the industry for 25 years.

"I have known Prat Patel for three years now and have found him to be a champion for all the vendors that do business with AAHOA members, including ValueXpress," opined Michael D. Sneden, Executive Vice President of ValueXpress. "Prat was instrumental in the creation of ‘Deal Central’ at the last annual convention that brought hoteliers seeking loans to ValueXpress in a casual setting for some intense deal-making that was a great success for us."

"Prat has always been open and transparent in all my dealings in the decade I have known him," commented Jay Bhakta. "I am confident that Prat and AAHOA will put these matters behind and continue the great work of the organization as it continues to greater impact the hospitality industry."

9.10.14: Watch Your Alignment!

We recently were delayed in closing a number of hotel loans due to a recurring issue. Often hoteliers, primarily those involved in the construction of smaller (less than $10 million) limited-service hotels, obtain their franchise agreement well in advance of property construction. This secures a protected area for the owner while a site is located. Many times the franchise agreement is executed in the individual name of the owner because an entity that might hold the future land and hotel property has not been formed as there may not be any land or building to put in the entity at that point.

Then the owner finds a site, obtains the funds to build the property, creates an entity to hold the land and hotel, and begins operation once construction is complete. Often new hotels perform quite well, and with lending markets cooperating, the owner seeks a long-term, fixed-rate CMBS conduit loan with cash-out to extract equity for the next project. During loan processing, we routinely obtain a comfort letter from the franchise that provides for certain notice and agreements between the borrower, lender and franchise. This is where the problem begins.

CMBS conduit lenders require that the franchise agreement be in the name of the borrower (logical, if you need to enforce the terms in the comfort letter and you have to have the correct legal parties executing agreements). But recall our borrower executed the franchise originally in his own name, and he never thought to update it when the hotel entity was formed.

The process to redo the franchise agreement in the name of the borrowing entity is known as "re-alignment," as you are realigning the franchise agreement to match the borrowing entity. It's not a big deal because the franchise usually has no issue doing it, but it can take two to three weeks. The moral of the story is the day the sponsor executes his CMBS conduit loan term sheet, check the signature block of the franchise agreement to be sure it's in the name of the borrower, and if not, start the re-alignment process right away.

9.5.14: CMBS Market Update and August Review

CMBS spreads are slowing declining after widening dramatically in August; however, the market did not see a new multi-borrower conduit deal price after mid-August, so dealers noted that the spread improvement was based on secondary market trades. The last new multi-borrower CMBS deal to price was the $1.2-billion offering by Cantor Commercial Real Estate, Deutsche Bank, Ladder Capital and Nataxis on August 13. The super-senior AAA-rated bonds priced at 90 basis points (bp) over swaps, a 19 bp surge over the post-crash low of 71 bp achieved in July.

Issuers are now shopping two conduit deals expected to price next week. Initial indications are the super-senior AAA-rated bonds should price in the 85 bp area, a 5 bp improvement over the Cantor deal, but still well wide of the July low. These two deals are the first of a flurry of deals expected to price in September that could total $15 billion, including single-borrower transactions as well as multi-borrower conduit deals. Junior CMBS classes are also expected to price at levels 5-10 bp lower than the Cantor deal.

"We are just hoping for stable spreads," commented one conduit lender. "We can deal with the higher spreads versus the July lows, but we just need them to stay in a range that keeps our borrower quotes in the money. We have some older applications in processing that are underwater versus our profit benchmark at swaps +90, but we can hold at swaps +80; we are just going to have to see how spreads shake out here in September to determine how we will approach our borrowers in terms of loan spreads on these applications."

9.2.14: Credit Union Lending Way Up

The “Wall Street Journal” recently reported that U.S. credit unions are stepping up lending aggressively, posting loan growth of 9.8% in the second quarter of 2014, according to data released by the National Credit Union Administration (NCUA). That easily surpassed the 4.9% increase in loans reported last week by the Federal Deposit Insurance Corporation (FDIC). Loan growth, the highest on a year-over-year basis since the first quarter of 2006, comes after credit-union membership topped 100 million in June, according to NCUA. In the second quarter, net commercial loans increased 12% to $48 billion, while other loan categories also posted double-digit gains.

The growth has traditional commercial bankers on the defensive. "Credit unions along with overregulation are going to slowly euthanize community banks in this country," said David Locke, Chief Executive of McFarland State Bank, a Wisconsin bank that has about $450 million in assets.

"Credit unions have an unfair advantage over traditional community banks of the same asset size because credit unions are not taxed," said Michael D. Sneden, Executive Vice President of ValueXpress. "Also, since they generally operated on a 'not for profit' basis, they do not have shareholders expecting a return on investment, which provides an even higher competitive advantage over community banks."

As a result, commercial loan and other products tend to be very competitively priced. Commercial banks can still compete on complex commercial transactions as credit unions are not typically staffed with seasoned commercial lenders, but they are still able to provide better terms than commercial banks on simpler commercial deals with lower risk profiles.

8.27.14: Atlantic City, N.J. Casinos Closing: What's the Future?

Atlantic City officials, the State of New Jersey and its residents wonder about the fate of Atlantic City and the rest of its gambling palaces as the Revel Hotel and Casino closed its doors on Monday after the Showboat Casino closed on Sunday. Trump Plaza, which is connected to the famed Boardwalk Hall, will close September 16, following the Miss America Pageant.

After reaching an all-time high revenue of $5.2 billion in 2008, gambling revenue has fallen 50%, eroded by out-of-state competition, beginning with the Foxwoods casino (opened in 1986) and Mohegan Sun casino (opened in 1996) in Connecticut. The bleeding accelerated when Pennsylvania approved slot gambling in 2004 and table gambling in 2010. Since then, five full-service casinos have opened in Pennsylvania. Three of those -- Mount Airy, Mt. Pocono (opened in 2007), Sands Casino, Bethlehem (opened in 2009) and SugarHouse Casino, Philadelphia (opened in 2010) -- within striking distance of Atlantic City.

Many experts suggest that Atlantic City never developed its other asset, the beach, to compliment gambling. Atlantic City features 500-feet-wide beaches in many locations along the boardwalk, while other Jersey Shore beaches suffer from massive erosion. But access to the beach in Atlantic City is often blocked by massive casino buildings, unlike in other Jersey Shore towns. Furthermore, there is little in terms of food and drink on the Atlantic City boardwalk directly across from the beach, also unlike other Jersey Shore towns, like Seaside Heights.

One official commented, "We threw all our eggs in one basket (gambling). Maybe this is a wake-up call (to refocus on Atlantic City's other asset, the beach).”

8.22.14: Big September Pipeline to Test CMBS Spreads

Super-senior AAA-rated CMBS spreads retreated from recent highs of 90 basis points (bp) seen when a $1.2-billion offering by Cantor Commercial Real Estate, Deutsche Bank, Ladder Capital and Nataxis priced on August 13. Super-senior AAA-rated CMBS are currently trading in the 85 bp area. That said, the heavy CMBS calendar for September may again pressure spreads if there is not enough buyer demand to absorb the potential supply.

A recent survey by Commercial Mortgage Alert indicates 19 transactions totaling $15 billion are expected to price in September. According to a research report by Jeffries, the ebb and flow of CMBS new-issue supply is likely to play a role in spread direction. Jeffries suggests the increased volume in CMBS offerings appears to be a result of conduit lenders lowering their offered mortgage rates to entice borrowers; this could mean that volumes may increase during the balance of 2014. Indeed, Commercial Mortgage Alert has identified another 5 deals totaling $6 billion expected to price in October and the potential for more deals to be added. The September-October total of $21 billion would be the largest two-month total since the market crash, and it would put the market on track to break $100 billion in issuance for the year.

8.15.14: CMBS Delinquency Posts Small Decline in July

The CMBS delinquency rate for U.S. commercial real estate loans in CMBS declined a fraction in July, to 6.04%, barely extending a 14-month month-over-month decline, according to Trepp. Loan resolutions totaled just over $600 million, one of the lowest monthly totals in recent years. Removing these resolved loans resulted in 11 basis points (bp) of downward movement in the delinquency rate. Loans that cured reduced delinquencies by 13 bp, but this was more than offset by loans that were newly delinquent. New delinquencies added about 23 bp to the delinquency rate.

Period % 30 Days
or More Delinquent
Jul-14 6.04%
Jun-14 6.05%
May-14 6.27%
Apr-14 6.44%
Mar-14 6.54%
Feb-14 6.78%
Jan-14 7.25%
   
3 Months Ago 6.44%
6 Months Ago 7.25%
12 Months Ago 8.48%

Here are the numbers by property type:

8.12.14: CBRE Acquires PKF Consulting USA

Looking to become a dominant force within the lodging industry in both valuations and strategic advisory services, CBRE Group, Inc. recently acquired PKF Consulting USA, LLC (PKFC), a hotel advisory, consulting and research firm. Headquartered in San Francisco, California, PKFC was formed in 1999 to provide real estate appraisals; litigation support and expert testimony; market and financial feasibility studies; purchase price allocations; asset recovery and impact studies. The company provides these services to a wide range of clients, including owners and operators; financial institutions, real estate developers; investors; product and service providers to the industry; and government agencies.

PKFC is likely to be integrated into CBRE's hotel division, which was formed in 2003 and is headed by Kevin Mallory. CBRE Hotels has a range of offerings geared primarily for owners. Services include hotel brokerage and investment sales; feasibility studies; debt and structured finance; asset management; investment and marketing advisory; and loan sales.

With the PKFC acquisition, CBRE Hotels now has roughly 270 employees focused on the hospitality space in 44 offices worldwide. The firm is poised for additional growth as the combined company will aggressively pursue additional market share within the hospitality space.

8.8.14: CMBS Rally Stops Dead in Its Tracks; Spreads Blow Out

After super-senior AAA-rated CMBS spreads declined to a post-crash low of 71 basis points (bp) in mid-July, spreads surged in the first week of August. On August 6, JP Morgan, Barclays, Starwood and GE Capital priced the super-senior AAA-rated CMBS of their $1.1-billion CMBS offering at 85 bp, a whopping 14 bp increase. The next deal in the market is a $1.2-billion offering by Cantor Commercial Real Estate, Deutsche Bank, Ladder Capital and Nataxis. Price guidance on the super-senior AAA-rated bonds is also 85 bp, but if the weakness continues, Cantor may have to increase spreads further to attract buyers. Spreads were wider on all the other bond classes from the JP Morgan deal, generally by 15-25 bp.

CMBS professionals expressed a variety of opinions for the spread widening. Investors appear to be demanding higher spreads to compensate for the decline in swap rates to attain a satisfactory overall yield from CMBS investments. Traders were also wary of the turmoil in the Middle East and Ukraine. Such events tend to push out credit spreads and increase investments in less risky U.S. Treasuries.

One investment banker summed it up as "The August blues: You have a lot of deals in the queue and all the CMBS buyers are on vacation. With no one to buy the bonds, dealers have to widen spreads to get the deals out the door. Hopefully, the market will correct somewhat in September."

The news is bad for borrowers. New quotes in August are 15-20 bp wider, and since recent deals under application were signed during a period of heavy competition, some borrowers may be facing re-pricing prior to closing; this is a difficult conversation for borrowers who do not fully comprehend that market forces can negatively impact their interest rates prior to closing.

8.5.14: Corpus Christi Economy Continues to Sparkle

HVS, a market leader in hospitality consulting and valuation, recently reported on the Corpus Christi, Texas economic climate. The report highlighted the following:

7.29.14: Predatory ADA Litigation of Major Concern for Hoteliers

We recently closed a $5-million hotel loan secured by a Hampton Inn in Florida. During property diligence, we noticed a $25,000 legal fee under the “professional expense” category on the profit and loss statement. Since we figured it was a one-time expense, we wanted to back it out of the underwriting. We needed to confirm what the expense was incurred for to be able to do the adjustment.

"Mike, we were sued by a guest who said our ADA grab bars in the shower were too high. I could not believe it," said the sponsor. "We called our attorney and he immediately knew what was happening. He said the lowest cost option was to settle."

Hmmm.

Then recently, we were working on a loan on another Hampton Inn in California. The purchase transaction was muddling along when the owner received a lawsuit for purported ADA violations regarding the substandard size of the ADA designation parking spaces.

Wow.

Based on these two events, I was riveted by the recent article written by Pratik (Prat) Patel, chairman of AAHOA, called "ADA Litigation: Roadblock to Access." Prat reports a rash of ADA lawsuits against hotels in California. Prat reports that 13 hotels have been sued by the same two people for alleged ADA violations, such as inappropriate ADA parking, non-accessible entrances and non-complaint bathrooms.

To combat this business model for some unscrupulous law firms, AAHOA is supporting H.R. 777 sponsored by Rep. Duncan Hunter (R., CA) that would restore the proper balance between ADA litigation and increased accessibility. In the meantime, hoteliers need to be aware that predatory ADA lawsuits are spreading.

7.25.14: Lighter Lockboxes for Hotels

In a further indication of the loosening of credit standards, the typical soft lockbox/springing cash management requirement as defined by Wells Fargo (see below) for hotels has been reduced to the springing lockbox/springing cash management structure.

“Our borrowers really had no conceptual problem with the soft lockbox/springing cash management structure except for the cost,” commented Gary Unkel, Senior Loan Originator at ValueXpress. “The soft lockbox accounts were costing in excess of $500 a month for really no good purpose in their minds, so the relaxation of this standard is a great economic benefit to our clients.”

As a refresher, these are the types of cash management structures as defined by Wells Fargo, the market leader in CMA accounts for CMBS conduit loans:

Springing Lockbox/Springing Cash Management Agreement(s):
No accounts exist at closing. Account opening paperwork is collected. Deposit account control agreement (DACA) and cash management agreements (CMAs) are negotiated and signed. Everything is kept on file in case of a trigger event. If/when there is a trigger event we “spring” open the accounts. After the accounts are opened they operate as hard lockbox/hard cash management accounts.

Soft Lockbox/Springing Cash Management:
A lender-controlled restricted lockbox account is opened on day one. Rents/property revenue is deposited into this account. Funds are then swept into a borrower-controlled operating account (can be with any bank). No cash management account is necessary unless there is a trigger event. If there is a trigger event, then funds are swept into a lender-controlled cash management account. Waterfall is run monthly.

Hard Lockbox/Hard Cash Management:
A lender-controlled restricted lockbox account is opened on day one. Rents/property revenue is deposited into this account. Funds are then swept into a lender-controlled cash management account. Waterfall is run monthly.

7.23.14: Standard and Poor’s in Hot Water over CMBS Ratings

The Wall Street Journal reported that the Securities Exchange Commission (SEC) notified Standard and Poor’s Rating Services (S&P) that it could face an enforcement action for alleged securities fraud regarding six commercial real-estate securities deals in 2011. It was not immediately clear which six 2011 real estate deals are in question; however, around that time, S&P faced intense backlash from investors and issuers when it took the unprecedented step of pulling a preliminary rating on a $1.5-billion CMBS offering. By withdrawing the rating, issuers Goldman Sachs and Citigroup lost millions, and issuers looked to other firms for ratings thereafter. Despite subsequently replacing management, S&P never really recovered from the debacle.

The SEC notice comes at a difficult time for the firm that was once a dominant participant in the CMBS ratings market. On Friday, July 17, the firm cut its CMBS staff 33%, reflecting its reduced presence in rating recent CMBS transactions. The firm is also defending itself against a $5-billion lawsuit related to pre-crash residential MBS deals that soured. These legal matters could likely cause CMBS issuers to continue to bypass S&P on deals, particularly with other ratings options from Morningstar and DBRS that entered the market after 2010 providing more rating options for issuers.

Some industry veterans believe S&P can rebuild itself. The firm remains active in rating single-borrower CMBS transactions that could lead to another restructuring of the CMBS operations.

7.14.14: Out-of-Market SBA Lending on the Rise

American Banker recently reported that more community banks are offering Small Business Administration (SBA) loans far beyond their local markets, hoping that the income boost outweighs the long-term risk of lending in unfamiliar regions. Strong demand for SBA loans and a strong secondary market have encouraged more banks to expand their SBA operations, often nationally.

Banks are being enticed to expand their SBA 7(a) lending primarily as the premiums for selling SBA 7(a) guarantees in the secondary market remain highly profitable. This week Cantor Fitzgerald’s SBA desk was purchasing SBA 7(a) guarantees for a Prime plus 2.75%, 25-year loan at 117, a 13.5% premium to the bank after splitting the portion of the premium above 110 with the government. That means earnings of $270,000 on a $2-million guarantee, plus a 1% servicing fee for the life of the loan. These are huge numbers for smaller community banks.

One of the challenges of expanding SBA lending “out of territory” in regulatory parlance is the concern regulators have for banks making loans out of their geographic region. Lenders that have expanded outside their traditional areas report that, while national regulators have been taking a close look at their underwriting practices, they have not objected to geographical expansion.

“Our regulators are supportive, but they want good risk management in place,” commented one national SBA community bank lender.

7.12.14: A ValueXpress Success Story

"I wanted to share with readers a recent experience that typifies our mission to help clients and why I come to work every day," said Michael D. Sneden, Executive Vice President at ValueXpress. ValueXpress recently received a loan request from one of its key intermediaries for a hotel loan in San Jose, California. The sponsor's loan had matured, and he had just received a maturity default and foreclosure notice. In addition, the sponsor needed another $5 million to close on the acquisition of another property in which a $750,000 deposit had become non-refundable. The sponsor had never done a CMBS conduit loan.

ValueXpress received the executed loan application on Sunday evening and I was on a plane to San Jose on Monday. When the sponsor picked me up at the airport at 11 p.m., he said the magic words, "Mike, you tell me what to do, and I will do it. Fast!" We started at 8 a.m. on Tuesday, and one by one, we knocked off all the property diligence checklist items. Then the sponsor said, "Mike, can we do the majority of the legal checklist to move faster and save on cost?" I agreed. So we ordered the title report, survey, comfort letter and gathered the organizational documents. I left on Thursday night with the property diligence checklist 100% complete and the legal checklist 75% complete. When we called borrower's counsel, he said, "Wow! All I need to do is form a corporate Managing Member, review the loan docs, provide our opinions and close!"

It gets better. The borrower owns the restaurant adjacent to the hotel and did not realize he could finance the unencumbered property with the hotel. With the restaurant included, the loan was increased by $2.5 million. Then by organizing the income and expense statements into the Uniform System of Hotel Accounts and refining the cash flows, the appraisal value came in higher than expected! The loan was increased by another $3 million, resulting in a cash-out of $10 million versus $5 million. Can you say happy borrower?

"When I left, the sponsor could not thank me enough," said Sneden. "He said, ‘Mike I learned more about commercial real estate finance for hotels in the last three days than in my entire career.' Needless to say, we are completing a follow-on transaction for another hotel property owned by the sponsor located at the San Jose Airport and we will be completing more after that."

7.10.14: CMBS Conduit Loan Originations Explode on Lower Rates

“Commercial Mortgage Alert” recently reported that CMBS issuance dropped 8% in the first half of 2014 versus a year ago. The decline was blamed on competition from the community banking system, which is now hungry for commercial real estate loans after cleaning up its balance sheets after the 2008-2009 financial crisis.

The report does not reflect the decline that occurred during June and July in both the Swap rate, the financial index that is used to set interest rates on CMBS conduit loans, and CMBS spreads, which is the second component that impacts the all-in interest rate determination for borrowers. The 10-year Swap rate, used to price CMBS conduit loans with a 10-year term, is hovering around 2.60%-2.65%, while CMBS spreads for commercial property loans $5 million and up has fallen from over 200 basis points (bp) to around 175 bp, resulting in a borrower rate in the 4.50% area; the rate is even lower for loans over $10 million.

"Our CMBS conduit loan pipeline is exploding," commented Michael D. Sneden, Executive Vice President of ValueXpress. "We signed up a few large loans (more than $20 million) and have over a dozen recently signed mid-sized loans, all scheduled to close in the third quarter. In total, we are looking at over $100 million for the quarter, which is a pretty good clip and puts us well ahead of last year's pace."

7.1.14: Sizing Cheat Sheet for Non-Recourse Hotel Construction Loans

We recently had a conference call with our non-recourse construction lender who laid out a nifty concept to perform a "rough and dirty" loan sizing for hotel construction loans. ValueXpress will be converting these instructions into a simple model that can be found on our website.

As a refresher, typical non-recourse hotel construction deal terms are $10 million and up, 75% loan-to-cost, three-year term with options to extend. Rates are reset monthly and are in the Libor plus 6.50% area (6.65% today). Payments are interest only. Properties need to be located in primary markets and constructed by experienced hoteliers.

The sizing begins with a monthly STAR report for the competitive set of hotels that are anticipated to compete with the subject hotel within its market. It is extremely important that the competitive set does not contain any "clunkers" that drag down the average ADR/Occupancy/RevPar for the set. Take the STAR report RevPar for the most recent 12 months, multiply it by 365 and then multiply by the number of proposed rooms. This will indicate the estimated pro forma revenue for the to-be-built hotel.

Our construction partner assumes a 65% expense ratio for limited and select-service hotels (in other words, a Net Cash Flow of 35% of room revenue). Multiply the room revenue above by 35% to obtain the pro forma Net Cash Flow available for debt service. Divide the result by a Debt Yield of 12%, and presto, the result is the rough and dirty loan amount (use the lower of 75% of project costs or this result please).

By example, we recently obtained a $12-million non-recourse construction loan for a limited-service hotel at San Francisco Airport. The proposed hotel is 128 rooms and total project costs are $16 million. The trailing 12-months competitive set Revpar is $100.00. 128 rooms x $100 RevPar x 365 days x 35% = $1,635,200 in pro forma Net Cash Flow. Dividing the Net Cash Flow by 12% = $13,626,667, which is in excess of 75% of project costs ($12 million). Primary market, experienced sponsor, loan > $10 million = LOAN APPROVED!

6.27.14: Super-Senior CMBS Spreads Continue to Decline

On June 19, Deutsche Bank and Cantor Fitzgerald priced the benchmark class of a $996.3-million multi-borrower CMBS conduit offering at the tightest spread in more than a year. The benchmark class of the Deutsche-Cantor deal priced at 78 basis points (bp) over swaps. That was 1 bp tighter than the spread on the long-term, super-senior class of the multi-borrower CMBS conduit offering led by J.P. Morgan that priced on June 12 and at the tightest level since February 2013. The benchmark class priced at 79 bp over swaps. The last time the CMBS market achieved that level was on February 5, 2013 when a multi-borrower issue led by Morgan Stanley and Bank of America priced at 72 bp over swaps, which was the lowest level since the restart of the CMBS market in 2010.

The other investment-grade classes in the Deutsche-Cantor deal, rated by S&P, Fitch and DBRS, priced generally in line with price talk and at spreads that ranged from 3 bp more to 5 bp less than the comparable tranches of the JPMorgan offering.

Next up is a multi-borrower conduit deal backed by $1.3 billion of commercial mortgages contributed by J.P. Morgan, Barclays, MC-Five Mile, Starwood Mortgage Capital and RAIT Financial. Price guidance for the transaction is expected to be released before the July 4th holiday.

“We are seeing a gradual decline in spread on new borrower applications,” noted Michael D. Sneden, Executive Vice President at ValueXpress. “Together with declines in the swap rate, all-in borrower interest rates are very attractive, approaching the lowest levels since the restart of CMBS in 2010.”

6.24.14: ValuXpress Finishes CMBS Marketing Material for CCTG Grads

ValuXpress has completed a new CMBS marketing flier for Commercial Capital Training Group (CCTG) graduates to use in conjunction with marketing materials developed for other lending programs. The flyer can be utilized as a “click-to” on grads’ websites. For example, if a grad’s home page lists five loan programs and one of them is CMBS, a click on the CMBS selection will take you to the flyer. And the flyer has an area where CCTG Marketing Director Alex Vasilakos can insert the grad’s company information. The final phase of the project will be to complete a link to CMBS conduit loan rates on the flyer. Check out a sample flyer here.

“The flyer was designed to be directed toward the key benefits of CMBS conduit loans right now, namely “unrestricted cash out,” non-recourse, and longer term/amortization as superior to competing products,” said Michael D. Sneden, Executive Vice President of ValueXpress.

“We are pleased to be able to assist CCTG grads by supplying marketing materials and support,” said Sneden. “Of the over 400 graduates to date, many have decided that CMBS conduit loans should be one of their primary focuses. As a result, ValueXpress is processing increasing amounts of CMBS conduit loans for CCTG graduates with a very high level of success.”

6.17.14: A Look at Empty Office Space in Northern/Central New Jersey

The Star-Ledger, New Jersey’s largest newspaper, recently published an article that examines the direction of office demand in Northern and Central New Jersey. It provides some takeaways for office demand trends in other suburban markets. Since office properties are a large component of CMBS loans, the trends are quite relevant.

The article begins by noting three major suburban headquarter office properties that are vacant or soon to be: the 1-million sf/500-acre former Merck headquarters in Readington, N.J. off I-78, the 2-million sf/500-acre former Bell Labs campus in Holmdel, N.J. off the Garden State Parkway and the soon-to-be vacant Hoffman-LaRoche 127-acre U.S. headquarters, located on Route 3 in Nutley, N.J. with approximately 2 million square feet of space. Overall vacancy in the Northern/Central N.J. market is 25%.

The article suggests these properties will need to be repurposed as large suburban campuses are “dinosaurs from the 1980s.” Their obsolescence has been driven by companies gravitating toward more compact offices with collaborative workspaces in downtown locations and away from large, cubicle-heavy spaces common in New Jersey’s suburbs.

When locating offices, decision makers are considering the desires of Millenials. They don’t want to travel far distances in cars to work in plain vanilla office buildings. They want to work near where they live, which is typically the N.J. transit cities of Hoboken or Jersey City or other hip transit-oriented communities like Morristown, Summit and Montclair.

“The redevelopment of the Hoffman-LaRoche facility will likely be very successful, as there is very strong, retail, office and residential demand along the Route 3 corridor. Busses and trains in the vicinity of the complex can serve all users,” noted Michael D. Sneden, Executive Vice President at ValueXpress. “The other two sites will be more difficult to redevelop, as they don’t have the transportation and services desired by the up-and-coming workforce anchored by Millenials.”

6.13.14: ValueXpress to Offer Fixed-Fee CMBS Program

ValueXpress is putting the final touches on a fixed-fee CMBS conduit loan program for small-balance CMBS conduit loans with a banking partner. Applications are being accepted now and transactions are expected to close within 60 days. The program caps transaction costs at $25,000 and is available for all eligible CMBS conduit loan asset classes except hotels. The program targets CMBS conduit loans in the $2-$5 million range.

"Those of us with grey hair (or, in my case, no hair) may remember the small-balance, fixed-fee CMBS conduit loan programs sponsored by Credit Suisse and the LaSalle Select program from the pre-2007 era," recalls Michael D. Sneden, Executive Vice President at ValueXpress. “We did over 100 transactions in the LaSalle program that capped fees at $15,000. It was very cost effective for small-balance borrowers and the streamlined diligence and non-negotiable loan documentation allowed the program to be very borrower friendly. This helped first-time and less-sophisticated CMBS borrowers greatly."

"We are very active in the $2-$10 million CMBS conduit loan origination market and the return of a fixed-fee program is welcome news," commented Gary Unkel, Senior Loan Originator at ValueXpress. "The high cost and complex legal/property diligence has been a deterrent for small-balance borrowers seeking CMBS conduit loans. This new program should be attractive to cost-conscious borrowers and allow us to better compete with community banks that typically have lower transaction costs."

6.12.14: Super-Senior CMBS Spreads Decline to 16-Month Low

The super-senior benchmark AAA-rated class of a multi-borrower CMBS conduit offering led by J.P. Morgan priced on June 12 at the tightest level since February 2013. The benchmark class priced at 79 basis points (bp) over swaps. The last time the CMBS market achieved that level was on February 5, 2013, when a multi-borrower issue led by Morgan Stanley and Bank of America priced at 72 bp over swaps, which was the lowest level since the restart of the CMBS market in 2010.

Since the beginning of 2012 when the super-senior AAA-rated class was at 120 bp over swaps, the bond has been on a gentle roller coaster. The spread rose in the first half of 2012, peaking at 160 bp in June 2012 due to global economic uncertainty. But by fall 2012, the spread had declined to 83 bp, the low for the year, on its journey to the market low of 72 bp over swaps in February 2013.

But after a few months of stability in the beginning of 2013, the market roiled when comments made in May 2013 by then-Federal Reserve Chairman Ben Bernanke indicated that the central bank could begin tapering its bond-buying program. Spreads widened to 128 bp over swaps by summer 2013.

As the balance of the year progressed and tapering turned out not to be the end of the world, the spread on benchmark AAA-rated CMBS began a steady decline to the 79 bp level reached this week.

Will the spread continue to decline or will the roller coaster start its ascent once again? Stay tuned.

6.4.14: Relaxed CMBS Conduit Underwriting Benefits Borrowers

Lower underwriting standards and competition for CMBS conduit loan are helping borrowers in many ways to lower transaction costs. Here are some interesting trends.

- Fixed-fee CMBS conduit loan programs (see our 6.13.14 news comment "ValueXpress to Offer Fixed-Fee CMBS Program") feature streamlined third-party reports and simplified loan documents. These features lower transaction costs for borrowers, but have less protection for the lender.

- Agreed Upon Procedures, basically an outside accounting review of the form and accuracy of property income and expenses, are practically extinct after being required on all CMBS conduit loans originated in the 2010-2012 period, saving the borrower approximately $7,500. Lenders are now relying on their internal review of property income and expenses.

- Bankers are waiving or refunding application and underwriting fees. This is another $5,000-$10,000 savings for borrowers.

- Springing lock boxes without in-place cash management accounts are becoming more available, particularly for non-hotel assets. In these cases, cash management accounts are not set up at closing, but are "triggered" to be set up only if performance deteriorates over the loan term below a prescribed level. This saves $300-$500 per month in account maintenance fees for the borrower, but significantly lowers lender protection related to property cash control should the property performance decline and the borrower refuse to set up the cash management account when requested.

"One area that continues to be a challenge to contain costs is lender's legal charges," commented Jim Brett, Senior Underwriter at ValueXpress. "Keeping lenders’ legal costs below $20,000 is difficult. We are hoping the small-balance, fixed-fee program can solve this challenge."

5.30.14: 10-Year Treasury Falls Further, Confounding Experts

The yield on the benchmark 10-year Treasury note fell further this week, closing at 2.46% on Friday after closing at 2.44% on Wednesday, the lowest closing yield since July 2013. The move caught just about everyone by surprise. I sure can’t figure it out, but here is what one of our investment banking partners is saying:

“Treasury rates have been rallying again with the 10-year Treasury now 50 basis points (bp) inside of where it was in January. The 10-year Swap rate is now 2.53%.

Three items that may be contributing to the movement:

  1. Draghi in Europe is saying that he's planning to act quickly in the European version of QE, so the Euro should weaken. With the Euro at 1.35/1 U.S. dollar, the dollar should get stronger (Euro weaker). The U.S. deficit is shrinking with the United States borrowing less. With the German 10-year below the U.S. 10-year, Europeans are buying U.S. 10-year to receive higher yields and to put on long-dollar/short Euro trades.
  2. The 50 bp rally in the 10-year since January is causing a lot of pain for anyone short the 10-year with taper thoughts in their heads. Five months later, the shorts could be capitulating and unwinding their short bets, and this could be causing a short squeeze.
  3. The United States may not be doing as well as the press and the White House would like us to believe ... Some think serious revisions to GDP are coming ... possibly negative in the year-to-date 2014 second quarter. This should get better, but not great, as we move through the second half of 2014.”

“I spent last week in San Antonio with my partner, Jay Bhakta, spreading the word and drumming up quick-close business,” said Michael D. Sneden, Executive Vice President at ValueXpress. “We breathe rates day-in and day-out, but borrowers are not always aware. We will be sizing and quoting a whole bunch of loans this week as response to the lower rates has been strong.”

5.28.14: 9th Annual SAHOA Golf Tournament and Trade Show a Big Success

On Wednesday, May 28, 2014, ValueXpress was among the sponsors of the 9th Annual San Antonio Hotel Owners Association (SAHOA) Golf Tournament at the Hyatt Hill Country Golf Club in San Antonio, Texas. About 100 golfers took to the links under sunny skies and a delightful breeze to play in a scramble competition, following longest drive and closest-to-the-pin competitions. The golf course was in excellent condition and greens played fast.

ValueXpress was represented at the event by Jay Bhakta (left), Senior Loan Originator, and Michael D. Sneden (right), Executive Vice President.

Sneden and Bhakta teamed up with long-time client Anand Bhakta (a scratch golfer who helped carry the team) and Ron Stewart, Senior Director, Owner and Franchise Services at Marriott International (another great player who kept the team in the running – which may say something about the golf skills of Sneden and Bhakta; they’d better stick to lending!)

“Scores were extremely low, likely due to the special ValueXpress logo’d balls we gave out to all the teams,” quipped Jay Bhakta, Senior Loan Originator at ValueXpress.

The next day featured the Texas Hotel Owners Association/Asian American Hotel Owners Association (AAHOA) Joint Industry Trade Show. After that, Mike and Jay headed out to meet clients in Corpus Christi, primarily to share the news of the great rates now available on CMBS conduit loans for hotels.

5.21.14: Dicier CMBS Conduit Loans Result in More Subordination

In response to eroding collateral quality, rating agencies recently have been boosting credit-enhancement requirements -- with the result that subordination levels on junior triple-A CMBS have moved closer to the standard 30% threshold for super-senior AAA-rated CMBS. On May 21st, Deutsche Bank and UBS priced a $1.05-billion CMBS offering with junior triple-A subordination of 26.63%. With the COMM offering signaling an acceleration of that trend, the ongoing viability of the senior-junior structure for triple-A CMBS is unclear. In the first quarter, the average junior triple-A subordination level on new-issue transactions was 23.1%, up 2 percentage points from a year earlier.

“When we were buying junior triple-A CMBS this time last year for our client, Country Bank, subordination levels were 20%-21%. The increase in subordination is surprising, but I am glad to see that the rating agencies are responding to the erosion in loan quality and reflecting that risk in higher subordination levels,” said Michael D. Sneden, Executive Vice President at ValueXpress. “With the tightening of spreads and reduction in loan quality, we put the brakes on our CMBS purchases for now.”

“What’s also interesting is our average Class B portfolio subordination from last year at this time is around 14%. Now Class B subordination is in the 18% area and Class C is currently around 14%,” noted Jim Brett, head of CMBS analytics at ValueXpress. “This all means that dealers are selling fewer bonds at lower subordination levels, which negatively impacts profitability. However, CMBS spreads have compressed to more than offset the impact of higher subordination levels.”

5.16.14: 10-Year Treasury Yield Hits 9-Month Low; Swaps Follow

The yield on the benchmark 10-year Treasury note fell on Thursday, May 15, 2014 to close at 2.50%, a low not seen since last October. Intraday, the note touched 2.47%. Although investors have been expecting rates to rise, the bond market is not cooperating, confounding economists. Weak economic growth is the consensus opinion as to why rates remain low. Pushing down the rate further this week was news that global central banks have signaled that they would be highly accommodative in their monetary policies as their economies wrestle with the same slow-growth issues as the United States.

"Since the 10-year Swap rate tracks the benchmark 10-year Treasury note, the Swap rate has fallen as well," commented Michael D. Sneden, Executive Vice President at ValueXpress. "The 10-year Swap rate is roughly 10 basis points (bp) higher than the 10-year Treasury note, which means the index is roughly 2.60%."

"CMBS conduit loan borrowers should be elated with the current confluence of events," notes Gary Unkel, Senior Loan Originator at ValueXpress. "CMBS bonds are selling at declining spreads, and those declining spreads are reducing spreads to borrowers. In combination with the declining Swap rate, borrower rates are down 50 bp in the last three weeks, below 4.5% for larger, lower-leverage transactions and about 4.5% for small balance (less than $10 million) full-leverage deals."

"We are all out there banging the drums at our customers to be sure they are aware of the great rates, and hopefully, many are reading this note," said Steve Lombardi, Senior Loan Originator covering the New England market for ValueXpress.

5.12.14: Non-Recourse Construction Loans Are Back!

In another sign of real estate investors looking for opportunities for investment, financial services companies are beginning to offer non-recourse construction/rehabilitation loans for typical CMBS-quality assets. CMBS-quality assets are preferred as the expected exit strategy is a fixed-rate CMBS conduit loan funded on stabilization.

"We are not active in originating construction loans per se," commented Michael D. Sneden, Executive Vice President at ValueXpress. "But we have a solid client roster and many of the cash-out CMBS conduit loans we close are contemplated by the sponsor to provide the equity component for a new construction project. It is nice to be able to offer a one-stop option for the client, the cash-out loan and the construction loan. Plus the construction loan underwriting is CMBS conduit loan based, so we are intimately familiar with the drill and can guide the client through the process."

Typical non-recourse deal terms are $10 million and up, 75% loan-to-cost, three-year term with options to extend. Rates are reset monthly and are in the Libor plus 6.50% area (6.65% today). Payments are interest only.

Qualifying assets are multi-family/manufactured housing communities, commercial (office, retail and industrial), self-storage and hospitality located in primary and secondary markets. Loans will be considered for construction, rehabilitation, turnaround and conversions. Contact your ValueXpress representative for details.

5.6.14: Malls Struggle When Anchors Leave

Shopping malls, already negatively impacted by internet retailing (see our 2.18.14 post “More Thoughts on the Future of Retail”), often find themselves in a serious downward spiral when anchor tenants close their doors. Anchor tenants are traditionally defined as national retail chains that lease large, multilevel spaces within the mall, typically at the ends of the mall. For older readers, these stores used to be called "department stores" as they had many "departments" within the store for men, women, kids, etc. Smaller retailers fill in the space between the anchors. Most malls have two to four anchor tenants. The anchor tenants provide steady shopper traffic for the smaller retailers.

Unfortunately, many anchor store chains are in trouble. J.C. Penney, the fifth-largest U.S. department store chain, recently announced its intention to close 33 stores (see our 1.15.14 post “JC Penney to Close 33 Stores”). Sears, the second-largest U.S. department store chain, has been losing money for years and expects to announce additional store closings shortly.

Nearly half of the 1,050 U.S. indoor and open-air malls have both of those struggling chains as anchor tenants, according to real-estate research firm Green Street Advisors. Of those malls, nearly a quarter are struggling with sales below $300 per square foot and vacancy rates above 20%, meaning they will have a hard time finding new tenants if current ones leave.

"Many of these malls are in CMBS," commented Michael D. Sneden, Executive Vice President at ValueXpress. "Those loans are a high default risk, and the recovery on those loans are likely to be poor as the probability those properties will be re-leased is weak."

5.2.14: Three New CMBS Deals Warmly Received by Investors

After a lull in new CMBS issuance, the market easily absorbed three multi-borrower offerings this week. Senior classes priced in line with dealer guidance, while junior classes priced at levels tighter than seen in the last CMBS issue at the end of March.

A total of approximately $3.9 billion in CMBS priced during the week. On Tuesday, Deutsche Bank, Jefferies and Cantor Fitzgerald led a $1.2-billion offering in which the long-term, super-senior bonds were priced at 86 basis points (bp) over swaps. On Wednesday, two deals priced, a $1.4-billion transaction led by J.P. Morgan and Barclays and a $1.3-billion transaction led by Wells Fargo and RBS. The super-senior bonds from those deals priced at 87 bp over swaps. These spreads were consistent with the 88 bp level for super-senior bonds in the last CMBS deal.

However, the more junior investment-grade classes of bonds priced at spreads that were substantially tighter than the March deal as investors looked for additional yield and pent-up demand for the bonds exceeded supply. The bonds from the three recent deals traded at anywhere from 15 to 30 bp tighter than the March deal.

“The market has shown considerable stability so far this year,” commented Jim Brett, Head of Underwriting at ValueXpress. “Along with the slow but steady tightening of CMBS spreads, we have seen fairly dramatic reduction in loan spreads for borrowers, on the order of 30-40 basis points. Combined with the drop in the Swap rate, the all-in rate to borrowers is in the 4.5% area on a 10-year fixed-rate deal, a level not seen for over a year.”

4.30.14: Swap Rates Decline on Poor GDP Report

Swap rates, an important financial index that is used to set interest rates on CMBS conduit loans, fell this week after the government reported annualized Gross Domestic Product (GDP) growth of a mere 0.01% in the first quarter of 2014, according to the “advance” estimate released by the Bureau of Economic Analysis (BEA). In the fourth quarter, GDP increased 2.6%.

“In response to the report, Swap rates fell,” noted Michael D. Sneden, Executive Vice President at ValueXpress. “The market is indicating that slow growth means interest rates can remain low for perhaps a longer period of time, and the Swap rate adjusted to reflect that thinking.”

Economists blamed frigid winter weather for depressing first-quarter results, but not everyone is convinced that weather tells the whole story. Forecasters were anticipating growth around 1%. The BEA found weakness across a number of indicators, including trade and inventories, non-residential fixed investment and lower government spending.

After the report released on Wednesday, the 10-year Swap rate declined intra-day to 2.70% before closing at 2.77%. The index has hovered in the 2.70%-2.75% range since the report was released.

“This is good news for our CMBS conduit loan borrowers,” commented Steve Lombardi, Senior Loan Originator at ValueXpress. “We are continually advising our clients that eventually interest rates will increase as the economy grows, but they don’t want to listen. This less-than-stellar GDP report will hopefully push out the date when rates move up.”

4.23.14: Who Holds the Most Commercial Loans?

The winner is commercial banks, which held $1.57 billion in commercial real estate debt at year-end 2013, according to data from the Federal Reserve Board. The amount of commercial real estate debt held by banks represents 48.9% of the $3.20 billion of total outstanding loans. CMBS is a distant second, with 17.7% of the commercial loan market, followed by insurance companies (10.7%), other (10.4%), federal agencies (7.6%) and agency CMBS (4.6%).

The nation’s largest banks increased their holdings of commercial real estate loans by 4.7% in 2013, the first substantial gain since the downturn. Meanwhile, loans in CMBS rose a meager 0.1% as new originations barely kept pace with CMBS maturities. But the big year-over-year gainer was agency CMBS, with a whopping 29.7% increase in outstanding loans at year-end 2013. The loser for 2103 was federal agencies, primarily Fannie Mae/Freddie Mac and HUD multifamily programs, which saw an 8.3% decline in commercial loans outstanding.

Banks are expected to continue growing balances in 2014, as most of the problem loans from the 2008-2009 financial crises have been resolved, and with net interest margins compressing, banks need to grow their commercial loan balances to increase or even maintain earnings. For 2014, $100 billion in CMBS originations are forecasted, which should lead to some modest growth after subtracting maturing CMBS loans and troubled CMBS loans that are resolved and paid off. Federal agency loans will still be pressured by leaders in Washington, D.C. who want to reduce the involved of government in commercial lending.

Overall Holders of Commercial Real Estate Debt on December 31, 2014

Total
$, Billions
%
Banks
$1565.90
48.9%
CMBS
$567.40
17.7%
Insurers
$343.40
10.7%
Federal Agencies
$243.50
7.6%
Agency CMBS
$147.10
4.6%
Other
$332.30
10.4%
TOTAL
$3199.60
100.0%

Source: Federal Reserve Board

AAHOA Alert! 4.30.14: CMBS Conduit Loan Rates for Hotels Fall Below 5%

Lender competition for CMBS conduit loans for hotels, particularly limited-service hotels owned by AAHOA members, is contributing to rapidly declining interest rates for borrowers. In addition, small balance borrowers ($3 million-$10 million) are enjoying low interest rates that were previously available only for transactions over $20 million.

“We are seeing 10-year fixed interest rates on larger hotel deals and portfolio deals in the 4.5% area,” commented Jay Bhakta, Senior Loan Originator at ValueXpress. “But what is really compelling is 10-year fixed interest rates under 5% for Hamptons, Holiday Inn Express and similar limited-service properties even if the loan amount is only around $5 million. Although we do a lot of big deals, the $5-million deal is our bread-and-butter business for AAHOA members.”

“What has happened is the index that is used to set the interest rate for CMBS conduit loans has fallen in April because the economy is not growing much and corporate earnings in the first quarter were poor,” explained Michael D. Sneden, Executive Vice President at ValueXpress. “We are telling potential borrowers to act now, because if the economy improves in the next few quarters, the index that is used to set the interest rate for CMBS conduit loans is likely to go back up.”

AAHOA Alert! 4.28.14: CMBS Conduit Loans Available in Small Markets

ValueXpress can obtain CMBS conduit loans for AAHOA members who own limited and full-service hotels in small markets. “Traditionally, CMBS conduit lenders do not like small markets and will not make hotel loans there,” notes Michael D. Sneden, Executive Vice President at ValueXpress. “But through our long-standing relationships with AAHOA members who own primarily limited-service hotels in small towns, we have been able to show our CMBS conduit lenders low defaults on our closed transactions with AAHOA members in small markets. So they will make loans in small towns for us.”

“Small markets are becoming an increasing part of our CMBS conduit loan business,” according to Jay Bhakta. “We recently closed and are working on transactions in a variety of small markets.”

Recent transactions include hotels owned by AAHOA members in Snyder, Texas (population 10,000), Pratt, Kansas (population 6,800), Guymon, Oklahoma (population 11,000), Lone Pine, California (population 2,000) and Lapeer, Michigan (population 9,000). And as many AAHOA members own hotels in small markets, ValueXpress will continue to develop CMBS conduit loan relationships to serve members in these markets.

AAHOA Alert! 4.24.14: AAHOA Borrowers Use Cash-Out Proceeds from CMBS Conduit Loans to Grow

Since 2011 when the CMBS conduit loan market resumed, ValueXpress has made approximately $200 million in CMBS conduit loans to AAHOA members who refinanced approximately $140 million of debt. This means that $60 million of equity was returned to borrowers, most of which was reinvested in additional hospitality opportunities.

“One of the primary benefits of CMBS conduit loans is the unrestricted cash-out feature that is not available with any other hotel loan product,” commented Jim Brett, head of underwriting at ValueXpress. “Borrowers can use this “cheap” money to make more investments and grow their presence in the hospitality industry.”

“We all know the classic AAOHA member success story, whereby the young hotelier came to the United States and started with a small roadside independent motel, then grew into their first franchise property, eventually becoming a multi-property, multi-franchise owner today,” said Jay Bhakta. “Well, many of these stories happened because cash-out CMBS conduit loans provided the cash equity to grow. And ValueXpress wants to help develop more of these success stories by providing the cash needed to grow through our CMBS lending program.”

4.18.14: CMBS Conduit Loan Rates Fall

The combination of lower CMBS yields, competition and a declining swap rate is contributing to rapidly declining interest rates for CMBS conduit loan borrowers. As of Thursday, April 17, the 10-year Swap rate used to set CMBS loan interest rates had fallen to 2.75% from an April high of 2.93% on April 4. In addition, CMBS lenders are lowering spreads in tandem with lower CMBS yields on recent CMBS issues amid heavy competition for new loans. The result is borrower rates in the 4.65%-4.75% range for commercial loans and around 5.0% for hotel loans.

“What is also very appealing is the spread compression happening even on smaller balance loans, those in the $3-$5 million range,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “While it was not unusual to see tight spreads on higher balance loans over $10 million and lower leverage loans, competition is extending rate benefits to smaller balance deals.”

Furthermore, CMBS conduit loans are now pretty much even with Fannie Mae on multifamily loan rates, even on small balance loans. Spreads on 10-year Fannie Mae deals are in the Treasury plus 200 basis points (bp) range, while CMBS is in the Swaps plus 200 area. “10-year Swaps are 10 bp higher than the 10-year Treasury, which means that the typical CMBS conduit deal is still 10 bp higher in rate, but we have seen CMBS lenders go to Swaps plus 190 to match Fannie Mae offers to win deals,” commented Gary Unkel, Senior Loan Originator at ValueXpress. “We are seeing a much higher level of multifamily deal flow now versus the beginning of the year.”

New CMBS conduit loan rates are in the 4.65%-4.75% range for commercial properties based on spread quotes in the 190-200 range. Hotel spreads are 200-225 depending on franchise affiliation and location, with stronger brands in primary markets seeing better pricing.

4.14.14: CCTG Graduates Gaining Traction in CMBS Originations

Graduates of the Commercial Capital Training Group (CCTG), a training program for individuals who want to enter or expand their reach in the commercial real estate finance business, are finding that CMBS conduit lending can be a lucrative product for their business.

“My associate Kevin Monahan began training CCTG graduates in 2012 about the CMBS conduit loan product,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “He thoroughly enjoyed sharing his knowledge with the students until his untimely death from pancreatic cancer in the fall of 2013.”

“At the recommendation of Kris Roglieri and Jon Cosentino, the founders of CCTG, I took over the reigns from Kevin and have been teaching 10-15 new students each month since November 2013 at the school in Albany, N.Y.” said Sneden. “The students are enthusiastic about CMBS conduit lending once they learn of its unrestricted cash out, non-recourse structure and nationwide footprint, in addition to generally high loan balances that generate large fees per transaction.”

“We act as the back office for the grads, gathering diligence, performing loan sizing, obtaining loan approvals and term sheets, completing diligence and closing loans,” commented Jim Brett, head of loan underwriting at ValueXpress. “As graduates become confident that they have a partner that will get the loan closed, more and more graduates are embracing the CMBS conduit loan product.”

Of the over 400 graduates, many have decided that CMBS conduit loans should be one of their primary focuses. As a result, ValueXpress is processing increasing amounts of CMBS conduit loans for CCTG graduates with a very high level of success.

4.9.14: Fixed-Rate SBA 7(a) Loans Becoming More Prevalent

The attractive premium income achieved by selling the guaranteed portion of variable rate SBA 7(a) loans has kept fixed-rate 7(a) loans from becoming a significant portion of overall 7(a) loan origination. SBA lenders have been known to suggest to borrowers that fixed-rate 7(a) loans “don’t exist.”

Variable and fixed rates are available in the 7(a) program. Both are subject to a maximum rate set by the SBA (currently Prime + 2.75% for variable and 8.26% for fixed rates on long-term loans > $50,000 as of April 2014). Both the fixed and floating rate maximums are in excess of market rates.

With competition fierce for owner-occupied commercial loans with good credit characteristics, some SBA 7(a) lenders are adding the fixed-rate option to their 7(a) product line. Helping advance the market are 7(a) loan guarantee dealers that are making markets on the buying and pooling of fixed-rate 7(a) guarantees for sale to investors. One dealer is offering to buy 7(a) guaranteed loans with initial fixed-rate periods of 3 years and 5 years, followed by quarterly adjustments for the balance of the 25-year term. In addition, the dealer is offering a 25-year fixed for life purchase; however, the par price is a 6.25% rate.

Although fixed-rate premiums are significantly lower than floating rates, some borrowers simply will not close a floating rate deal. A banker recently told me that he closed a 5-year fixed-rate deal with a 25-year term at 5.25% for a good client, sold the guaranty for 103 and now services the loan for a 1% fee. While not a great execution, the banker did not want the client to close elsewhere and potentially lose the relationship.

4.4.14: CMBS Origination Volume Slips in First Quarter

CMBS issuance in the first quarter fell 11% from a year earlier, according to Commercial Mortgage Alert. An estimated $20.4 billion of CMBS were issued in the first quarter of 2014, a decline from $22.9 billion a year ago. On an annualized basis, the pace of issuance is about $80 billion, less than 2013’s $86 billion and far short of the industry projection of roughly $100 billion for 2014. The pipeline for the second quarter of 2014 is roughly even with 2013 at $15 billion, so it looks like the second half of 2014 will need to be robust to hit the $100-billion mark.

“We are seeing declines in the origination pace in our target market, the small balance ($3-$20 million) borrower,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “We are struggling to compete on rate against community banks on 5- to 7-year fixed-rate refinance deals in which the sponsor is not concerned about recourse. A creditworthy sponsor can find rates of 3.5-3.75% or lower from any number of commercial banks in the New York metro area.”

“But we still have an advantage on large cash-out transactions and transactions in which non-recourse is required,” said Gary Unkel, Senior Loan Originator at ValueXpress. “In addition, we are able to work transactions in which the sponsor has some credit issues that the community bank does not want to see.”

“I think we will continue to close a steady volume of cash-out transactions in 2014,” said Sneden. “Whether we can beat last year’s number may require a dip in rates, even if only for a short while, this summer or fall, so we can add some rate-sensitive transactions on top of the steady cash-out refinance business already in place.”

4.1.14: Trepp Reports Further Decline in Delinquency

The CMBS delinquency rate continued its impressive decline in March, marking the tenth consecutive month the rate has fallen, according to Trepp.

The rate dropped 24 basis points (bp) over the course of the month, bringing the delinquency rate for U.S. commercial real estate loans in CMBS to 6.54%. The Trepp delinquency rate is 228 bp lower than a year ago and 380 bp lower than the all-time high reached during the summer of 2012.

U.S. CMBS Delinquency Rate:

Period % 30 Days
or More Delinquent
Mar-14 6.54%
Feb-14 6.78%
Jan-14 7.25%
   
3 Months Ago 7.43%
6 Months Ago 8.14%
12 Months Ago 9.50%

Driven by ongoing CWCapital distressed asset sales, the forecasted drop in delinquencies that accelerated in February extended into March with a large block of distressed asset resolutions. Over $2.1 billion in previously delinquent loans were resolved with losses over the course of the month. This level was down from $2.6 billion in February, but was still above the normal monthly average over the last two years. By removing these delinquent loans from the numerator, the rate improved 40 bp.

3.26.14: Apartment Rents Climb as Vacancies Drop

Apartment landlords continued to push through hefty rent increases at the start of the year, although the pace of the rises was slightly weaker, according to the Wall Street Journal. Rental rates increased 0.6% during the first quarter, according to data from 79 U.S. metro areas that was released on March 25 by Reis Inc., a real estate research firm. While that was a little slower than the 0.8% rise in last year's fourth quarter, rents were up a hefty 3.2% from a year earlier and have risen 13% since rents began their upward trajectory in 2009.

And with vacancy levels falling, rents appear poised for further growth, according to Reis, which said the rental vacancy rate fell to 4% in the first quarter from 4.2% in the fourth quarter of 2013 and half the level in 2009.

Rents are at a higher base and still growing," said Ryan Severino, an economist at Reis. "They will likely keep growing for the next few years."

Rental pressure has been building for years, as rising demand has run into an undersupply of apartments. With employment rising slowly but steadily, more young people are forming households, usually by leaving their parents' residences or breaking off from groups of roommates.

The burden of rising rents has fallen hard on young workers, who are more likely to be renting or, in many cases, looking to get their own place after years of underemployment.

Young people have seen their job growth pick up of late, but they still are below where they were before the recession. About three-quarters of 25- to 34-year-olds had jobs in February, down from a prerecession high of 80% in 2007.

3.21.14: AAHOA Trade Show Featuring “Deal Central” an Enormous Success

The ValueXpress booth was bustling with activity on March 20-21, 2014 at the annual Asian American Hotel Owners Association (AAHOA) Trade Show in Philadelphia, Pennsylvania. Over 3,000 attendees visited the trade show held at the Pennsylvania Convention Center. “Again this year as last year, the top loan product sought by hoteliers was CMBS conduit loans. With hotel performance improving at a rapid pace, and CMBS conduit loans the only realistic program with unrestricted cash out, interest was very high,” said Michael D. Sneden, Executive Vice President at ValueXpress. “We were sizing loans on the spot and issuing term sheets from our booth and during Deal Central. Borrowers were amazed at the potential cash proceeds in their pocket after paying off existing debt.”

ValueXpress was one of a few select sponsors invited to participate in Deal Central, an evening of intense deal making in a casual setting that featured excellent food and cocktails.

“My clients were impressed by the competitive rates for CMBS conduit loans,” noted Jay Bhakta, a Senior Loan Originator with ValueXpress who covers the southeast U.S. market that includes Texas. “With rates in the 5.0%-5.5% area, my clients can take cash out and yet have the same payment because of the lower interest rate and longer 25-year amortization schedule.”

Most clients use the cash-out proceeds to grow their businesses by building or buying other hotel assets. “One of my clients was able to obtain a construction loan from a bank requiring 50% equity by using the cash-out proceeds from a CMBS conduit loan as the equity contribution for a new hotel project,” Bhakta said.

3.17.14: CMBS Prices Remain Firm; Market Stable

CMBS prices remained in a tight range during the last 30 days in which four CMBS deals priced. The benchmark long-term, super-senior bonds from the first issue, a $1-billion offering by Citigroup, Goldman Sachs, MC-Five Mile and Cantor Fitzgerald, priced on February 28 at 93 basis points (bp) over swaps, within the range of 87-95 bp of issues since the beginning of 2014. Further down the capital stack, Class AS CMBS priced at 125 bp over swaps, and the Class Bs from the deal priced at 170 bp over swaps.

Next up, Deutsche Bank, UBS, Key Bank and Cantor priced the long-term super-senior bonds from a $1.2-billion offering on March 4 at 92 bp over swaps. The Class AM and B priced at 115 and 165 bp over swaps, respectively. Soon after, Wells Fargo, RBS, Liberty Island and Basis Investment priced the senior bonds from a $1.1-billion offering at 89 bp over swaps. The Class AM and B priced at 105 and 150 bp over swaps, respectively.

The most recent issue, a $927-million offering by Ladder Capital, Deutsche Bank and Natixis, priced the long-term super-senior bonds on March 14 at 92 bp over swaps, and Class AM CMBS priced at 110 bp over swaps, while the Class Bs from the deal priced at 150 bp over swaps.

“CMBS issuers and traders thrive in a stable market like we have seen so far in 2014,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “The stability is allowing CMBS conduit lenders to lower their spreads despite CMBS prices being range-bound, as some volatility risk is removed from their spreads. Plus the trend for the mezzanine AAA/AA- CMBS is tighter, which is helping shrink borrower spreads as well.

"We are seeing spreads in the 210-225 bp area for full-leverage small-balance commercial assets and 250 bp area for hotels," commented Gary Unkel, Senior Loan Originator at ValueXpress. "With the 10-year Swap Rate (Swap) Index hovering around 2.80%, all-in rates to borrowers are falling below 5%. Low leverage deals and/or higher loan balances can be well under 5%."

3.12.14: SBA Approves Borrower-Friendly Rule Changes for 504 Loan Program

The Small Business Administration (SBA) has issued a rule that will eliminate the section of the SBA guide which limits project expenses eligible for 504 Loan Program financing to those incurred within nine months prior to receipt by SBA of a completed loan application. This change will permit financings of expenses toward a project regardless of when they were incurred as long as they are directly attributable to the project.

“This does not sound like a big deal, but we have two 504 projects that are applicable; one closed and the rule change was too late to help the sponsor, and the second project is only moving forward based on the rule change, which is an example of its significance,” noted Michael D. Sneden, Executive Vice President at ValueXpress.

In the first deal, the sponsor spent $750,000 to demolish an existing structure on the project site, and thereafter completed a lengthy rezoning and approval process that took 12 months. Because the project proceeded after the 9-month window had expired, the demolition costs were not eligible 504 project costs.

The second deal was impacted even more by the rule. The sponsor was to construct a new franchised limited-service hotel in New York City. In order to secure a tax abatement, the sponsor had to complete site demolition, clearing excavation and a foundation, which it did at a cost of nearly $2 million out of an overall project cost of $10 million. Approvals took 14 months. Once the sponsor learned that the site preparation and foundation were not 504-eligible expenses, the sponsor turned to other alternatives; with the rule now in place, the 504 project can proceed with the full $10 million as eligible 504 costs.

3.7.14: More on CMBS Loan Quality

Investors in CMBS tend to focus on the top 10 loans in CMBS pools, as these loans tend to comprise in excess of 50% of the principal balance of a CMBS issue, and therefore, they would have the largest impact in the event of default. In general, though, the top 10 loans are higher quality and better underwritten relative to the rest of the pool.

CMBS investors should consider looking deeper into the next 10 largest loans (which combined with the top 10 loans typically represent 75%-80% of the total loans in a CMBS issue), according to a recent report from the rating agency Kroll. The report suggests the credit quality of the next 10 is slipping more rapidly than the bigger loans that tend to get all the attention.

The report notes gradual deterioration over the past year in underwriting standards for the 20 largest loans in Kroll-rated transactions. And it finds that the trend is more pronounced at the lower end of that range, which has always tended to be of lesser quality than collateral in the first tier. The agency says careful scrutiny of the 10 biggest loans “can mask credit creep” among mortgages ranked 11th to 20th by initial balance.

“When we evaluate CMBS issues for possible acquisition to add to Country Bank’s CMBS portfolio, we look at the top 20 loans as well as a sample of the balance of the loans,” commented Jim Brett, head of CMBS analytics at ValueXpress. “We clearly see the loans below the top 10 as poorer quality and more aggressively underwritten. The balance of the loans below the top 20, typically $3-million to $10-million loans are even worse.”

“We factor these results into our loss analysis,” noted Michael D. Sneden, Executive Vice President at ValueXpress. “In 2010, we were projecting bond losses of about 3%, but now we are more in the 5%-6% range. We require 200% cushion, which means the CMBS subordination levels must be 12% or more for us to recommend that Country Bank buy bonds from the issue.”

3.3.14: NADCO Sees SBA 504 Refinances on Horizon

As it relates to the on-again/off-again SBA 504 refinance program, Claire O’Rourke, Director of Government Relations at the National Association of Development Companies (NADCO), indicated that lenders need to lobby their representatives. In a recent interview with Bob Coleman, editor of the Coleman Report, O’Rourke said, “Don’t assume congressmen/congresswomen and their staff know what you talking about as you launch into your talking points."

The 504 refinance program has the potential to save, in some cases, tens of thousands of dollars each month in interest from refinancing high-cost debt using the 504 program. The U.S. economy can benefit from these savings when small businesses reinvest these savings into their businesses. O’Rourke noted that the cost of re-implementing the 504 refinance program is budget neutral and has a high probability of being implemented because “everyone (in Congress) loves small business.”

NADCO, the trade association of SBA Certified Development Companies (CDCs), is the industry’s primary voice in Washington D.C. for the SBA program. O’Rourke recently joined NADCO after working for the Senate Committee on Small Business and Entrepreneurship with Senator Mary Landrieu (D., LA).

2.26.14: Takeaways from CW Capital’s $3.2-Billion Troubled Loan Auction

The results of CW Capital’s $3.2-billion bulk sale of seriously troubled CMBS conduit loans began to filter through servicer reports, according to a research piece written by Jeffries. As of the February servicer reports, 77 loans from 12 fixed-rate CMBS conduit transactions had a current balance at disposition of $2.15 billion. Only 2 of the 77 loans were liquidated at no loss. Of the 75 other loans, the average loss severity was 54%. One property, Pheasant Run Resort, experienced a loss of 100%; the sales proceeds of $5.65 million were insufficient to pay accrued interest and costs. In terms of dollars, the highest loss severity was incurred by the Hyatt Regency – Jacksonville, Florida, which sustained a loss of $118 million on a loan that carried a principal balance excluding accrued interest of $150 million.

Despite these seemingly depressing results, 40 of the sold loans resulted in proceeds that were in excess of their most recent appraised values, Jeffries noted. The fact that 40 of these sales reaped higher proceeds than recent appraisals underscores the recovery that continues in the commercial properties markets, assisted in large part by the depth of the current bid for distressed loans and assets and plentiful/cheap sources of debt.

Based on the overall positive results of the sale, additional sales may hit the market, as sentiment is that selling distressed assets today may be more feasible than waiting for further increases in value given the substantial costs to carry distressed assets.

2.21.14: AAHOA Members: Bring P&L and STAR Report to Philly

ValueXpress will offer “on the spot” loan proposals to Asian American Hotel Owners Association (AAHOA) members attending the “Deal Connection” event and Trade Show at the AAHOA Annual Convention in Philadelphia on March 19-21, 2014. “Just bring your 2013 property income and expense statement and your December monthly STAR report, and we will run your numbers through our loan models and provide a loan proposal in just a few minutes,” said Jim Brett, head of underwriting at ValueXpress. “You can even bring reports on your phone email and forward them to me at my “Deal Central” desk or our booth in the Trade Show.”

As previously posted, as 1 of only 20 “by invitation” sponsors, ValueXpress has committed be a part of AAHOA’s inaugural “Deal Connection.” The event – Turning Silver into Gold – will occur during the AAHOA Annual Convention on Thursday, March 20, 2014 6-9 p.m. in the Terrace Ballroom in the Convention Center. ValueXpress will be represented by Michael D. Sneden, Executive Vice President; Jay Bhakta, Senior Loan Originator; and Jim Brett, Head of Underwriting.

In addition, on Thursday and Friday, March 20-21, 2014 ValueXpress will be exhibiting at the Trade Show. ValueXpress will be located in Booth 865 at the Convention Center noon-6:00 p.m. on both Thursday, March 20 and Friday, March 21. You can bring your property income and expense statement and December monthly STAR report, and we will provide you a loan quote at our booth or at “Deal Central.”

2.18.14: More Thoughts on the Future of Retail

I’m a (typical?) guy who hates to shop, which is why my wife is both amazed and puzzled by my newfound shopping sprees. No, I’m not talking about buying the latest fashion like “I gotta have that new Michael Kors jacket at Macy’s,” but something different. Every day I come home from work to newly delivered boxes, lots of boxes, and shifty wife eyes. “What did you buy now?” she asks me.

See it’s not that I hate shopping. It’s that I hate getting in my car. I hate driving. I hate having my time consumed by walking around in stores, and I hate going to different stores to find the best price, which means more driving in my car (Get it? Vicious circle.). But now I don’t have to shop in bricks-and-mortar stores for “commodities.” In every case when I know what I want, I buy it on the internet at the best possible price. Plus I can buy obscure stuff that’s hard to find. (Can you say 13-year-old fan motor for our bathroom? Done, thanks to mrsupply.com).

I consider myself pretty typical. So if I extrapolate, a lot of people are migrating to internet shopping and not as many people are shopping in bricks-and-mortar stores. This is not a revelation. It’s been written about a lot in the press, but I am my own best example.

This trend makes underwriting retail CMBS conduit loans tricky. Malls used to grow net operating income (NOI) like clockwork, rolling over to bigger loan amounts at each refinancing, but NOI growth has stopped. Many malls and shopping centers are struggling. Whenever I need a dose of retail reality I head to deadmalls.com and deadanddyingretail.com. It’s fascinating stuff – if you’re in the lending business!

2.13.14: Wells Research Supports Weaker Underwriting Metrics in CMBS Loans

Jim Brett, head of CMBS analytics at ValueXpress, was recently lamenting, “Mike, I feel like the CMBS deals are more aggressive than last year. The underwriting and asset quality just doesn’t feel as good, except for a deal here and there. If I looked at the trailing credit metrics, I wonder what I would see?”

Wells Fargo recently issued a CMBS and Commercial Real Estate Research report that supports Jim’s lament: Underwriting standards for CMBS conduit loans are deteriorating. The report notes that the recent COMM 2014-CCRE15 transaction had a net cash flow (NCF) DSCR of 1.43x, which was the second-lowest NCF DSCR of any multi-borrower transaction issued since 2010.

In the report Wells took a look at key credit metrics for 2012, 2013 and year-to-date 2014 and found decreasing results in each category. NCF DSCR declined, LTV increased, loans with LTV above 70% increased, debt yield decreased, and interest-only payment periods increased. “While these trends are great for the loan origination side of our business, we have to tread carefully as we add additional CMBS exposure on the Country Bank side of our business, where we manage its $75-million CMBS portfolio and selectively add new purchases,” commented Michael D. Sneden, Executive Vice President of ValueXpress.

The table below is a quick summary of Wells Fargo’s findings*:

Vintage NCF
DSCR
LTV LTV >
70%
Debt
Yield
DY <
9%
2012 1.71x 63.5% 22.8% 10.5% 18.0%
2013 1.89x 63.1% 27.3% 10.9% 26.1%
YTD 2014 1.69x 64.3% 33.4% 10.3% 34.1%

*All figures based on original issue date.

2.7.14: Report from the 2014 MBA CREF Convention

Participants at the 2014 MBA Commercial Real Estate Finance Convention (CREF) held in Orlando, Florida, agreed the CMBS conduit loan machine is cranking full tilt: Should rates remain at close to current levels, this year's CREF panelists suggested volume of $100 billion in CMBS originations should be easily achieved. But the panel was concerned about deteriorating underwriting standards and competition compressing profit margins.

On the panel "CMBS Market Forecast," John Burke, Managing Director at RBS, Dennis Schuh, Managing Director at J.P. Morgan and Matt Salem, Managing Director at Rialto Capital shared their opinions on what is expected in 2014 in the CMBS loan origination market:

Regarding credit quality, Burke did not expect to see a decline in credit quality, while Salem countered that it's already happening. "Of the loans, 50% have LTV more than 70% in current CMBS issues, while prior to 2013 only 20% were above 70%," commented Salem, who seemed to have a good grasp statistically on the credit metrics for CMBS. Schuh chimed in, agreeing that standards are declining "but underwriting standards are still good because they are declining from a very conservative level."

All the panelists joked about the Commercial Mortgage Alert dropped at their hotel room doors: It reported 37 active conduits and the effect of the competition on their paychecks. But in seriousness, the panel worried about spread compression decreasing profit levels and the challenge to grow their originations in 2014 versus 2013 amid additional competition. Without a major market hiccup, the panelists felt there would not be much consolidation, if any, in 2014.

2.5.14: Ladder Capital Goes Public - Cantor Commercial Real Estate Next?

Ladder Capital Corp announced the pricing of its initial public offering (IPO) of 13,250,000 shares of its Class A common stock at a price to the public of $17.00 per share on Wednesday, February 5. Ladder is a major contributor of loans to CMBS issues with $2.2 billion in loan contributions to CMBS issues in 2013, according to Commercial Mortgage Alert (CMA). This ranks the company 12th among the 29 firms that contributed loans to CMBS issues in 2013.

Ladder's trading debut followed the news that another commercial lender active in CMBS conduit loan origination, Cantor Commercial Real Estate, is planning an IPO. The Cantor Fitzgerald affiliate has hired Deutsche Bank to lead the effort, according to The Wall Street Journal. Cantor Commercial Real Estate contributed $5.3 billion of commercial loans to CMBS issues, according to CMA, ranking the firm 5th among the 29 firms that contributed loans to CMBS issues in 2013.

Early investors in Cantor Commercial, including CIM Group, are looking to sell some of their ownership stakes in the business, according to the Journal. CIM Group invested $350 million and owns 55% of the business, according to a Standard & Poor's report cited by the Journal. Cantor Fitzgerald owns 11%.

1.29.14: Commercial/Multifamily Mortgage Debt Posts Largest Increase Since 2008

Commercial/multifamily mortgage debt outstanding increased by $25.2 billion in the third quarter, as all four investor groups increased their holdings, according to the Mortgage Bankers Association (MBA). In its MBA Commercial Real Estate/Multifamily Finance Mortgage Debt Outstanding - Q3 report, the MBA reports total commercial/multifamily debt outstanding stood at $2.47 trillion in the third quarter, a 1% increase from the second quarter. Multifamily mortgage debt outstanding rose to $887 billion, up $10.8 billion, or 1.2%, from the second quarter.

"Commercial and multifamily mortgage debt outstanding grew by the largest amount since 2008," said Jamie Woodwell, MBA Vice President of commercial real estate research. "The third quarter also marked the largest increase in the outstanding balance of loans in commercial mortgage-backed securities (CMBS) since 2007. There were increases in the holdings of every major investor group."

Commercial banks continue to hold the largest share of commercial/multifamily mortgages at $870 billion, or 35%. CMBS, CDO and other ABS issuers are the second-largest holders with $563 billion, or 23%. Agency/government sponsored enterprise (GSE) portfolios and mortgage-backed securities (MBS) hold $391 billion, or 16%, while life insurance companies hold $333 billion, or 14%.

1.24.14: ValueXpress to Participate in AAHOA’s Inaugural “Deal Connection”

As 1 of only 20 “by invitation” sponsors, ValueXpress has committed be a part of the Asian American Hotel Owners Association (AAHOA) inaugural “Deal Connection.” The event – Turning Silver into Gold – will occur during the 2014 AAHOA Annual Convention, which begins in Philadelphia on Wednesday, March 19, 2013.

“Having completed over 100 financing transactions in excess of $500 million with AAHOA members, we are grateful to the AAHOA Board for including ValueXpress in this exciting new program. And we look forward to providing the financing needed by members to continue to grow their business,” commented Michael D. Sneden, Executive Vice President of ValueXpress.

At the “Deal Connection,” Turning Silver into Gold, on Thursday, March 20, 2014 6:00–9:00 p.m., the ValueXpress Team will connect with many of the thousands of hoteliers in attendance who are ready to jump start their portfolios. With three hours of face-to-face conversations in a comfortable, dedicated meeting space, ValueXpress is sure to generate a significant amount of financing transactions.

“I look forward to having all my hotel clients in one place,” noted Jay Bhakta, Senior Loan Originator at ValueXpress. “I travel quite a lot throughout the southeastern United States to work on their loan transactions, but I can’t see all of my clients on these trips; this event allows me one-on-one opportunities to meet and offer assistance in providing for their financing needs.”

1.21.14: ValueXpress to Assist in Marketing Program for CCTG

Due to an overwhelming request for marketing support by graduates of the Commercial Capital Training Group (CCTG) program, ValueXpress will develop marketing material for graduates to use when pitching CMBS conduit loans to their clients. In collaboration with Jon Cosentino and Kris Roglieri, principals in CCTG, ValueXpress will create a “trademarked” print program for all interested CCTG grads and their firms.

“We are pleased to be able to assist CCTG grads by supplying marketing materials and support,” said Michael D. Sneden, Executive Vice President of ValueXpress.

As part of this new support for CCTG grads, materials will be geared toward website, trade show and print programs. They will include the grad’s company name and logo as well as “a CCTG partner company” designation. In addition, a scalable national .pdf piece will be included that can be used for handouts, blast emails and print ads.

“Marketing will be directed toward the key benefits of CMBS conduit loans right now, namely “unrestricted cash out,” non-recourse, and longer term/amortization as superior to competing products,” commented Sneden.

1.15.14: J.C. Penney to Close 33 Stores

J.C. Penney said it will close 33 underperforming stores and lay off 2,000 employees as the venerable but troubled retailer continues a sweeping turnaround effort. Penney said the closings are part of its turnaround, which began in April when Myron (Mike) Ullman returned to lead the company. He's largely undoing the strategies implemented by former CEO Ron Johnson, who was pushed out after an overhaul that included eliminating sales and promotions in favor of everyday low prices caused revenue to plunge.

Trepp reports that nine of the closing stores are part of CMBS. In eight cases, the J.C. Penney store is part of the collateral for the loan. Given that J.C Penney is part of 189 CMBS loans, the impact of these store closings is relatively small for CMBS investors.

1.10.14: Meet Me at the MBA in Orlando, FL

Michael D. Sneden, Executive Vice President of ValueXpress, will be representing the firm at the Mortgage Bankers Association Commercial Real Estate Finance (CREF)/Multifamily Housing Convention and Expo at the Hyatt Regency in Orlando, Florida February 2-5, 2014. The convention is expected to attract over 2,500 commercial and multifamily professionals who will be networking with industry leaders and listening to professionals as they share their views on the direction of the industry.

"I have been attending CREF for over 15 years, and it is by far the best opportunity to meet my colleagues to share our past, current and future views on the commercial real estate lending markets," said Sneden. "This year, with the continued post-crash growth in CMBS conduit lending, I am looking to meet with my contemporaries who want to participate in the rewards of CMBS conduit lending; I want to see if there is a way we can work together."

"According to CMBS pros, the CMBS lending market is projected to climb to $105 billion in 2014 from $86 billion in 2013," notes Sneden. "ValueXpress has been tracking the market increases and expects to increase originations by 25% in 2014, and we would like to work with more colleagues as we reach our goal."

Mike will be in Orlando from Sunday, February 2 through Wednesday, February 5. If you want to get together for a drink or chat between session presentations, please email Mike at msneden@valuexpress.com.

1.9.13: Buyers Grab CMBS from Year's First Issue

CMBS buyers returned to the market in early 2014 to gobble up the year's first issue, a $1.4-billion offering by Deutsche Bank, Nataxis, Cantor Fitzgerald and Liberty Island. The long-term, super-senior bonds priced at 87 basis points (bp) over swaps, down 3 bp from initial price guidance and 8 bp lower than the level achieved on the equivalent bonds from the previous issue. Further down the capital stack, Class AM CMBS priced at 115 bp over swaps and the Class Bs from the deal priced at 165 bp over swaps. The classes were well oversubscribed.

"The DB/Nataxis transaction featured excellent underwriting characteristics and high collateral quality," noted Jim Brett, head of CMBS analytics at ValueXpress. "Some investors thought that the high quality of the issue may have contributed to the tight spreads on the deal and may not be indicative of market levels. We will have to wait for the next CMBS deal for confirmation, but the secondary market has tightened if this deal sets the new market levels."

"Based on the results of CMBS spread tightening, we are seeing spreads to borrowers tighten another 10-15 bp to the 220 bp area for full-leverage commercial assets and 250 bp area for hotels," commented Michael D. Sneden, Executive Vice President at ValueXpress. "With the 10-year Swap Rate (Swap) Index hovering around 2.95%, all-in rates to borrowers are falling toward the low 5% area right now. Low leverage deals can be under 5%."

12.31.13: Conduit Loan Maturities in 2014 Present an Opportunity

Following the maturity of approximately $375 billion of commercial loans in 2013 held by CMBS trusts, banks, insurance companies and other financial institutions, Berkadia and Trepp estimate another $350 billion is coming due in 2014 and roughly $1.4 trillion in 2014-2017. The large amount of maturing loans will keep all lending sources busy during the period.

CMBS conduit loans constitute approximately $400 billion of the 2014-2017 total, and with over two dozen firms currently contributing conduit loans to CMBS issues, the industry is poised to increase market share, to perhaps the $500-billion level.

"We are already seeing significant numbers of loans in CMBS pools that are refinancings of existing CMBS loans," noted Michael D. Sneden, Executive Vice President at ValueXpress. "In the most recent $1.4-billion CMBS offering by Deutsche Bank, Nataxis, Cantor Fitzgerald and Liberty Island, $763.7 million (55.5%) of the loan balance was properties refinanced from prior CMBS securitizations, an impressive amount."

"We are continuing to utilize our Trepp database to contact borrowers with maturing CMBS conduit loans as we expect refinancing of existing conduit loans into new conduit loans to be a significant portion of our business in the 2014-2017 period," said Gary Unkel, senior loan originator at ValueXpress.

12.27.13: Transaction Highlights for 2013

ValueXpress completed 30 CMBS conduit loan transactions in 2013 with a principal balance of over $200 million. Average loan size approximated $7 million. Hospitality loans were most prevalent, but transactions were completed for every CMBS conduit loan asset class -- multifamily, retail, office, self-storage and hospitality.

"2013 was a fairly typical year for ValueXpress," commented Michael D. Sneden, Executive Vice President of ValueXpress. "In periods of market stability, our originations are typically in the $200-million area, with average loan size of about $5 million, closing three to four loans a month. We continue to successfully focus on the small balance ($3-$15 million) market to lend our expertise to borrowers and intermediaries who are not terribly experienced in the CMBS conduit loan origination process."

"We expect 2014 to be more of the same: $200-million plus in originations, mostly refinancing of maturing loans or cash-out refinancing of existing loans," noted Gary Unkel, Senior Originator at ValueXpress. "The large pool of maturing CMBS conduit loans in 2014 will provide an opportunity to refinance those loans into another CMBS conduit loan."

"In 2014, we also expect to increase CMBS conduit loan originations from the graduates of Commercial Capital Training Group (CCTG), in which ValueXpress is the preferred CMBS conduit loan partner," commented Sneden, an educator at the school. "The school graduated over 100 professionals in 2013 who are now pounding the pavement for CMBS conduit loans for ValueXpress to process."

12.23.13: ValueXpress Advises on $71 Million in CMBS Purchases in 2013

ValueXpress advised its affiliate, Country Bank, on the purchase of $71 million of CMBS securities in 2013 that included 19 separate transactions from 18 CMBS issues. Each of the 18 issues was analyzed in detail by ValueXpress under the direction of Jim Brett, head of CMBS analytics.

"At the pool level we study asset quality, Debt Yield, Net Cash Flow, DSCR, LTV and sponsorship," explained Brett. "In addition, we model the cash flows for the top ten loans in the pool, which typically exceed 50% of the overall loan balance in the issue. The results must exceed our hurdles before we recommend for Country Bank to purchase CMBS from a particular issue.”

"Approximately 75% of the purchased CMBS were Class B bonds, while the balance was Class AS bonds," said Michael D. Sneden, Executive Vice President of ValueXpress. "Careful analytics are very important, as these classes are not the most senior bonds, and although the yield is juicier, subordination levels (the point at which the bonds can take principal losses from defaults on the underlying loans) are lower than senior CMBS. The average subordination level on our Class B bonds in 15%, the point at which principal losses would occur. However, we project that the losses on the loans supporting our purchased CMBS will never exceed 5%, providing a strong cushion against any principal losses.”

The CMBS investment program, started in 2008, has been very successful for Country Bank, allowing it to profit from rising CMBS values in 2009-2010 through a divestiture program during the period, and providing relatively high yields on bonds purchased in 2012-2013 that are now being held to maturity.

12.19.13: Will CMBS Conduit Loans for "Micro Apartments" Be the Next Rage?

In recent years, officials in many of the nation's most expensive housing markets have embraced "micro apartments" as a way to provide less-expensive housing for young renters. They are betting that the tiny apartments -- generally the size of a hotel room for about half the rent of a full-size apartment -- will attract young professionals and recent college graduates, helping to revitalize city centers.

Micro apartments are about 300 square feet or smaller, though some developers and cities define them as large as 500 square feet. They sometimes lack a separate kitchen or bedroom. Developers believe that single people in their 20s and 30s will accept less space in exchange for lower rent, even in cities where rent levels aren't especially lofty. Nationwide, rents have soared as the supply of apartments hasn't kept pace with demand.

"It may take a while, but CMBS conduit loans will be perfect for these projects," commented Michael D. Sneden, Executive Vice President of ValueXpress. "Fannie Mae is not fond of small unit properties, preferring a mix of studios, 1-bedroom and 2-bedroom layouts. They also have rent/square foot (sf) and value/unit criteria that "micro apartments" may violate. Rents of $1,200 per month for a 300 sf unit in New York City ($4.00/sf) will be common, which is higher than Fannie Mae standards."

CMBS conduit lending does not have similar restrictions on unit size, unit mix, rent/sf or value/unit; therefore, these loans will become very attractive for "micro apartment" buildings as they are developed and stabilized.

12.13.13: CMBS Spreads Hold Steady Amid Flurry of Offerings

CMBS prices are holding firm as dealers shop three CMBS deals totaling $3.22 billion, each with distinct loan underwriting characteristics and collateral quality. The three conduit offerings are a $1.1-billion deal by Deutsche Bank, Cantor Fitzgerald, KeyBank and Liberty Island (COMM 2013-CCRE13); a $1-billion issue by Wells Fargo, RBS, Liberty Island, Basis Real Estate Capital, National Cooperative Bank, UBS and C-III Commercial Mortgage (WFRBS 2013-C18); and a $1.1-billion transaction by JPMorgan, Barclays, GE Capital, Redwood Trust and RAIT Financial (JPMBB 2013-C17).

The Wells-RBS transaction has arguably the best underwriting characteristics and high collateral quality. The loan pool consists of 67 loans secured by 73 properties with a weighted average loan-to-value (LTV) of 54.4% and a weighted average Net Cash Flow Debt Service Coverage (NCF DSCR) of 2.48x. The loan pool NCF Debt Yield is 13.8%.

The Deutsche Bank-Cantor deal also provides good loan metrics. The loan pool consists of 53 loans secured by 73 properties with a weighted average LTV of 60.8% and a weighted average NCF DSCR of 2.10x. The loan pool NCF Debt Yield is 12.7%.

"We look for NCF DSCR of more than 2.0x and NCF Debt Yield of more than 12.0% when sourcing CMBS for our portfolio," noted Jim Brett, head of CMBS analytics at ValueXpress. "Both of these deals hit the mark."

The JPMorgan deal was more aggressively underwritten than the Wells-RBS and Deutsche Bank-Cantor deals. The JPMorgan pool consists of 64 loans secured by 72 properties with a weighted average LTV of 66.3% and a weighted average NCF DSCR of 1.49x. The loan pool NCF Debt Yield is 10.3%.

The Deutsche Bank-Cantor deal priced the deal's long-term, super-senior bonds on Friday with a spread of 93 basis points (bp) over swaps, in line with recent offerings. The RBS-Wells and JPMorgan bonds were being marketed at the same levels; market participants were finding very strong demand for the RBS-Wells deal.

12.10.13: CMBS Conduit Shops Offering Tight Spreads for Low Leverage Deals

Multiple CMBS conduit loan originators have recently announced lower spreads for low leverage transactions on higher balance loan amounts, generally greater than $10 million. A typical announcement we just received from one of our partners:

As an additional programmatic expansion to our lending platform of fixed and floating rate CMBS loans, we are actively originating low leverage (approximately 50% LTV) fixed-rate non-recourse conduit loans on quality real estate (retail, office, multifamily, industrial) in the following interest rate ranges:

5-year fixed rate loans: 3.50%,
7-year fixed rate loans: 4.00%, and
10-year fixed rate loans: 4.50%

As a valued partner, I look forward to providing custom-tailored financing solutions for ValueXpress clients from any of our product offerings including our attractively priced low leverage loan program.

"An additional benefit for ValueXpress clients is since we have completed over $100 million in CMBS conduit loans with this investor, it has agreed to provide this special pricing on low leverage loan as small as $5 million," said Michael D. Sneden, Executive Vice President at ValueXpress LLC. "Since our average loan size is $7-$8 million, this is an added bonus for our clients."

12.6.13: Fiscal 2014 SBA Loan Volume Struggles to Gain Traction

This week SBA published its regular "Lending Statistics for Major Programs" as of December 6. This report provides rolling performance statistics periodically for the 7(a) and 504/CDC loan programs, broken down by the respective categories of minority participation and policy-targeted penetration.

Overall, the 7(a) program continues a sluggish start into fiscal 2014, which began on October 1, 2013 with year-to-date total volume of $2.58 billion, down 11% from the same period a year ago (as of December 6, 2012). A slower start into fiscal 2014 was expected due to the federal government shutdown that lasted 17 days in October.

The number of 7(a) loan increased to 7,162 through December 6, 2013, nearly 9% fewer that the fiscal year-to-date 2013 figure and lagging about 2.6% behind the same period in fiscal 2012. Another metric tracked by many pundits is the average 7(a) loan size, which is currently $359,848, down a modest 2.2% year to date from fiscal 2013, but still 14% over fiscal 2012. Expect that number to grow as the year progresses.

Meanwhile, in SBA 504/CDC lending, the total volume of loans lagged at $680 million year to date through December 6, 2013, down 29% from fiscal year-to-date 2013 and almost 14% lower volume than the opening of fiscal year-to-date 2012 results.

The total number of 504/CDC loans decreased to 1,004 fiscal 2014 year to date (through December 6, 2013) after totaling 1,465 at this point in fiscal 2013. This level of loans marks a 31% decrease from 2013 and more than an 18% decrease from fiscal year-to-date 2012 lending.

11.29.13: CMBS Conduit Loans Work in Fannie “Pre-Review” Markets

CMBS conduit loans secured by multifamily properties compete directly with similar loans offered by Fannie Mae through 24 Delegated Underwriting and Servicing (DUS) lenders. Typically, DUS lenders are authorized to approve and close loans without Fannie Mae approval. Both loan products allow cash-out, are non-recourse, have long (10-year) fixed-rate loan terms and similar maximum LTVs (75% for cash-out, 80% for purchases).

But Fannie Mae has some competitive advantages. Fannie Mae rates are typically 0.25%-0.50% lower than CMBS conduit loan rates and transaction costs are lower. Therefore, in many markets, a Fannie Mae multifamily loan on a well-performing apartment complex with a financially strong and experienced sponsor is a better option than a CMBS conduit loan. However, Fannie Mae has determined certain markets as "a market with weak economic conditions deemed to present increased credit risk." Those are known as "Pre-Review" markets, where LTV is typically limited to 65% LTV and all loans must be approved by Fannie Mae. CMBS conduit loans do not have "Pre-Review" markets, and therefore, all markets are eligible for 75%-80% financing, thereby presenting an opportunity to originate CMBS conduit loans in those markets.

Current Fannie Mae “Pre-Review” Markets
Indiana Jacksonville MSA
Michigan Las Vegas MSA
North Dakota Lafayette, LA MSA
Ohio (except for Columbus MSA) Midland, TX MSA
Abilene, TX New Orleans MSA
Albuquerque, NM Phoenix MSA
Atlanta MSA Tyler, Victoria and Odessa MSA
Auburn, AL Tucson MSA
Bakersfield, CA Shreveport MSA
Houston MSA Fairfield, CA MSA


"Typically we will originate a Fannie Mae loan in non-Pre-Review markets for deals with no credit or performance issues, and CMBS conduit loans in Pre-Review markets," commented Michael D. Sneden, Executive Vice President at ValueXpress.

11.23.13: CMBS Volume Expected to Blow Away Estimates

An active pipeline of commercial MBS deals over the next several weeks will push annual issuance close to $90 billion, well above the $65-billion average prediction by a panel of CMBS professionals polled at the beginning of the year.

According to Commercial Mortgage Alert, 15 more transactions totaling $15 billion are scheduled to price by yearend. Added to the $72 billion of offerings already completed, full-year volume would climb to $87 billion, up 80% from 2012.

Although CMBS loan originators report strong loan demand, some headwinds are apparent moving into 2014. Rates have moved up since the summer, when Fed Chairman Ben Bernanke told Congress that the Central Bank's bond purchases may be reduced if the U.S. employment outlook shows sustained improvement. In June, Bernanke said the Fed could begin phasing out bond buying later this year and halt purchases around mid-2014 as long as the economy meets its forecast. As a result, rates moved up approximately 100 basis points, resulting in CMBS loan rates moving from the low 4% area to the low 5% area, slowing demand.

On the other hand, maturing CMBS loans will continue to be refinanced into new CMBS loans, and with Fannie Mae and Freddie Mac cutting back on originations, multifamily lending in CMBS may rise next year. In addition, the scare of higher rates next year will likely pressure some borrowers to refinance early next year to avoid the risk of higher rates later.

"We will start to see some CMBS volume estimates for next year in the upcoming weeks, likely in the $75-$100-billion range. I hope I am wrong, but I see 2014 at the lower end of the range," noted Michael D. Sneden, Executive Vice President at ValueXpress.

11.18.13: N.Y. Metro Community Bank Rates Competitive for Recourse Commercial Deals

Originators that focus on small balance CMBS loans (roughly $3-$20 million) in the N.Y. metropolitan area are having a tough time competing with community bank portfolio lenders on interest rates when the sponsor is indifferent to recourse. While CMBS conduit loan rates are currently in the low 5% area for 10-year fixed-rate terms and in the high 4% area for 5- and 7-year terms, N.Y. metro community banks are offering rates in the high 3% area for 5-year terms and low 4% rates for 7- and 10-year deals.  In addition, transaction costs for a community bank commercial loan are typically much lower than a CMBS conduit loan. However, nearly all community banks require personal recourse, so the lower rates are only effective when the sponsor is willing to personally guarantee the loan.

"I can get six quotes in a couple of hours for a 5-year loan on a commercial property in both New York and New Jersey at 3.75% fixed," commented Gary Unkel, senior loan originator for ValueXpress. "I even saw a 2.99% 3-year fixed-rate deal recently and a 5-year multifamily offer at 3.5%."

"When we get a deal with no cash-out and the sponsor does not require non-recourse, we rarely get that deal as the borrower usually accepts the better community bank deal over CMBS," commented Michael D. Sneden, Executive Vice President at ValueXpress. "But if the sponsor requires non-recourse and/or a significant cash-out, the community bank usually drops out, putting CMBS in the catbird seat."

11.15.13: Steve Lombardi Joins ValueXpress

Steve Lombardi, a 20-year veteran in commercial real estate lending, private equity and capital markets, joined ValueXpress effective November 15. Steve is primarily responsible for commercial loan originations focused on CMBS conduit loans in New England. Steve is based in Melrose, Massachusetts, just north of downtown Boston.

"Steve brings an outstanding breadth of experience to the ValueXpress team from his history in commercial property sales, development and site selection, where he assisted companies find and develop real estate assets. More recently, Steve was involved in private equity investment, identifying companies in growing industries requiring access to capital to make acquisitions or fund internal growth plans. “Many of these clients are family-owned and lack the expertise in structuring capital investment to grow their businesses, and Steve brought that expertise to the table," commented Michael D. Sneden, Executive Vice President at ValueXpress.

"I am very excited to be working with Mike, Jim and the rest of the ValueXpress team," said Steve. "ValueXpress has an excellent reputation in the market for service. My prior work with less-sophisticated real estate and business owners demands hand holding to achieve a good borrower experience. And ValueXpress is known for that kind of personal touch."

"I am particularly energized to originate CMBS conduit loans, given the resurgence of the product since 2010 and the ability to provide unrestricted cash out to owners of underleveraged properties or those in which the sponsor created value through leasing or rehabilitation," said Steve. "I will be hitting the Boston MSA to kick off, then work the balance of Massachusetts and the surrounding states."

Steve can be reached at slombardi@valuexpress.com or at 888-805-1390.

11.11.13: What's Hot in CMBS Conduit Loan Origination

"As I look back on the CMBS conduit loans we closed in 2012 and 2013 to date a clear pattern has emerged on what motivates small balance sponsors (loans in the $3-million to $20-million range) to close CMBS conduit loans as opposed to competing commercial loan products," commented Jim Brett, head of underwriting at ValueXpress. "The overwhelming motivation has been the ability for sponsors to extract large cash-out loan proceeds from refinancing into a CMBS conduit loan."

Looking at the data, of the $350 million in loans closed by ValueXpress, all but one was a refinance! From the set of refinanced loans by dollar amount, 80% provided cash-out proceeds to the sponsor in amounts ranging from $250,000 to $7.5 million. Of the remaining 20% of the loans, the primary driver for a CMBS conduit loan execution was some level of sponsor (but not property) distress. Approximately $50 million of loans refinanced borrowing entities out of a defensive bankruptcy. Typically, the prior lender had failed, and the note was sold to an investor that immediately called a non-monetary default and moved to foreclose. The borrower then filed for bankruptcy to protect ownership of the asset. The CMBS conduit loan refinanced the property out of bankruptcy.

"Our data suggest that intermediaries who want to successfully originate CMBS conduit loans in volume need to focus on the refinancing of low-leverage, income-producing commercial real estate in which the sponsor has identified a need to extract cash from the asset, typically for another investment," notes Michael D. Sneden, Executive Vice President at ValueXpress. "These transactions are successful because our primary competitors in the small balance market -- community banks -- hate cash out and the cash-out proceeds help mask the higher costs to close a CMBS conduit loan and the negative perception of the prepayment burden as well.”

11.6.13: CMBS Prices See-Saw

The CMBS market is having trouble finding direction subsequent to the pricing of the CMBS offering from RBS and Wells Fargo on Monday, November 4 in which the benchmark super-senior class of the offering was priced at a spread of 93 basis points (bp) over swaps (down from 105 bp on the previous Cantor Fitzgerald issue from late September).

Two additional CMBS transactions priced on Friday, November 8: a $1.13-billion deal from J.P. Morgan and a $1.08-billion deal from Goldman Sachs. For the Morgan deal the benchmark super-senior class priced at 96 bp over swaps, a little softer than the RBS/Wells issue, but still significantly tighter than the 105 bp from the Cantor deal.

The Goldman deal did not fare well. The benchmark super-senior class priced at 108 bp over swaps, far worse than prior deals, including the Cantor deal. There was no consensus among traders why the Goldman deal fared worse, but given both deals priced the same day, it is likely that collateral or loan underwriting metrics accounted for the difference.

"It is interesting to note that pieces of the Miracle Mall Shops in Las Vegas have shown up in the Cantor deal and the Goldman deal, both of which priced wider than other deals that priced around the same time," said Jim Brett, head of CMBS analytics at ValueXpress. "We thought that loan was aggressively underwritten and we have not bought any bonds from issues that contain the split pieces of that loan."

In any event, the inconsistency in new issue CMBS pricing is making it harder for loan originators to set pricing on new loan applications. But the good news for borrowers is that, for now, most CMBS origination shops are leaving pricing unchanged as competition is fierce and many firms believe spread increases will cause them to lose business.

11.1.13: Mike Sneden to Present at Commercial Capital Training Group

Michael D. Sneden, Executive Vice President at ValueXpress, will be presenting CMBS conduit loan origination techniques to the November 2013 class of the Commercial Capital Training Group (CCTG) in Albany, N.Y. on Wednesday, November 20. CCTG is a one-of-a-kind training company that provides a one-week, comprehensive commercial training and education program tailored for new and experienced commercial loan and mortgage brokers. Sneden will be sharing with participants his selling skills, which he has honed from originating $1.5 billion of CMBS conduit loans over a 20-year span. Sneden will be instructing future classes monthly for the foreseeable future, continuing the legacy of Kevin Monahan, who presented at the school on behalf of ValueXpress until his death from cancer in early October.

“I want the CCTG professionals to learn the CMBS conduit loan product, its benefits, its structure and how to sell the product to their clients,” said Sneden. “Then, I want them to lean on ValueXpress to produce positive underwriting and closing experiences that clients will share with other owners to drive more business to CCTG grads, earning them substantial fees in the process.”

“I am responsible for underwriting and closing CMBS conduit loans at ValueXpress,” notes Jim Brett, head of underwriting. “Ongoing, Mike and I will help CCTG grads with qualifying transactions, loan sizing, sponsor education on CMBS loan structure, property/sponsor underwriting and loan closing.”

For more information on Commercial Capital Training Group and how to enroll in the training program, please visit http://www.commercialcapitaltraining.com.

10.30.13: CMBS Conduit Loan Rates Fall

New CMBS loan applications should see a 15-basis-point (bp) decrease in spread based on the results of the most recent CMBS offering from RBS and Wells Fargo that is expected to price on Friday, November 1. The benchmark super-senior class of the offering was being marketed at a spread of 95 bp over swaps. That is down from 105 bp on the equivalent long-term, super-senior tranche of the previous conduit issue, a $1.2-billion transaction that priced on October 24 (COMM 2013-CCRE12). Dealers were reporting strong demand across all of the deal classes.

“We like the asset quality and underwriting characteristics of the RBS-Wells issue and own bonds from four prior RBS-Wells deals,” commented Jim Brett, head of CMBS analytics at ValueXpress. “The RBS-Wells offerings typically have high-quality assets and above-average pool debt yield, which is attractive.”

New CMBS conduit loan spreads should fall about 15 bp in the next few days into a range of 225-250 bp for commercial properties and 250-275 bp for hospitality. A general rule is that borrower spreads move bp for bp with changes in the benchmark super-senior spread from the most recent CMBS issue; however, loan spreads are falling disproportionately to the most recent benchmark super-senior class as CMBS loan originators are cutting their profit margins to compete for additional volume in a slower market.

With the 10-year Swap Index used to set CMBS loan rates at 2.65%, expect to see CMBS conduit loan rates to borrowers for larger commercial properties fall to the 5% area.

10.23.13: ValueXpress Enters New Relationship to Originate SBA 504 Loans on Hotels

ValueXpress recently entered a relationship with a private equity fund to originate SBA 504 loans utilized for the purchase of owner-occupied real estate properties. The investor will pool the 504 first liens and issue securities in the capital markets backed by the loans. ValueXpress will primarily use the program as an alternative to its existing national co-origination platform with a West Coast lender as that relationship will not accept hotels, prefers small balance loans and has very strict underwriting criteria. In addition, the new relationship is aggressive on larger SBA 504 transactions (more than $3.0 million) and has less-rigorous underwriting criteria.

“We have been very active in hospitality lending, but less so recently in the SBA 504 program because our national co-originator left the hotel market in 2009 based on regulatory pressures, and we were unable to find a suitable alternative,” said Michael D. Sneden, Executive Vice President at ValueXpress. “This new national hotel platform will allow us to get back in the market for SBA 504 hospitality loans and larger SBA 504 loans for other owner-occupied properties.”

10.18.13: Kevin Monahan, 1960-2013

On Friday, October 11th, we lost a dear friend and colleague, Kevin Monahan, to pancreatic cancer. I met Kevin in 2005 when he worked at Business Loan Express (BLX) as a Business Development Officer (BDO). We worked together on a construction loan for a Country Inn & Suites hotel in Ithaca, N.Y. for one of my clients. The transaction was very difficult, but Kevin persevered and got the loan approved. Today the hotel is one of the best performing in the Country Inn franchise system.

Kevin was passionate about his work and loved the hospitality industry.  Kevin taught me everything I know about SBA 7(a) lending. He was always willing to share his knowledge with me.

I remember one call from Kevin who was beaming with news, “Mike, I have been named BDO of the year at BLX.” I was not surprised, as his work ethic, patience with borrowers/referral sources and his production levels all pointed to him being a top performer. The recognition was well deserved.

In the spring of 2009, we received word that a tumor had been discovered in Kevin’s pancreas. We were able to follow his journey through a blog written by his wife Phuong (http://mohny.blogspot.com). After his tumor was surgically removed, Kevin began intensive medical treatments that were very fatiguing. In 2010, Kevin asked if he could refer some loan transactions to us. By doing so, it would allow Kevin and ValueXpress to interact, stimulating his mind and distracting himself from his illness. We at ValueXpress agreed wholeheartedly.

Kevin had a passion for sharing his knowledge of commercial lending with others, and he became an instructor at Commercial Capital Training Group, teaching budding mortgage brokers the ins and outs of mortgage origination once a month in Albany, N.Y. Watch a clip of Kevin in action here.

At Kevin’s memorial service, I learned that despite his incredible work ethic, his wife and his three wonderful kids came first with him. There was a slide show at his memorial, and in every picture he had his arms around his wife or kids, always in a hug, which said it all.

Kevin, may you rest in peace.
- Mike Sneden

10.14.13: Spreads and Rates Stable After Morgan Stanley Prices CMBS Issue

On October 10, Morgan Stanley and Bank of America (BoA) priced a $1.3-billion CMBS issue that allowed CMBS loan originators to breathe a sigh of relief as the transaction’s spreads were more in line with those of three multi-borrower CMBS offerings that priced last month compared with those of a deal that Cantor Fitzgerald and Deutsche Bank priced the prior week. The result supported the view that the unexpectedly wide spreads on the Cantor-Deutsche issue weren’t reflective of the broader market.

In fact, some subordinate investment-grade classes in the Morgan Stanley-BoA transaction even priced 10-25 basis points (bp) tighter than comparable bonds in the three September deals. And the spreads were as much as 45 bp tighter than on comparable classes in the Cantor-Deutsche deal.

“We looked at buying some of the Class AM and Class B CMBS from the Cantor-Deutsche deal, but we were surprised by the aggressive underwriting of the top two loans, representing 20% of the issue, both of which were underwritten to the bare minimum Net Cash Flow (NCF) DSCR of 1.25x,” said Michael D. Sneden, Executive Vice President at ValueXpress. “Typically, the top loans are underwritten in the 1.50-1.75x NCF DSCR range, providing assurance that the top loans have plenty of cash flow cushion to absorb any temporary cash flow declines, but not in this case. In addition, the third-largest loan, representing 7% of the issue, is secured by a hotel in Mexico, and that was enough for us to easily pass on the deal,” said Sneden.

“In contrast, in the Morgan Stanley-BoA CMBS issue, the top five loans were underwritten with an average NCF DSCR of more than 1.50x, more typical of recent CMBS transactions,” said Jim Brett, head of CMBS analytics at ValueXpress.

As a result of the better Morgan Stanley-BoA execution, loan spreads to borrowers remained stable in the Swaps plus 250-290 range for a 10-year loan depending on asset type and leverage. With the 10-year Swap in the 280 bp area, interest rates to borrowers remain in the 5.25%-5.75% range.

10.9.13: ValueXpress Enters New Relationship for Small Balance CMBS Loans

ValueXpress recently cemented a relationship with a CMBS lender to originate CMBS loans as small as $2 million. The program features the typical terms of larger CMBS loans and is eligible for all the asset classes covered by larger loans, including multifamily, office, retail, industrial, self-storage and hospitality. In addition, transaction fees are lower than on larger loans, but not quite at the $12,000-$15,000 level that was prevalent in the CMBS conduit loan market prior to the CMBS market collapse in 2008.

“We have been very active in CMBS loans of more than $3 million, but this new lower threshold will allow an additional segment of the market to access CMBS conduit loans,” said Michael D. Sneden, Executive Vice President at ValueXpress. “We had a former partner that allowed CMBS conduit loans to $1 million, but the underwriting standards were tougher than $5-million CMBS conduit loans, so volume was low. This relationship should prove to be much more effective,” said Sneden.

“We are also working with another potential partner on a small-balance securitized loan product that will allow for relaxed prepayment penalties and less structure than CMBS loans, in exchange for a higher interest rate,” said Jim Brett, head of loan underwriting at ValueXpress. “We hope to report more details on this program in the near future.”

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10.4.13: SBA Sidelined by Government Shutdown

It’s October 1 and through failure of Congress to enact a fiscal budget or a continuing resolution to authorize federal spending, all parts of the federal government not deemed “essential” halted operations effective midnight last night.

According to Bloomberg BusinessWeek’s account regarding the first federal government shutdown in 17 years, about 800,000 government workers are being furloughed. In addition, funding is suspended for a wide array of services, including contracts that government agencies award to small business owners.

This means that financing for small businesses will be significantly impaired. The Small Business Administration (SBA), which guarantees tens of billions in loans for tens of thousands of entrepreneurs annually, has furloughed about 62% of its 3,500 workers, according to its response to the threatened shutdown posted on the SBA website last week.

SBA lenders have been here before, but this situation is not nearly as disruptive as the annual 7(a) subsidy fights that Congress went through prior to 2004, which shut down the entire loan program three times in 1995 alone.

“The SBA shutdown is definitely a bummer for us as we have a $5-million SBA 7(a) loan closing in process with our affiliate, Country Bank and we are not sure if we can close the loan because we need the SBA to sign off on the Environmental Site Assessment (ESA) for the project,” commented Jim Brett, the ValueXpress underwriter on the project.

10.1.13: U.S. CMBS Delinquency Report: Rate Declines Sharply in September, Continuing Year-Long Trend

According to Trepp, the CMBS delinquency rate continued its impressive decline in September, marking the fourth consecutive month the rate has fallen. In doing so, the commercial real estate markets shrugged off worries about Syria, the debt ceiling, and the potential impact of tapering bond purchases by the Federal Reserve.

The rate dropped 24 basis points (bp) over the course of the month, bringing the delinquency rate for U.S. commercial real estate loans in CMBS to 8.14%. The Trepp delinquency rate has now fallen 220 bp since the summer of 2012 when the rate peaked at 10.34%. The September rate is the lowest reading since July 2010.

There were about $1.7 billion in newly delinquent loans in September, a sharp reduction from the $2.5 billion in August. These loans put upward pressure of 31 bp on the delinquency rate. Offsetting these new delinquencies were $1.9 billion of loans that cured. This put 35 bp of downward pressure on the delinquent loan reading.

In addition, loan resolutions totaled just under $873 million in September. This represents one of the lowest monthly levels of resolved loans in recent months. Removing these distressed loans from the pool of delinquent assets created 16 bp of downward pressure on the delinquency number last month.

One aspect of the market that merits surveillance over the next few months is the situation with J.C. Penney. The stock's deep decline, along with worries that store closings may be on the horizon, could weigh on the CMBS and CRE markets in the near term.

9.24.13: SBA Releases SOP 50 10 5(F) Lending Guidelines

On September 24, SBA released SOP 50 10 5(F) to the SBA lending community. This SOP (Standard Operating Procedure), effective on January 1, 2014, contains several significant changes to SBA’s requirements in connection with its loan programs. Many of the revisions reflect a continuation of SBA’s stated goals to streamline, standardize and simplify its loan program requirements and alter many long-standing program requirements. A brief summary of the more significant changes follows:

9.20.13: CMBS Spreads Tighten Slightly as Swap Rate Falls

Spreads on new CMBS issues narrowed only slightly as financial markets rallied in response to the Federal Reserve’s surprise announcement that it would keep its massive bond-buying program running full-tilt. However, CMBS conduit loan borrowers still caught a break as the 10-year Swap Index used to set CMBS loan rates fell to 2.89% from 3.04% on Thursday.

New CMBS loan applications should see a 5-basis-point (bp) decrease in spread based on the results of five CMBS offerings during the week of September 16 totaling $3.8 billion. The most recent deal, a $1.1-billion offering by Ladder Capital, Deutsche Bank and Natixis, is expected to price on Monday. Its long-term, super-senior bonds were being marketed with a projected spread of 103 bp over swaps. Equivalent benchmark bonds in a $1.1-billion offering led by Citigroup and Goldman Sachs priced at the same level on Wednesday, just before the Fed announcement. Comparable bonds in a $1-billion deal led by Wells Fargo and RBS priced Monday at 105 bp. That matched the previous conduit issue, which priced August 14 (GSMS 2013-GCJ14).

Investors generally cheered the Fed’s decision to postpone any tapering of its long-running effort to hold down interest rates by scooping up $85 billion per month of Treasury and mortgage-backed bonds. Yet there was little movement in new-issue spreads. That’s partly due to lingering buy-side concerns about taking on long-term risk, since the Fed might still change course by yearend, possibly causing interest rates to rise.

“On one hand, I am glad the market was able to absorb all the new supply and spreads narrowed a bit, good news for new CMBS loan origination,” said Michael D. Sneden, Executive Vice President of ValueXpress. “But on the other hand, we received only $4.2-million from a $5.0-million CMBS order for bonds from the RBS deal as the AS Class that we purchased was 1.25x oversubscribed.”

9.17.13: For Hotels, Is the Party Over?

Two pervasive messages of the Lodging Conference held at the Arizona Biltmore on Tuesday were more qualitative than quantitative, despite the general mindset of commercial real estate investors to focus on numbers.

The key takeaways? The hotel sector’s good times may soon be over -- though that suggestion was, of course, challenged by those who remain cautiously optimistic:

“This year we surpassed the previous peak for hotel values, which was reached in 2006,” said Stephen Rushmore, Jr., president and chief executive officer (CEO) of HVS. “Expect continued growth, in the double digits (on a percentage basis) through 2016, and then proceed with caution.”

Added Mike Patel, principal, NewcrestImage and 2013 chairman of Asian American Hotel Owners’ Association, “The upside potential for hotels is strong, putting pressure on cap rates to go down even as interest rates go up.”

Others in the industry suggest more of a ‘don’t worry, be happy’ outlook. They said, “When things are good, there’s always a trend for people to say ‘things are going to get worse.’ We think it’s our job to predict the next bad time, but none of us are that smart, so just enjoy it.”

Asserted Bernard Siegel, principal, KSL Capital Partners, “The pace of growth won’t be as strong as the last five years, but real rate growth has yet to occur, so there could be some tailwinds.”

Noted David Kong, president and CEO, Best Western International, “Supply is growing at a healthy pace and outstripping demand. I think we have reached our peak, so we need to be cautious and have plans for what’s to come. The strategy has to be growing market share.”

9.10.13: Decline of Enclosed Mall Appears Permanent

The demise of many big-box and department-store retailers has led to a decline in large enclosed malls that won’t reverse itself any time soon -- if ever – according to panelists of the International Council of Shopping Center’s (ICSC) Western Division Conference in San Diego, CA yesterday. Speakers opined that the days of the department store-anchored mall are gone, but many retail models are emerging to replace it.

One of those trends is outlet centers, according to Speaker Michael Marino, executive vice president and division manager for Wells Fargo Bank; he said his firm has financed two or three, even during recent difficult financial times. Another trend is Hispanic grocery-anchored local centers; Mark Schurgin, president of the Festival Cos., said his firm is currently developing eight. And speaking of grocery stores, trends in this area abound, from Internet-ordered groceries via Amazon.com, according to Terry Evans, vice president of the Kroger Co., to retailers like Target adding grocery aisles to their floor plans.

“The Internet use of grocery is one of the biggest trends we’re seeing,” said Evans. “It’s a trend we’re studying and continuing to look at.” The trend is a concern to grocery retailers like Kroger, who don’t want to see their market share eaten up by former non-grocery retailers.

Also growing is the size and number of grocery stores, according to Evans. Kroger’s stores now range from 75,000 square feet to 125,000 square feet, and Evans expects to add 150-175 new major projects over the next three years. He also said that consolidation is not over in the grocery business, and we will hear about other deals taking place over the next couple of years.

9.6.13: 10-Year Swap Rate (Swap) Index Breaks 3%; Treasury Not Far Behind

Although 10-year Swaps and Treasury rates fell Friday after a softer-than-expected U.S. jobs report quelled market expectations that the Federal Reserve will imminently roll back its monetary stimulus, the Swap Index used to set CMBS loan rates broke the 3% mark on August 19; it has traded in a range of 2.95%-3.15% since, hitting the top of that range on September 5. The 10-year Treasury closed at 2.98% on that day, two ticks from 3%.

The unrelenting rise in loan rates is depressing CMBS borrowers as CMBS loan spreads are not declining in tandem with the increase in the Swap Index, leading to higher-than-expected rates on loans under application. Furthermore, borrowers considering a CMBS refinance to secure an attractive long-term fixed rate are backing away now that rates are in the 5.5-6.0% range. On purchase transactions, borrowers are recognizing that purchase cap rates no longer make sense with debt costs up 100 basis points and they are going back to sellers to renegotiate contract prices, delaying deals.

“We are still active in CMBS refinancings in which there is a large cash equity return to the borrower that helps absorb the higher rate, opportunistic refinances (i.e., discounted payoffs, or pay offs of debt acquired by a third party) and loans refinanced at maturity,” commented Michael D. Sneden, Executive Vice President of ValueXpress, “but the discretionary borrower looking for a rock-bottom rate is gone. That borrower is often opting for a community bank loan; those institutions are slow to adjust their loan rates to current market conditions, providing banks a current competitive advantage over CMBS in terms of rate.”

9.3.13: Time to Get Creative with Earnouts

ValueXpress recently originated two CMBS loans on unstabilized properties in which the sponsors would not have received adequate loan proceeds based on the property’s limited historical operating statements. Working with a long-time CMBS lending partner with an aggressive entrepreneurial focus (yes, some of the CMBS shops are very creative), the transactions were structured with earnouts, whereby the entire amount of desired proceeds were rate-locked and funded at closing, but a portion of the funds above a pre-determined Debt Yield were placed in escrow. The sponsor, over a pre-determined period (6 months on one deal and 12 months on the second deal), submitted updated trailing 12-month cash flow statements monthly that would include a current, high performing month of cash flow and drop off a worse performing month from the prior year; the result was higher underwritten Net Cash Flow and higher loan proceeds at the pre-determined Debt Yield. After a number of months, the Net Cash Flow reached levels such that the entire earnout was released to the borrower as the Net Cash Flow on a trailing 12-month basis supported the entire loan amount, including the earnout at the predetermined Debt Yield.

“These transactions would have never closed in the absence of the earnout structure,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “In the end, one deal hit its Debt Yield target in three months and the second transaction is expected to hit its target in six.”

8.29.13: Off Track: Subway Franchisees Decry Deep Discounts

“Since we have provided numerous SBA loans to Subway sandwich shop owners and as a subscriber to the $5.00 foot-long bargain myself, I found this New York Post article written by Josh Kosman intriguing and thought I would share parts of it with our readers,” commented Michael D. Sneden, Executive Vice President of ValueXpress.

This summer wasn’t the best time for Subway sandwich shops — the world’s largest restaurant chain — to stumble. Founder and Owner Fred DeLuca, the driving force and vision behind the Milford, CT, chain’s growth into a 40,000-unit chain, is in a Connecticut hospital being treated for leukemia, and he has told associates he is awaiting a bone marrow transplant. The hands-on owner is still in daily contact with regional managers trying to find new ways to reverse a sales decline, a Subway development agent told The Post.

Same-store sales at the closely held company dipped 2% last month and are down over the last several months, the first declines in recent memory, sources close to the company tell The Post. In June DeLuca launched a $4 lunch special — a six-inch sub, beverage and chips — and plans the re-introduction next month of the company’s popular $5 foot-long campaign. But the plans are not going down well with many of the company’s franchisees. At that price, franchisees complain, they just barely cover their costs.

“There are not any Subway owners who like it,” a franchisee who owns three stores told The Post. “Everybody is pissed off.” Margins at a typical store, where revenues are about $400,000 a year, are now between 8% and 10% because of the price cuts, the franchisee said. Just a few years ago, margins were 12%, according to the franchisee.

8.23.13: Changes Around the Corner for Environmental Site Assessments

Nearly all CMBS lenders obtain a Phase I Environmental Site Assessment report as part of the property diligence process. EMG, an industry leader in delivering Phase I Environmental Assessments and a member of the ASTM E50 Committee, reports that the committee is currently finalizing changes to the E1527 "Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process," with an expected release date this fall.

EMG anticipates three key changes.

1. Key Definitions:
* The definitions of Recognized and Historic Recognized Environmental Conditions (REC and HREC, respectively) will be simplified.
* A new definition of "Controlled Recognized Environmental Conditions" (CREC) will be introduced to identify RECs that have been conditionally closed.

2. File Reviews:
* Where applicable, Environmental Professionals will have a duty to consider the significance of available regulatory agency files and provide a rationale if these files are not reviewed. This could result in slightly more File Review recommendations and yield a greater degree of certainty in conclusions.

3. Vapor Encroachment:
* Though Vapor Encroachment and Vapor Intrusion studies will not be required by the standard, Environmental Professionals will be required to consider soil vapor as a potential pathway for the migration of contaminants.

8.19.13: In Bustling Houston, It's a Case of “Build, Baby, Build!”

HOUSTON/NEW YORK (Reuters): With Texas one of the few bright spots in the U.S. economy, the skyline of swaggering Houston is where the action is as builders and global oil companies, from Phillips 66 to Exxon Mobil Corp, look past previous busts and spend billions on gleaming new buildings.

The U.S. shale oil and gas revolution -- which has already changed industries from railroads to pipelines and refineries -- is helping drive the voracious appetite for office space needed for the expanding work force in the world's energy capital.

Demand is so hot that Houston is one of the few places where banks -- including Wells Fargo & Co., which is seen as one of the more conservative big banks -- will loan money for a new building without demanding developers first have a tenant.

"Houston is booming and bar none the strongest market in the United States of America," said Joseph Sitt, chief executive of Thor Equities, which has two projects under way in Houston.

There are some 56 office buildings totaling at least 11 million square feet under construction in and around Houston, according to real estate services firm CBRE Group Inc. That space is equivalent to 190 football fields.

In the forested suburbs, Exxon has what it calls "one of the largest commercial construction projects under way in North America." The nearly 400-acre campus with 20 buildings will have enough room for 10,000 employees.

8.14.13: SBA Compliance Review -- Critical Issues

Lenders need to monitor some missteps that could mean a possible impairment to the SBA guaranty and should be taken seriously when making, closing, and servicing an SBA loan portfolio should the lender be audited by the SBA.

Examples of critical issues that are common in a loan review are as follows:

1. Form 1050 and disbursement documentation:
SBA requires that the lender disburse the loan proceeds in accordance with the uses of proceeds stated in the Loan Authorization. In order for a lender to demonstrate its adherence to this requirement, it must control disbursement by use of joint payee checks or other means of limiting payment, and it must document its files to show that the loan funds were used for the intended purposes (e.g., pay a vendor directly from loan proceeds based on an invoice in file showing the purchase of an item authorized for payment under the Loan Authorization). Lenders must document each disbursement on an SBA loan. The lender and borrower must complete and sign Form 1050 at the time of first disbursement. If there are subsequent disbursements, the lender must document each disbursement and attach the documentation to the original Form 1050.

2. Equity:
Inadequate equity documentation effectively compromises the full viability of the guaranty. This is a significant issue when the loan becomes an early default. SBA has provided better guidance on how to properly document a loan file for the borrower's equity contribution; it now defines the process in three areas (equity evidence, equity source, and equity use). It is important to document the equity exactly as it is depicted in the SBA loan authorization.

3. Verification of financial information:
SBA requires that lenders obtain and review IRS tax transcripts to verify borrowers' financial information. Also, when loan proceeds will be used to purchase an existing business and prior income is being used to support the selling price, the lender must verify the sellers' financial information by obtaining IRS tax transcripts. The lender should document that any issues found in the verification process should be explained and resolved before loan disbursement. If the issues are not resolved, the lender should not disburse until SBA approval has been provided.

8.9.13: Market Swallows Flood of CMBS Issues at Tighter Spreads

CMBS buyers returned to the market to gobble up the latest wave of multi-borrower offerings – four deals totaling more than $4 billion. Furthermore, prices generally tightened on each issuance. Now, new-issue prices on benchmark paper from commercial MBS offerings have retraced almost half of their recent decline.

This week, the long-term, super-senior bonds from a fifth offering, a $1.24-billion offering by Goldman Sachs, Jeffries, Five Mile Capital, Citigroup and Starwood (GSMS 2013-GCJ14), is being shopped at 98-100 basis points (bp) over swaps, slightly tighter than the comparable bonds from a $1-billion offering by Cantor Fitzgerald, Deutsche Bank, KeyBank and UBS (COMM 2013-CCRE10) that priced August 1 at 100 bp over swaps, the tightest spread seen since early June. Those benchmark bonds had been shopped with price guidance of 105-110 bp. Equivalent paper from the previous two conduit issues priced July 17 at 115 bp (GSMS 2013-GC13) and 120 bp (WFCM 2013-LC12).

Also on August 1, the benchmark bonds in an $856.3-million offering by Bank of America, Morgan Stanley and CIBC (MSBAM 2013-C11) priced at 105 bp, which was 5 bp tighter than talk.

Further down the capital stack, Class B CMBS tightened in tandem with the long-term, super-senior bonds, as the Class Bs from the Goldman deal are being shopped at 175 bp, down from 215 bp on the Wells Fargo deal and 190 bp on the most recent Cantor deal.

“Based on the results of CMBS spread tightening, we are seeing spreads to borrowers tighten another 10-15 bp to the 235 bp area for commercial assets and 260 bp area for hotels," commented Michael D. Sneden, Executive Vice President at ValueXpress. "With the 10-year Swap Rate (Swap) Index hovering around 2.80%, all-in rates to borrowers are falling toward the 5% area right now."

8.7.13: Blackstone Is Expected to Sell Hilton in IPO

As private equity firms rush to cash in on their investments, the Blackstone Group is moving to sell one of the biggest companies to go private in recent years. Hilton Worldwide, the hotel giant that Blackstone bought six years ago, has begun preparations for an initial public offering (IPO), people briefed on the matter said on Wednesday. That includes hiring four banks – Deutsche Bank, Goldman Sachs, Bank of America Merrill Lynch and Morgan Stanley – to start the process. An offering for Hilton, whose more than 4,000 properties are as diverse as Hampton Hotels and the Waldorf-Astoria in Midtown Manhattan, would probably be in the first half of next year, one of these people said.

Private equity firms have been eager to sell their companies, either outright or through an IPO, to take advantage of booming stock markets and generate realized profits for themselves and their limited partners.

Blackstone, the world’s largest buyout firm, also is working on an IPO for its La Quinta hotel chain, a person with knowledge of the matter said earlier this week. Blackstone hired JPMorgan Chase & Co. and Morgan Stanley to explore a sale or IPO of La Quinta, the person said.

7.30.13: SBA Chief Karen Mills Leaving with No Replacement Named

When Karen Mills announced in February that she would not stay on for a second term as head of the U.S. Small Business Administration (SBA), she still planned to remain in her post until the government agency named a replacement. But those plans apparently changed as Mills told the SBA staff on a conference call Wednesday that she will be leaving her post at the end of August.

In September 2010, the SBA selected ten economic "clusters" as part of a pilot program to aid regional businesses. Each cluster is a collaboration of businesses, non-profits and academic institutions to advance a specific sector, ranging from nuclear energy to agriculture. The idea, according to SBA Chief Mills, is to support small business participation in regional clusters, "which are enhancing the ability to create jobs locally and compete on a national and global scale."

Mills will continue work on economic issues surrounding entrepreneurship at both Harvard Business School and Harvard’s Kennedy School starting this fall, according to a statement from Emily Cain, press secretary for the SBA. In addition, Mills will “pursue business opportunities,” Cain says. Specifics were not provided.

7.26.13: Small Balance, Higher Leverage CMBS Loans Available

Higher leverage CMBS conduit loans are now available for small balance (greater than $5 million) transactions utilizing a first mortgage and mezzanine loan combination that is seamless to the borrower. Leverage can be up to 75% for hospitality properties and 80% for commercial/multifamily properties.

"Historically first mortgage and mezzanine loan combinations in CMBS were only available on loans of $20 million and up, and the conduit lender needed to team with a mezzanine lender, creating an inefficient and costly execution," said Michael D. Sneden, Executive Vice President at ValueXpress. "This program allows for smaller balance transactions as low as $5 million, and the mezzanine portion of the loan is handled in-house. The borrower receives one blended interest rate and makes one payment. The underwriting process is efficient and less costly."

The loan product is available for all asset classes that qualify for standalone CMBS conduit first mortgage loans -- commercial, multifamily/MHC, self-storage and hospitality. There are caveats, however; no cash-out (and preferably some cash in), no credit issues with the sponsor, newer assets and strong markets are required.

"This product is exceptional for situations in which the existing loan balance on a maturing loan cannot be cleared through a 70%-75% standalone CMBS conduit first mortgage loan," said Gary Unkel, Senior Originator at ValueXpress. "A client was 15% short on loan proceeds to clear a refinance of existing debt and was unwilling to fund all the shortfall. In the end, the borrower agreed to fund about 5% of the shortfall including closing costs, and the 10% additional leverage provided by the first mortgage and mezzanine loan combination covered the balance. Furthermore, the blended single rate was not that much higher than a standalone CMBS conduit first mortgage loan rate."

To obtain a quote for a CMBS conduit loan scenario requiring additional leverage, contact your ValueXpress representative.

7.24.13: CMBS Prices Rise Before Next Wave of Offerings

Commercial MBS values continued to slowly move upward during the week of July 22 as issuers began marketing or prepared to roll out four offerings totaling more than $2.5 billion, according to Commercial Mortgage Alert.

On Friday, Bank of America, Morgan Stanley and CIBC launched an $856-million multi-borrower offering, while an additional two deals close to being launched are also multi-borrower transactions. One is a $1.1-billion offering by RBS, Wells Fargo, National Cooperative Bank, Liberty Island, C-III Commercial Mortgage and Basis Real Estate Capital. The other, led by Deutsche Bank and UBS, is expected to be at least that large.

With the prevailing spread on long-term, super-senior bonds from the latest generation of conduit issues tightening by about 5 basis points (bp) over the past week in the secondary market, these levels will likely be reflected in price guidance on these new issues.

Yesterday, Wall Street dealers were willing to buy such bonds at a spread of roughly 105 bp over swaps and sell them at 100 bp. The bid-ask was about 110-105 bp a week ago, after comparable super-senior bonds from two recent conduit offerings priced July 17 with spreads of 115 bp (GSMS 2013-GC13) and 120 bp (WFCM 2013-LC12).

"Based on the results of CMBS spread tightening, we are seeing spreads to borrowers tighten 15-20 bp to the 250 bp area for commercial assets," commented Michael D. Sneden, Executive Vice President at ValueXpress. "The new spread levels are providing some relief to borrowers who were shocked at the rapid rate increases that occurred after Ben Bernanke spoke at a press conference on June 19. With the 10-year Swap Rate (Swap) Index hovering around 2.80%, all-in rates to borrowers are in the 5.30% area right now."

7.17.13: SBA 7(a) Premiums Recovering After Rough June

Secondary market premiums on the sale of SBA 7(a) loan guarantees are recovering from declines experienced in June after Ben Bernanke spoke at a June 19th press conference and fixed-income markets roiled in reaction based on perception that the Fed could begin phasing out bond buying later this year and halt purchases around mid-2014 as long as the economy meets its forecast. After premiums held at record levels of 118.75 since February 2013, pricing fell to 117.50 by the end of June. However, indications are pricing has recovered to the 118 level as of mid-July.  The market tone is improving along with other fixed-income products as now analysts believe markets overreacted to Bernanke's comments.

2013 Premium*
Jun 117.50
May 118.75
Apr 118.75
Mar 118.75
Feb 118.75
Jan 117.50
2012 Premium*
Dec 117.50
Nov 117.00
Oct 117.00
Sep 116.00
Aug 116.00
Jul 115.50
*Based on Prime + 2.75%, Quarterly Reset, 25-year loan term.

"We continue to pursue SBA 7(a) loans in the five-state footprint surrounding New York City for our affiliated bank, Country Bank," said Michael D. Sneden, Executive Vice President at ValueXpress. "We are working on a $5-million SBA 7(a) loan right now, and at 118, that would be a net profit of $525,000 on the $3,750,000 guarantee sale after the split with the government, a nice day's work! Plus Country Bank will receive $37,500 annually in servicing fees during the life of the loan."

7.12.13: CMBS Delinquency Plummets

In June, according to Trepp, the CMBS delinquency rate posted its lowest reading in almost three years. The 42-basis-point (bp) drop in the delinquency rate was the biggest one-month improvement since Trepp began publishing a monthly rate in fall 2009. Four of the five major property types saw their delinquency rates fall in June. The delinquency rate for U.S. commercial real estate loans in CMBS was 8.65% in June. This was the first time the rate has dropped below 9% since November 2010 and the lowest percentage since the October 2010 rate of 8.57%.

The resolution of distressed CMBS loans has been a major factor in driving the delinquency rate lower this year, as was the case in June. Loan resolutions totaled $1.25 billion in June, up sharply from May's about $858 million. The removal of these distressed loans from the delinquent assets bucket last month created 23 bp of downward pressure on the delinquency number. At the same time, about $1.25 billion in newly delinquent loans was recorded in June, approximately half of May’s total. This put upward pressure of 23 bp on the delinquency rate, negating June's high level of loan resolutions.

Despite the huge improvement in the delinquency rate, investors ended the month of June asking themselves if the latest salad days for the CMBS market are about to end. The huge wave of new CMBS issuance, refinancing of older loans, new property sales, and higher prices and velocity of selling distressed properties were driven by five-year lows in CMBS spreads and microscopic Treasury yields. Since May 1, however, the yield on the 10-year Treasury is almost 100 bp higher and CMBS AAA spreads 30-40 bp higher. This means significantly higher borrowing costs for property owners, a potential hindrance for many factors driving delinquencies lower.

7.9.13: Swap Rates and Loan Spreads Stabilize...for Now

After the 10-year Swap Rate (Swap) Index used to set CMBS conduit rates jumped from 2.37% to 2.60% on June 19 while Federal Reserve Chairman Bernanke spoke at a press conference and further spiked to 2.86% on Monday, June 24, the index has settled into a range of 2.80%-2.90%. Since the July 4th U.S. holiday, the index has traded within this band, and traders are seeing stabilization of the Swap at these levels. Federal Reserve Chairman Bernanke gave markets some respite this week when he signaled in the release of the June Fed meeting notes that his signature bond buying program could continue to mid-2014.

Similarly, CMBS traders are seeing stabilization of spreads from recent CMBS deals. For example, benchmark bonds from recent CMBS issues were changing hands in the secondary market at spreads of 120-125 basis points (bp) yesterday -- roughly the same as early last week, when the previous conduit issue priced. “The spreads are pretty similar. If anything, they’re 2-3 bp tighter now,” one trader said.

“The stabilization of the indexes that set borrower interest rates is resulting in consistency in new loan quotes to borrowers,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “We are seeing spreads to borrowers in the swaps-plus-275 range for a full-leverage small balance (< $10 million) conduit loan with a 10-year term, resulting in interest rates in the area of 5.5%.”

“We are recommending, however, that our clients negotiate lower interest-rate floor levels in their loan applications as market pros believe that Swap rate and/or CMBS prices will trend downward and a lower floor will allow borrowers to capture potentially lower rates,” said Sneden.

7.3.13: New SBA Change-of-Ownership Rules

On July 1, 2013, the Small Business Association (SBA) released a revision to SOP 50 10 5(E) that revised and clarified the SBA’s requirements for financing change-of-ownership transactions with SBA-guaranteed loans. Prior to this revision, the SBA had restricted SBA financing for change-of-ownership transactions that were structured as stock purchases where the stock (or ownership interest) of the selling shareholder(s) was being purchased by an individual or individuals. The new rules lift this restriction and greatly simplify the requirements governing change-of-ownership transactions for SBA lenders.

The new guidelines allow for a change of ownership to be achieved through an asset purchase, a stock purchase, or a stock redemption. The revised language of the SOP provides for two basic scenarios in which a change of ownership can occur: (1) a change of ownership between existing owners and (2) a change of ownership that results in a “new” owner.

A change of ownership between existing owners may be accomplished either through a stock purchase or a stock redemption. Whether structured as a purchase or redemption, the remaining owners must own 100% of the stock at the completion of the transaction. If structured as a purchase, the individuals acquiring the stock and the company whose stock is being acquired must be co-borrowers on the loan. If structured as a redemption, the business whose stock is being redeemed must be the borrower and the remaining owners may be either co-borrowers or guarantors.

A change of ownership resulting in a new owner may be structured as either a stock purchase or an asset purchase. If structured as a stock purchase, 100% of the stock may be purchased either by an entity or an individual who is not an existing owner of the business. If the purchaser of the stock is an individual, then the individual and the target must be co-borrowers on the loan. If the purchaser of the stock is an entity or if the transaction is structured as an asset purchase, then the business being acquired may be a co-borrower on the loan.

6.30.13: Bob Taylor Joins ValueXpress

Bob Taylor, a 15-year veteran in commercial real estate lending, has joined ValueXpress effective July 1. Bob will be primarily responsible for commercial loan originations in the western portion of the United States. Bob will be based in Salt Lake City, Utah.

“Bob brings an outstanding breadth of experience to the ValueXpress team from his stints at Johnson Capital, Greystone, Arbor Commercial Mortgage and Madison Capital,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “Bob produced primarily HUD 223f and 221d4 multifamily loans at these shops and is excited to broaden his menu to include Fannie/Freddie and CMBS multifamily loan products.” In addition, Bob will be originating CMBS conduit loans secured by commercial properties from his extensive contacts with developers, investors, commercial bankers and other intermediaries.

“I am very excited to be working with Mike and his team,” said Bob. “ValueXpress has an excellent reputation in the market for service. They get it done, but the firm is not as well known in the West. My job will be the get the word out and markedly increase the volume of originations west of the Mississippi.”

“I am particularly energized to originate CMBS conduit loans, given the resurgence of the product since 2010 and the ability to fund loans is all 50 states,” said Bob. “I will be hitting the primary markets in my region to kick off – Salt Lake, Denver, Albuquerque, Phoenix and Las Vegas.” Bob can be reached at btaylor@valuexpress.com or at 801-499-0213.

6.26.13: Prudential’s Lillard Says Buy CMBS as Bonds Overreacted

Prudential Financial Inc.’s Michael Lillard said investors should buy commercial mortgage-backed securities and other bonds that fell on concerns the U.S. Federal Reserve will slow its pace of debt purchases.

The increase in yield provided by CMBS, emerging-market debt, high-yield bonds and bank debt makes those assets particularly attractive, according to Lillard, the chief investment officer at Prudential Fixed Income. Newark, New Jersey-based Prudential, the second-largest U.S. life insurer, has more than $1 trillion under management.

“You’ve seen a big overreaction to the Federal Reserve,” Lillard said at a June 26th event in New York. “We really think it’s a situation where commercial real estate is pretty solid.”

Fixed-income assets have fallen since May 22 when Fed Chairman Ben S. Bernanke told Congress that the Central Bank’s bond purchases may be reduced if the U.S. employment outlook shows sustained improvement. Bernanke said on June 19 that the Fed could begin phasing out bond buying later this year and halt purchases around mid-2014 as long as the economy meets its forecast.

“Yields have overreacted here and they’re too high,” Lillard said. “In our portfolios right now, we’re actually somewhat long duration, and we expect yields to retrace.”

Lillard said he recommends the highest-quality CMBS issues. Investors are demanding 1.2 percentage points more than the benchmark swap rate to buy new CMBS tied to shopping malls, skyscrapers, hotels and apartment buildings, according to data compiled by Bloomberg. That’s up from 72 basis points in February, the narrowest spread since sales revived in 2009. A basis point is 0.01 percentage point.

6.24.13: CMBS Borrowers Shell Shocked over Rapid Rise in Rates

Borrowers are struggling to come to grips with what happened to CMBS loan rates over just a few days since Ben Bernanke spoke at a press conference on Wednesday, June 19. The 10-year Swap Rate (Swap) Index used to set CMBS conduit rates was at 2.37% that day, already reflecting an increase from just a few weeks earlier. But what happened during the time Bernanke spoke was stunning. The Swap increased dramatically, reaching 2.60% by the close of the day and spiking further to 2.86% on Monday, June 24. Over a span of just three full business days, the Swap blew out 50 basis points (bp)!

To make matters worse, investors in CMBS securities fled the market, unwilling to invest in 10-year CMBS securities with markets volatile and the value of existing CMBS securities falling. This week, J.P. Morgan was shopping the benchmark 10-year triple-A class of a $961.2-million offering at 125-bp area over swaps. That was 5 bp wider than the comparable long-term, super-seniors from an offering that priced Monday, June 24 and a whopping 22 bp higher than the equivalent tranche of a June 14th deal and an amazing 40-plus bp higher than four weeks ago.

Generally, a 1 bp increase approximates a 1 bp increase in loan spread for a CMBS shop to maintain the same profit margin. So between 50 bp in Swap increase and 40 bp increase in loan spread, borrower quotes are now 90 bp higher than prior to June 19.

“It’s hard to explain this to borrowers because it’s so dramatic,” said Michael D. Sneden, Executive Vice President at ValueXpress. “Borrowers think CMBS issuers are not being truthful or are trying to pad their profits or something else to the disadvantage of the borrower, since they have no power over pricing. I send them this 10-Year Swap chart and send them the pricing from recent CMBS deals so they can see what’s happening in black and white.”

“Thankfully, many experts believe the market has overacted (see previous article),” commented Jim Brett, head of CMBS analytics at ValueXpress. “I hope this is the case as otherwise we could be facing a slow summer in terms of CMBS conduit loan originations.”

6.14.13: CMBS Shops Challenged to Hold Spreads in Tough Market

CMBS conduit loan interest rates, typically set at closing, are based on two numbers added together: the 10-year Swap Rate (Swap) Index and the “Spread” (an amount added to the Swap based on current CMBS bond prices and a profit margin). CMBS conduit loan borrowers are facing a double hit on interest rates as the Swap continues to rise; it reached a 2013 high of 2.43% on Tuesday, June 11 before retreating slightly at the end of the week.  This is an increase of 60 basis points (bp) from 1.82% recorded five weeks ago.  An excellent chart showing the history of the Swap can be found here.

While a 60 bp increase in the Swap is painful enough for CMBS conduit borrowers, trouble is brewing on the CMBS bond side of the equation as well: Bond spreads are widening.  We had a conversation with one of our lending partners about the situation:

Mike and Jim: As I am sure you are aware and noted below, price guidance for AAA CMBS bonds for the JP Morgan deal that is currently in the market is S+103 (previously S+80, so 23 bp wider than 2 weeks ago).  Bond classes all the way down the capital stack are also significantly wider.  Please note that the JP Morgan deal has still NOT priced at these levels as JP has limited bids for its bonds, and thus, the market believes the AAA spreads will be gapping out to S+115 (35 bp wider than 2 weeks ago).

Lending Partner: I am not planning to widen any quotes or loans that are currently under application at this time.  My view is that if the market calms down, credit spreads will tighten back into the S+80 range and there would be no need to change quoted levels.  If that market does not tighten and the Borrower has chosen NOT to rate lock, I may have to widen pricing on a case-by-case basis, but will communicate this to you and the client in advance of closing.

6.11.13: 8th Annual SAHOA Golf Tournament and Trade Show Big Success

On Wednesday, May 29, 2013 ValueXpress was among the sponsors for the 8th Annual San Antonio Hotel Owners Association Golf Tournament at the Hyatt Hill Country Golf Club in San Antonio, TX.

 

130 golfers took to the links under threatening skies (but thankfully the rain held off) to compete in two- and four-man scramble competitions, following longest drive and closest to the pin competitions.  The golf course was in excellent condition and greens played fast.

 

In the evening, awards were handed out and a Texas Hold‘em tournament commenced. “I am embarrassed to admit that I never played Texas Hold’em before,” said Michael D. Sneden, Executive Vice President of ValueXpress.  “But my colleague Jay Bhakta is a seasoned gambler and helped me through.  At one point I was up a few thousand dollars, but I lost it all on a bold but losing ‘all-in’ bet,” said Sneden.  “It was great fun, and all the money goes to charity.”

The next day featured the Texas Hotel Owners Association/Asian American Hotel Owners Association (AAHOA) Joint Industry Trade Show. “We had tremendous traffic at our trade show booth. We signed up $40 million of new business,” commented Jay Bhakta, Senior Loan Originator at ValueXpress for the southern region of the United States.  “Texas remains a great market for us, as the energy boom is really boosting hotel performance in Texas and surrounding states.”

6.4.13: CMBS Lenders Offering Bridge Loans for Construction/Renovation/Repositioning

CMBS shops are using all their know-how in structuring fixed-rate CMBS conduit loans and applying this to bridge loans to capture attractive short-term investment yields and secure an opportunity to provide a fixed-rate CMBS conduit loan once the construction/renovation/repositioning period is complete.

“I have not pursued short-term lending opportunities historically as I struggled to understand the types of transactions that are suitable for bridge financing; the risk profile is so much greater than for a stabilized property,” said Kevin Monahan, Senior Loan Originator at ValueXpress for the eastern region of the United States.  “But recently one of our investment bankers made it easy for me to understand. He said, ‘Kevin, any transaction greater than $10 million that would result in a fixed-rate CMBS loan after the business plan is executed that clears the bridge loan would be what we are after.’ ”

“Okay, I get that.  I know what qualifies for fixed-rate CMBS financing since we do that all day long. Immediately what comes to mind is renovation and lease up of well-located commercial and retail properties, reflagging and PIP renovations for tired hotels in good locations, and ground-up construction for pre-leased or partially leased properties. I think I will simply begin with these opportunities,” said Monahan.

Not everyone qualifies for bridge financing despite having an opportunity that would result in a qualified fixed-rate CMBS loan.  The project must be located in a strong, primary market and the sponsor must have substantial experience with similar projects.  In addition, equity investment on the order of 30%-35% plus additional liquidity is required.

5.31.13: Swaps Widen Based on Bernanke Comments

The 10-year Swap Rate (Swap), the index used to set the interest rate for CMBS conduit loans, recently widened and is now above its 2013 range. For most of 2013 to date, the Swap has traded within a range of 1.80%-2.10%, but the Swap closed at 2.17% on May 27, the highest level so far this year.

Industry pros are suggesting that the trend of rising rates relates to concerns regarding comments made by Federal Reserve Chairman Ben Bernanke; he said that the central bank could begin tapering its bond-buying program in the next few meetings if there are signs of sustained gains in the economy. New York Federal Reserve Bank President William Dudley said on Wednesday, May 22, that Fed officials could reach a decision on quantitative easing in the next three or four months. Earlier this month, the “Wall Street Journal” reported Fed officials were discussing the winding down of the $85-billion monthly bond-buying program, though the timing was still being debated.

“Historically, the government has not tended to phase in policy changes over very long periods of time, and as a result, markets have been dislocated,” said Michael D. Sneden, Executive Vice President at ValueXpress. “Does anyone remember the Tax Reform Act of 1986, which wiped away tax advantages from depreciation? Real estate values plummeted 30% overnight and the Savings & Loan banking crisis of 1989 was a result,” said Sneden. “Had the government phased in the changes over a 5- or 10-year period, the crisis could have been averted.”

Now the government is a bit smarter, but with the ability to transmit information at a moment’s notice through the internet and the ability for markets to immediately trade on the slightest information, even if the Federal Reserve tapers its bond buying by $1, watch out.

5.27.13: Single-Borrower CMBS Transactions in Vogue Despite Rating Agency Disagreement

Issuance of single-borrower CMBS deals so far this year has reached $12.1 billion, more than the $10.1 billion issued in all of 2012, according to data from Commercial Mortgage Alert. Assisting in the rise of the single-loan asset securitization market, say investors and analysts, is a tweak in how some commercial-mortgage deals are evaluated by credit-rating firm Standard & Poor's. Since the N.Y. company changed its standards for single-borrower bonds last September, the volume of such offerings has more than doubled. S&P's rating market share in single-loan bonds has surged. The trend of single-asset deals is "disturbing" to industry pros as most believe investors would be better served if these loans were bundled into multi-borrower transactions with meaningful diversity.

Meanwhile, rating agencies Moody’s and Fitch are in disagreement on the use of “pro forma” underwriting when calculating cash flow levels in order to determine property values and, ultimately, subordination levels for deals they rate. Pro forma underwriting is widely recognized as one of the factors that caused high delinquency rates for loans originated in 2006-2007, when the use of pro forma cash flows was prevalent. The issue came to a head based on each agency’s view of the $1-billion single-asset CMBS financing of the Seagram Building in Midtown Manhattan. Using pro forma occupancy and rents, Moody’s gave an investment-grade rating to $670 million of the loan, while Fitch, using in-place rents and occupancy, said only $510 million of the loan was worthy of an investment-grade rating.

“We are not a fan of single-borrower CMBS transactions and have never bought CMBS from one, preferring the diversity provided by multi-borrower CMBS deals,” commented Jim Brett, head of CMBS analytics at ValueXpress. “For sure, we would never buy bonds from a single-asset deal with pro forma underwriting.”

5.22.13: Fannie Mae and Conduit Rates Converging for Multifamily

With Fannie Mae’s recent 10-basis-point increase in fees it charges lenders to guarantee loans and the continued decline in CMBS conduit rates, the rate gap between the two multifamily products is diminishing, particularly for smaller balance (under $10 million) loans on “B” quality multifamily properties. In addition, CMBS loans with cash-out are now readily available at 75% LTV, competitive with Fannie Mae’s 75% LTV cash-out product.

“Prior to the 2007-2008 crash of the CMBS market, CMBS loans went head to head with Fannie Mae in terms of rate and proceeds,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “But with more underwriting flexibility (i.e., no requirement that the property be 90% occupied for 90 days prior to loan funding), CMBS took its fair share or more of the multifamily market.”

“The collapse of the CMBS market allowed Fannie Mae (and Freddie Mac) to take control of the market, and it has been a challenge to win those clients back,” commented Gary Unkel, Senior Loan Originator at ValueXpress. “But now with rates and proceeds on similar footing, those clients are coming back to CMBS due to more flexible underwriting and faster processing speeds.”

“We recently had a deal under application with Fannie Mae,” said Jim Brett, Senior Loan Underwriter at ValueXpress. “The transaction is a portfolio of six apartment buildings, so the deal is complex. Since the properties are located in a flood area, Fannie required additional reserves beyond the FEMA limits and Fannie also reduced the LTV from 70% to 60%. We switched the loan to CMBS and expect to close at 70% LTV within 30 days at a rate that is only slightly higher than Fannie’s offer,” said Brett.

5.17.13: A ValueXpress Trademark – The Weekly Conference Call

A signature of ValueXpress CMBS conduit deals is the weekly conference call. At the beginning of each transaction, a working party list including borrower and borrower’s counsel and lender’s counsel and lender’s underwriting team is distributed and a set weekly conference call is scheduled. The initial kickoff call is usually one to two days after the borrower’s application is received with the transaction deposit.

“What is great about these weekly calls is they get all parties on the same page in terms of the closing time frame, which at 35-45 days is extremely quick,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “Lender’s counsel lays out the closing checklist items and provides borrower’s counsel with their marching orders, while Jim Brett, Senior Underwriter at ValueXpress, is usually way out in front on the property diligence.”

“The call is really a head’s up for borrower’s counsel not to let the schedule slip,” commented Jim. “Often the property diligence side of the transaction is completed in advance of legal work, and the weekly call keeps borrower’s counsel on their toes, as they really do not want to be embarrassed on a weekly call by not showing any progress on the legal side of the transaction with their client on the phone,” notes Jim.

“We really only started this process with the restart of CMBS in 2010, and as I look at my pipeline, we are closing deals 10-15 days faster than pre-2007 CMBS deals, which is a benefit to our borrowers with tight closing time frames,” said Sneden.

5.13.13: ValueXpress to Sponsor Volleyball Tournament in Houston, TX

On Saturday and Sunday, May 25-26, 2013 ValueXpress will be sponsoring a Volleyball Tournament at Spike Sports Club on Gessner Road in Houston, TX. The tournament features 350 players, primarily Asian-American hoteliers from Texas, Louisiana and Mississippi, on 32 teams.

This event – run in a round-robin format with two divisions: 35 years and older and under 35 – will use all eight of Spike’s courts. Jay Bhakta, Senior Loan Originator for the southern region of the United States for ValueXpress and 15-year volleyballer, will be participating both as a player and a referee.

“The ability to play volleyball at a high level is not a job requirement, but since Jay has played on numerous successful teams over the years, we will take it,” said Michael D. Sneden, Executive Vice President at ValueXpress.

“We are doing so much business in Texas, I told Mike we need to take advantage of every opportunity to stay in front of potential borrowers,” said Jay. “When we were approached by an existing client, one whom we recently provided financing for, to sponsor this event, we immediately said yes. Clearly, all of my referee calls will be in favor of those who have done business with ValueXpress!” declared Jay.

5.9.13: A River Runs Through It

One the amazing things about commercial mortgage lending is how something totally out of left field can crop up to delay or derail a financing. Sure, there is the old saying “time kills deals,” in which the passage of time causes a deal to die, perhaps due to increases in rates, a buyer comes along and puts the asset under contract, the market collapses (can you say CMBS and 2008), or the borrower simply changes his mind, possibly due to deal fatigue.

But I am not talking about these instances. I am talking about a transaction flying along at a 35- to 40-day closing pace and then 5 days before closing: wham! The left hook puts you down for an 8-count or worse, a KO.

We recently had two of the latter situations. We were trucking down the freeway, but at the 11th hour it turned out the franchise agreement had never been properly transferred to the sponsor many years ago (frankly, the franchisor knew nothing about it). With not much time left on the agreement, the sponsor needed a brand-new ten-year license. Ouch! Time-out for 30 days, then we completed the transaction. Only one 8-count on that one.

The next situation is even more bizarre. The drive was right down the fairway and bouncing to a stop about 275 yards out when the ball hit a rock and bounced into the water. Only on this deal the water (actually, it was a stream) had long ago been filled in by the State of New Jersey. And then our sponsor built a hotel on top in 2001. But it seems like the State of New Jersey still owns the “stream” that runs under the hotel (about 9% of the total land area). Since our sponsor does not own all of the land, the sponsor cannot get title insurance. No title insurance? No deal. So we have an 8-count while the sponsor goes back to the State of New Jersey to acquire title to the land . . . and we keep our fingers crossed that we can avoid a KO.

5.4.13: CMBS Delinquency Plummets

In April, the Trepp CMBS delinquency rate posted its lowest reading in more than two years: The 47-basis-point (bp) drop was the biggest one-month gain since Trepp began publishing the number in the fall of 2009. All major property types saw their delinquency rates fall in April. Hotel and apartment loans led the pack, each with more than 100 bp in improvement. The delinquency rate for U.S. commercial real estate loans in CMBS was 9.03% in April, the lowest reading since November 2010’s 8.92%.

The resolution of distressed CMBS loans was a major driver that lowered the delinquency rate in April. Over $1.6 billion in loans were resolved with losses during the month. The removal of these loans from the ledger of delinquent assets created 30 bp of downward pressure on the delinquency number.

Additionally, over $800 million in loans delinquent in March managed to pay off without a loss in April. The removal of these loans from the delinquent category added 15 bp of downward pressure to the rate. Loans that cured put an additional 35 bp of downward pressure on the delinquency rate.

As for the downside, that too managed to see significant improvement in April. The $1.6 billion in newly delinquent loans in April put about 30 bp of upward pressure on the delinquency rate. This was well below the average of $2.7 billion in new delinquencies in February and March.

4.29.13: ValueXpress to Sponsor Golf Tournament in San Antonio, TX

On Wednesday, May 29, 2013 ValueXpress will be a Gold Sponsor for the 8th Annual San Antonio Hotel Owners Association Golf Tournament at the Hyatt Hill Country Golf Club in San Antonio, TX. This 130-person event kicks off the Texas Hotel Owners Association/Asian American Hotel Owners Association (AAHOA) Joint Industry Trade Show on Thursday, May 30th at the adjacent Hyatt Regency Hill Country Resort and Spa.

ValueXpress will be exhibiting at the trade show, and Michael D. Sneden, Executive Vice President at ValueXpress, and Jay Bhakta, Senior Loan Originator for the southern region of the United States, will be speaking at the trade show.

“We are providing a significant amount of hotel financing in Texas right now with over $100 million closed in the last 12 months,” commented Michael Sneden. “We thought it important to get the word out to other hoteliers in Texas that the lending window is wide open at great rates, and we felt sponsoring the golf event would be a great opportunity for hotel owners to meet personally with us to learn how we can assist them with their financing needs.”

“We are active in Houston, San Antonio, Austin, Dallas and all the surrounding communities,” said Jay Bhakta. “The reason is hotels in Texas are highly performing right now, and that’s what the CMBS conduit loan market wants. The high performance is allowing for unrestricted cash-out refinances at rock bottom interest rates. When Pratik Patel, the Vice Chairman of AAHOA, offered us the chance to sponsor this event, we jumped on it.”

ValueXpress welcomes the opportunity to meet with hotel owners at the trade show to explain in detail its SBA 7(a), SBA 504, USDA B&I, CMBS conduit and conventional loans for hospitality properties. Call Jay Bhakta at (601) 918-2850 for your personal appointment.

4.24.13: Office Vacancy Struggling to Get Traction in New Jersey

According to the N.J.-based Star-Ledger, economists gauging the recovery in New Jersey can look to commercial real estate as an indicator. What they’ll find is a market that has been stagnant and struggling to get traction since the mid-2000s. And until jobs return, most sectors of commercial real estate remain on hold.

“Commercial real estate is in lockstep with jobs,” said Matt McDonough, managing director at Transwestern, a company specializing in commercial real estate services with offices in Parsippany, N.J. “When you see 20% office vacancy rates, you know jobs are down.”

He described a healthy office rental market as having about 10% vacancy. Since 2002, though, the vacancy rate has floated between 17% and 19% in Central and North Jersey. Some counties have done better. According to data from Cushman & Wakefield, vacancy rates in Hudson County are at 12%, but Morris County is at 26% and Monmouth County at 29%.

“Real estate grows based on the expansion of the economy,” said Paul Profeta, president and owner of Paul V. Profeta and Associates and a member of Rutgers Business School’s Board of Advisers. “When you have 3%, 4%, 5% GDP growth you have expansion. Companies are taking more space; they’re hiring more people. We don’t have that today. We’re really muddling along at 1.5%-2.0% growth. We’re basically treading water.”

Asked how long will it take New Jersey to recover, he said, “We seem to be muddling along. I don’t see anything on the horizon that is going to shake us out of that rut in the near future.”

4.19.13: This Is What It’s All About

ValueXpress recently closed a $17-million hotel portfolio secured by three hotels located in metropolitan New Orleans, LA. The sponsor was facing a $66,000 penalty if the transaction did not close by April 18. Here is what he had to say:

“Mike and Jim:
I'm sure you know already, but we made the closing deadline, and the wire was sent by the lender just in time so we'll make the critical SBA payoff deadline in the morning. I appreciate you guys working with us on this deal. It was very impressive to see how you went about working this deal from start to finish. I had a chance to shop around with other firms before we committed to your deal, and your firm certainly stands out from the rest of the pack. Your firm has a methodology in place that's more detailed, yet efficient when it comes to valuating, pricing and handling the deal from start to finish.”

What warms my heart about this sponsor’s comments is the reference to our process here at ValueXpress. Often, a sponsor who hasn’t worked with us before will say, "Oh, you just take my loan package, send it to a few lenders, I pick one and you collect a fee at closing." That is so far removed from what actually happens when ValueXpress works with sponsors. We have a process -- a good one -- that requires a lot of work and dedication from our staff to successfully manage sponsors quickly and efficiently through the loan process. But don't take my word for it. Take a sponsor’s word.

4.16.13: CMBS Spreads Do an About Face

After spreads widened on a recent UBS-Barclays CMBS transaction that priced on April 11, commercial MBS buyers snatched up three multi-borrower offerings totaling $3.4 billion this week, pushing spreads tighter with the pricing of each transaction, according to Commercial Mortgage Alert. Long-term super-senior bonds from the most recent issue, an $876.7-million offering led by Wells Fargo and RBS, saw very strong demand, pricing at 81 basis points (bp) over swaps. That was down 2-4 bp from price guidance.

"We initially were thinking an order for $5 million of Class B in the 150 bp area after just buying $4 million of Class B from the UBS-Barclays offering at 160 bp last week," commented Jim Brett, who performs CMBS analytics among his myriad of other duties at ValueXpress. "But as we began our work, we got the call the class was oversubscribed three days earlier than expected and that pricing was being tightened to 135 bps, below our hurdle rate."

"I was really bummed that we were unable to get bonds from the Wells-RBS issue as the quality of the collateral and the underwriting metrics were strong," commented Michael D. Sneden, Executive Vice President at ValueXpress.

The tighter spreads took some of the pressure off potential spread increases to borrowers. While CMBS spreads were pushing marginally higher, originators were generally holding spreads to borrowers steady, as competition remains strong for good deals. This was squeezing profit margins close to a point where lenders were going to be forced to increase spreads to maintain profitability levels. With tighter CMBS spreads, lenders can leave spreads alone for now.

4.10.13: Jay Bhakta Heads Back to Texas

After returning to home base in Jackson, MS to regroup for a week, Jay Bhakta, a Senior Loan Originator at ValueXpress for over 15 years, headed back to Texas to follow up on a substantial amount of pending business in Houston, San Antonio, Corpus Christi and Dallas.

Jay is one of the largest producers for ValueXpress, having closed over $500 million in commercial loans at ValueXpress, the majority of which are hospitality loans. Jay is highly respected in the Asian-American community and within the Asian-American Hotel Owners Association, having been a former hotelier himself.

"With rates at these levels I have to get clients educated and moving quickly," said Jay. "That means one-on-one, face-to-face to get them to focus. I spend the time with them to explain all the structural parts of CMBS loans and answer all their questions and give them comfort that we will deliver their loan in a timely manner."

"But I would not be able to make the promises I do without the support I get from the back office in New York. They get it done for me," said Jay. "I must admit it's ironic at the end of a deal when the client calls and says, ‘Well Jay you were okay, but who is that guy Jim who did all the work?’ referring to Jim Brett, Senior Underwriter at ValueXpress based in New York.”

4.5.13: AAHOA Show an Enormous Success

The ValueXpress booth was bustling with activity on March 28-29, 2013 at the annual Asian American Hotel Owners (AAHOA) Trade Show in Houston, TX. Over 3,000 attendees visited the trade show at the George R. Brown Convention Center.

“This year, the product of the day was CMBS conduit loans. With hotel performance improving at a rapid pace, and CMBS conduit loans the only realistic program with unrestricted cash out, interest was very high,” said Michael D. Sneden, Executive Vice President at ValueXpress. “We were sizing loans on the spot, and potential borrowers were amazed at the possible cash proceeds in their pocket after paying off existing debt.”

“My clients were also impressed by the very low interest rates for CMBS conduit loans,” noted Jay Bhatka, a Senior Loan Originator covering the southeast U.S. market that includes Texas. “With rates in the 4.5%-4.75% area, my clients can take cash out and yet have the same payment because of the lower interest rate and longer 25-year amortization schedule.”

Most of the clients use the cash out proceeds to grow their businesses by building or buying other hotel assets. One of my clients was able to obtain a construction loan from a bank requiring 50% equity by using the cash-out proceeds from a CMBS conduit loan as the equity contribution for a new hotel project,” Bhatka said.

3.29.13: Raj Patel Wins Authentic 24-K Gold-Plated $100 Bill at AAHOA Show

Hotel owner Raj Patel won a 24-karat gold-plated $100 bill at the ValueXpress booth at the Asian-American Hotel Owners (AAHOA) Convention and Trade Show in Houston, TX last week. Over 500 cards were submitted for the ValueXpress drawing, which we consider a big success.


Raj Patel and his 24 karat award.

The award was hand crafted in India by one of India’s renowned jewelers. Jay Bhakta hand carried the plaque from India for this very special giveaway for the Asian-American community. The 99.99 pure 24-k gold foil bill is a sight to behold!

When we first called Mr. Patel and told him he’d won the $100 bill, he was amazed. “I never win anything,” he said, “but my life is blessed anyway!”

Raj is the owner of the Super 8 motel located at Hobby Airport 2 miles from I-45 in southeast Houston, TX. Raj came to the United States in 1986 and worked in hospitality for ten years before building the 40-room hotel. Raj recalls with pride the construction effort, which commenced in early 1995; the hotel opened in 1996. Raj noted that business has been good year-in and year-out, and the property has won the “Pride of Super 8” award many times. His hotel enjoys glowing reviews on TripAdvisor and other review sites.

“We were thrilled that Raj was in the trade show hall when we drew his winning card,” said Jay Bhakta, who runs the Mississippi office for ValueXpress. “It was a pleasure to meet and speak with Raj and congratulate him on winning.”

3.26.13: CMBS Issuance Soars in 2013’s First Quarter

From January through March 2013, $22.9 billion of commercial mortgage-backed securities were issued, up almost fourfold from a year earlier, according to Commercial Mortgage Alert. That puts volume on pace to surpass $90 billion for the year, well above the $65-billion average prediction by a panel of CMBS professionals.

The first-quarter volume was the largest for any quarter since 2007’s fourth quarter and exceeded the previous post-crash high of $17.5 billion in 2012’s fourth quarter. There were 32 U.S. transactions from January to March, surpassing quarterly totals during the boom years. The number of issues reflects the unusually high number of single-borrower transactions, which inflated the total. Indeed, the 16 single-borrower offerings exceeded the 10 multi-borrower deals (the remaining six transactions fell into different categories). In contrast, there were only six single-borrower deals in all of 2006 and just two in 2007.

“We are tracking the overall market in terms of originations,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “We are going to finish the first quarter just shy of $100 million of production, giving us an annual run-rate of $300-$400 million, typical of what we saw in the 2005-2007 period. The difference is we are better equipped to handle the volume, keeping loan closings tightly bound in a 40- to 50-day range to make sure our clients grab these great rates.”

3.22.13: I Can’t Believe It’s Been 10 Years!

ValueXpress was very active in CMBS originations in 2003; after the shock of the events of September 11, 2001 began to lift from the commercial real estate markets 2002 and 2003 began a strong period of growth in CMBS originations: $52 billion in 2002 and $78 billion in 2003. In 2003, ValueXpress originated approximately $158 million of CMBS loans in about 40 transactions.

While many of the properties securing the CMBS loans we did in 2003 were sold, paid off early, or refinanced into a different loan product, ValueXpress has been fortunate to redo a fair amount CMBS loans it closed in 2003.

“I recently received a call from a 2003 borrower who said, ‘Mike, I can’t believe it’s been 10 years!’ Sure enough, this $3-million self-storage loan in Westchester County, NY was due,” said Michael D. Sneden, Executive Vice President of ValueXpress. “What’s nice is that loan rates back then were in the mid-6s; the loan has paid down to $2.5 million, and we are replacing it with a $3.5-million loan at about 4.75%. Best of all, the borrower gets a $1-million cash out and the new payment will be lower than the old one.”

“Same story here,” noted Gary Unkel, Senior Originator at ValueXpress. “I have a client with whom I did two CMBS apartment loans 10 years ago; we just added another small apartment complex to the mix and will be providing a cash-out CMBS refinance that will not increase the loan payment much at all.”

3.14.13: Dave Wood of Residential Home Funding Wins Nook Tablet at Regional Conference of MBAs Convention & Trade Show

Mortgage Banker Dave Wood won a new Nook HD 8 GM Tablet e-reader at the ValueXpress booth at the Regional Conference of MBAs Convention & Trade Show. Held March 10-14 at the Trump Taj Mahal Casino Resort in Atlantic City, NJ, “the trade show was very well attended by exhibitors and visitors, and it was highly successful for us,” commented Kevin Monahan, a regional loan originator for ValueXpress; Kevin covers the northeastern United States. “I’ve received numerous calls from many mortgage professionals who visited our booth and I’ve already begun working on several transactions.”

ValueXpress Nook winner Dave Wood is a Vice President of Residential Home Funding (RHF), an FHA and conventional home loan lender, based in Parsippany, NJ. When asked to sum up his business, Dave said, “RHF is a one-stop shop for anyone seeking either a home or business loan. My staff and I can help the first-time home buyer purchase their dream home, assist business owners to obtain much-needed working capital, and assist commercial property owners to refinance their investment or owner-user properties. Sometimes we’re doing a little of both – refinancing a client’s home and business property.”

3.11.13: Rising Property Values, Low Rates Spur Increase in Defeasance

More borrowers are using defeasance to release properties from securitized mortgages so they can take advantage of improving market conditions to sell or refinance the assets, according to Commercial Mortgage Alert.

Some $5.9 billion of U.S. loans in commercial MBS collateral pools were defeased last year, up 21% from $4.9 billion in 2011, according to a draft of an annual Moody’s report to be released March 25. Defeasance volume is likely to keep rising at roughly the same rate this year, according to Sandra Ruffin, a vice president at the rating agency.

The tactic has steadily grown in popularity over the last three years as property values have recovered, credit has become more available and interest rates have remained historically low. For property owners, the ability to refinance at a low rate or sell at a good price can outweigh the cost of defeasance.

3.8.13: CMBS Spreads Continue to Widen Amid Heavy Supply

Spreads on CMBS widened on mezzanine bonds from recent CMBS offerings floated by J.P. Morgan/CIBC and Wells Fargo/RBS this week. The junior triple-A bonds in the J.P. Morgan/CIBC deal priced at 110 basis points (bp), and comparable notes in the Wells/RBS issue widened further to 120 bp. Equivalent paper issued in recent transactions prior to these deals had held steady at 100 bp.

The widening was attributed to weakening demand in the fixed-income market overall coupled with the flood of fixed-income offerings, including heavy CMBS issuance. Apart from the heavy flow of CMBS offerings, market pros attributed the higher new-issue spreads to investor nervousness about the economy and U.S. budget woes. “The market was pretty choppy when the J.P. Morgan deal was out there,” said one group head at a rival CMBS shop.

“Based on the results of these CMBS issues, we are seeing spreads to borrowers widen 15-20 bp,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “The new spread levels are not affecting deal flow yet, but if loans spreads continue to widen and the swap rate also moves out, we may see borrowers hesitate in moving forward with new CMBS loan applications.”

3.4.13: ValueXpress Exhibiting at AAHOA Trade Show in Houston, TX

On March 28-29, 2013 ValueXpress will be exhibiting at the annual Asian American Hotel Owners (AAHOA) Trade Show in Houston, TX. ValueXpress will be located in Booth 736 at the George R. Brown Convention Center noon-6:00 p.m. on both Thursday, March 28 and Friday, March 29.

“ValueXpress is an Allied Member of AAHOA and has been exhibiting at the AAHOA Trade Show for over 15 years,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “We have completed over 100 hotel loans during this period with many of those loans to AAHOA members. The trade show presents an excellent opportunity to allow hotel owners to meet personally with us to learn how we can assist them with their financing needs.”

“This year it’s particularly important for us to talk with our clients,” stressed Jay Bhakta, a senior loan originator at the ValueXpress Jackson, MS, office and active AAHOA member. “Many hoteliers are not fully aware that the CMBS conduit loan market is aggressively seeking quality hospitality loans from owners of hotels that performed through the 2008-2009 recession. In addition, with the increase in SBA loan limits to $5 million, hoteliers have more options than ever to secure financing for their hotels.”

“Having just returned from India, I have some surprise giveaways from our home country,” noted Jay. “Please stop by our booth to find out what treat I have in store for you.”

ValueXpress welcomes the opportunity to meet with hotel owners at the trade show to explain in detail its SBA 7(a), SBA 504, USDA B&I, CMBS conduit and conventional loans for hospitality properties. Call Jay Bhakta at (601) 918-2850 for your personal appointment.

3.1.13: ValueXpress to Exhibit at 2013 Regional Conference of MBAs

On Tuesday, March 12 and Wednesday, March 13, ValueXpress will be exhibiting at the Regional Conference of MBAs Convention and Trade Show in Atlantic City, N.J. at the Trump Taj Mahal Casino Resort. Stop by Booth 5 at the Taj Mahal Exhibit Hall to see us on Tuesday, March 12, noon-3:00 p.m. during the commercial show or at Booth 515 7-9 p.m. during the residential show. ValueXpress will also be at Booth 515 at the conclusion of the residential show on Wednesday, March 13, noon-5:00 p.m.

The Regional Conference of MBAs annually brings together commercial and residential mortgage professionals located and affiliated with the Mortgage Bankers Association in the eastern portion of the United States (NJ, NY, PA, DC, CT, NH, MA, RI, MD, DE). Each state Mortgage Bankers Association is dedicated to promoting growth and good business practices in the real estate finance industry and is a resource that provides communication and networking opportunities for its members.

“ValueXpress is pleased to have this opportunity to meet with mortgage brokers at this Regional Conference to explain in detail its SBA 7(a), SBA 504, USDA B&I, CMBS conduit and conventional commercial loans for owner-occupied and investment properties,” said Michael D. Sneden, Executive Vice President of ValueXpress. “We will be jointly representing our affiliated company, Country Bank, at the trade show. The timing of the show is perfect for us as we provide information on Country Bank’s expanded SBA footprint into the six-state region surrounding New York City.”

ValueXpress will also be marketing its CMBS conduit program. “The CMBS conduit market is on fire right now, and we want to share the benefits of long-term, fixed-rate, non-recourse commercial loans for larger balance (more than $5 million) transactions,” said Jim Brett, head of underwriting at ValueXpress.

Need a little incentive to visit us at the show? ValueXpress will be giving away a Nook Tablet e-reader from a drawing of business cards collected at our booth during the show. The drawing will be at 4:00 p.m. on Wednesday, March 13th; the winner need not be present at the drawing. Would you like a personal appointment with a ValueXpress representative during the show? Call now and book an appointment with Kevin Monahan (973) 579-6061 or Mike Sneden (212) 883-6447.

2.26.13: CMBS Spreads Widen; Borrower Spreads Increase

Amid a flood of issuance (see the article below) long-term super-senior CMBS spreads have widened from the levels experienced in early February. Long-term super-senior CMBS with an initial 9.5- to 10-year life had seen spreads steady at 72 basis points (bp) since the beginning of 2013. However, the $629-million long-term super seniors from the UBS/Barclays CMBS issue that priced on February 15th widened to 80 bp. Furthermore, the $398-million long-term super seniors from the Deutsche Bank/Cantor Fitzgerald CMBS issue that priced on February 26 widened to 85 bp.

Meanwhile, the junior investment-grade classes continue to hold steady. The junior investment-grade AA-minus rated class B from both the UBS/Barclays and the Deutsche Bank/Cantor Fitzgerald deal priced at 125 bp, while the A-minus rated class C from both deals priced at 175 bp.

RBS and Wells Fargo are in the market with a CMBS deal that is expected to price the week of February 25. Price guidance is at the levels seen from the Deutsche Bank/Cantor Fitzgerald deal and demand for the issue is good, possibly resulting in price firming at these new levels.

"After a consistent period of loan spread compression for borrowers, lenders have increased their pricing by about 10 bps to compensate for the higher spreads on CMBS classes; since the long-term super-senior CMBS represent approximately 80% of a CMBS deal, there is almost direct correlation between super-senior CMBS spread widening of 10 bp and borrower loan spread widening of 10 bp," said Michael D. Sneden, Executive Vice President at ValueXpress. "With the swap rate coming in 10 bp this week, the effect on borrowing rates is negligible right now. I just keep my fingers crossed that CMBS spreads stabilize at these new levels without widening further."

2.22.13: SBA Develops 10-Tab Submission Tool for 7(a) Loans

As part of its continuing effort to provide excellent customer service, the 7(a) Loan Guaranty Processing Center (LGPC) has developed a 10-Tab Submission tool to streamline the submission of all loan applications processed at the LGPC. Historically, the LGPC has accepted loan application packages via mail, fax, and FTP (SendThisFile) with no requirements for document organization.

SBA highly encourages use of the 10-Tab, as it will assist SBA's lending partners in preparing complete and orderly packages for submission, reduce the number of incomplete applications, and allow improved LGPC processing times. Lenders are not required to use the 10-Tab tool for applications submitted to the LGPC at this time; however, packages not organized using the 10-Tab format may experience longer processing times. Later this fiscal year, SBA expects to issue a notice identifying a specific date by which lenders will be required to submit origination packages using the 10-Tab format.

To aid in this submission process, the LGPC has developed 7(a) submission tools and information that can be found at http://www.sba.gov/category/type-form/lending-forms. Scroll to the bottom of the page and select the appropriate 10-Tab Express form for you:

1. 7(a) Submission Instructions and Checklist,
2. Templates for Application Submission,
3. Printable Submission Templates, and
4. Submission Tutorial.

2.20.13: CMBS Volume Surging

The commercial MBS pipeline hasn't looked like this since 2007, according to Commercial Mortgage Alert. Scheduled to hit the U.S. market by the end of next month are 17 transactions totaling $12.5 billion; this is on top of the $13.5 billion of offerings that have already priced since the beginning of the year, according to a survey by CMA. The explosion of activity puts issuance on track to reach $26 billion for the first quarter, more than four times higher than a year ago and the highest three-month total since the fourth quarter of 2007. The volume is much heavier than expected. At the beginning of the year, a panel of bond pros predicted that 2013 issuance would reach $65 billion, but the market is now on a $100-billion pace. While few think issuance will continue at the current rate throughout the year, many have raised their expectations.

There are already 11 transactions totaling $11.4 billion in the queue for April through June -- almost matching the $12.4-billion level in last year's second quarter. Multiple other deals are expected to be added. All told, 28 deals totaling $23.8 billion are in the pipeline. The breakdown is 14 multi-borrower transactions totaling $16.9 billion, 13 single-borrower offerings totaling $6.7 billion and a $250-million offering backed by distressed loans.

2.8.13: Report from the 2013 MBA CREF Convention

At the 2013 MBA Commercial Real Estate Finance Convention (CREF) “exuberance” replaced 2012’s “optimism.” The 2013 CMBS conduit loan machine is cranking full tilt: Declining spreads have made CMBS conduit loans competitive with insurance company offerings on commercial assets and within striking distance of GSE (Fannie/Freddie) offerings on multifamily loans. Should rates remain at these levels, this year’s CREF panelists suggested a doubling in volume to $90 billion in CMBS originations was not out of the question.

In fact, the crystal ballers predicted that lending would be robust across the board in 2013. According to the Mortgage Bankers Association, commercial banks and finance companies, with their balance sheets repaired, are predicted to increase lending 7% to $75 billion in 2013 (30% market share), while CMBS is expected to grow to $55 billion (22% market share). Insurance company originations are estimated to be flat at $50 billion (18% market share), while the GSEs are anticipated to decline 8% to $75 billion (30% market share) in the face of competition from CMBS and banks.

Of concern in the CMBS conduit lending arena is whether the rapid growth in CMBS conduit lending and the potential for a reduction in underwriting standards could “undermine the industry yet again” (a polite way of saying “blow up the CMBS market”). One insurance company veteran noted, “CMBS suffers from adverse selection (read: it makes loans on crappier deals), that’s why our industry delinquency is under 1% and yours is 10%. If CMBS conduit underwriting gets aggressive on these assets, watch out for another collapse.”

Another panelist noted, “CMBS is really the only unregulated lending platform, at least until Dodd-Frank provisions become law. The industry cannot expect the b-piece buyer to regulate the market, as they have the same pressure to get money out the door as everyone else. I suspect that it is just a matter of time until the CMBS conduit market overheats, and we repeat a painful correction.”

2.5.13: Spreads Tighten Further on Junior Investment-Grade CMBS

While AAA-rated senior investment-grade CMBS spreads remain flat, junior investment-grade CMBS spreads continue to tighten for recent CMBS issues as investors take on additional credit risk in search of more yields. Long-term super-senior CMBS with an initial 9.5- to 10-year life have seen spreads stuck at 72 basis points (bp) since the beginning of 2013 as all five multi-borrower CMBS offerings have priced the long-term super-senior bonds at 72 bp.

Meanwhile, the junior investment-grade classes continue to tighten. The junior investment-grade classes typically consist of AA-minus rated class B, A-minus rated class C and the BBB-minus rated class D. Subordination levels typically range from 6% for the BBB-minus class to 15% for the AA-minus class. The spreads on these classes have tightened on each issue since the beginning of the year, as the classes are generally oversubscribed, allowing dealers to successfully test tighter levels for each new deal. For example, the class B bonds from the Morgan Stanley/Bank of America (BoA) issue on January 9, 2013 priced at 155 bp and compressed to 145 bp for the Goldman Sachs deal on January 24, 2013, then to 135 bp on the Wells Fargo/RBS deal on January 28, 2013. The most recent deal to price, a $1.14-billion multi-borrower offering from Morgan Stanley and BoA, priced the class B bonds at 125 bp on February 5.

“The spread compression has been great for our portfolio of class B CMBS purchased from the last 12 CMBS issues, and it allowed us to take some profits,” noted Michael D. Sneden, Executive Vice President of ValueXpress. “But on the other hand, replacing those bonds with new CMBS at tighter spreads is scary; once the spread tightening stops or reverses, it could spell trouble for the value of the portfolio.”

“Borrowers should benefit from slightly tighter spreads on their loans,” suggested Jim Brett, head of underwriting at ValueXpress. “Most spread reduction results from compression in super-senior CMBS since those bonds comprise the bulk (80% +/-) of a CMBS issue, but there is nothing wrong with a little spread reduction from junior investment-grade bond spread compression.”

1.26.13: Ballon Ice-Meter Predicts 9 Inches of Ice

Ok, I have been writing this e-newsletter for a little over two years, and we all need a break now and again. Some people skydive, some go on safaris, bungy-jump, or whatever; I go ice fishing.

To be specific, I have gone ice fishing with the same group of four to six guys I know from high school at the same northern Pennsylvania lake (which will remain nameless – don’t want additional fishing pressure, you know) for the past 35 years. Doesn’t sound like fun? You should try it; the peace and quiet found on a frozen lake is Zen-like!

Anyway, one of my buddies, Doug, is a physicist and a fisherman, although perhaps not in that order. He has an exceptional mathematical mind. A number of trips ago, he thought it would be useful to predict the lake’s potential ice thickness. Where the rest of the guys would just note if temperatures were above or below freezing, that was not good enough for Doug; he pulled out his slide rule and developed a formula to predict the ice thickness based on daily temperature readings from the weather station nearest to the lake. At first we laughed, but as we added data points each year (projected versus actual – just like real estate cash flows), the model became more and more accurate. Now we look forward to seeing how close Doug’s model is to actual every year.

1.25.13: Dan Carbeck Joins ValueXpress

Dan Carbeck, a 35-year veteran in commercial real estate lending, joined ValueXpress effective January 15. Dan will be primarily responsible for commercial loan originations in the mid-western portion of the United States.

“Dan brings an outstanding breadth of experience to the ValueXpress team from his stints at M&T Bank, Mellon Mortgage Company and Key Bank. In addition, Dan produced for Fannie Mae/Freddie Mac lenders GMAC Commercial Mortgage and ARCS Commercial Mortgage,” commented Michael D. Sneden, Executive Vice President at ValueXpress.

Dan has originated CMBS conduit loans, Fannie/Freddie multifamily loans, life company loans and commercial bank portfolio loans during his career. While at Largo Real Estate Advisors, Dan originated $2- to $15-million commercial loans for Prudential’s PruExpress loan program.

Beginning in 2007, Dan operated the Midwest office for Bond Street Capital, a commercial real estate origination shop formed in 2002 by Barry Reiner, a former First Union Capital Markets executive, and Joe Forman. The firm arranges CMBS conduit loans, insurance company loans and commercial bank portfolio loans.

“The CMBS conduit loan market is on a tear, and I want to participate with ValueXpress,” said Dan. “ValueXpress is known for its loan closing expertise and clients love the company’s smooth processing and closing routines. ValueXpress has solid lender relationships and quality underwriting support from Senior Underwriter Jim Brett. I know that by working with ValueXpress my clients will have a positive experience obtaining their commercial loans. And that will be a positive reflection on me. I am aggressively seeking new clients knowing they will be well-cared-for by me and the ValueXpress team.” Dan can be reached at dcarbeck@valuexpress.com.

1.23.13: Dodd-Frank Rules Could Stop CMBS in Its Tracks

CMBS pros are keeping a close eye on proposed regulatory reforms that could dramatically affect the future of the industry. In the wake of the financial crisis, policymakers and regulators have proposed rules and regulations aimed at banks and other financial institutions to curb excessive risk-taking. A notable provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Premium Capture Cash Reserve Account (PCCRA) could derail CMBS issuance depending on its final form.

PCCRA would require issuers to hold some level of risk retention from a CMBS issue. Most issuers work with a business model to pool and issue CMBS, and they have no intention -- and in many instances no capacity -- to retain a portion of the CMBS issue. It is likely PCCRA would discourage CMBS issuers from participating in the market and cause many current issuers to close shop.

Another proposed provision of concern targets the ability to transfer B-piece (also known as first loss bonds) investments. The proposed rule would prohibit a B-piece buyer from selling, leveraging, or hedging its first loss bonds. Ultimately, the B-piece buyer or first loss buyer would be required to hold its position for the full life cycle of the mortgages in the pool, which for most CMBS issues would be at least ten years. The universe of B-piece investors in CMBS is not that deep, as the first loss bonds have high risk, but also provide high returns. Any “handcuffs” on these investors could drive them away from investing in CMBS, and the ability for issuers to create CMBS falls apart without these investors.

The proposed rules have been slow to materialize into law. Hopefully this is a sign that regulators are giving the rules thoughtful consideration rather than the usual delay due to the inability to get things done. But should PCCRA or B-piece restrictions become law in their present form, it is quite likely that CMBS issuance will cease.

1.15.13: Wanna Meet at the MBA in San Diego, CA?

Michael D. Sneden, Executive Vice President of ValueXpress, will be representing the firm at the Mortgage Bankers Association Commercial Real Estate Finance (CREF)/Multifamily Housing Convention and Expo in San Diego, CA February 3-6, 2013. The convention is expected to attract over 2,500 commercial and multifamily professionals who will be networking with industry leaders and listening to professionals as they share their views on the direction of the industry.

“I have been attending CREF for over 15 years, and it is by far the best opportunity to meet my colleagues to share our past, current and future views on the commercial real estate lending markets,” said Sneden. “This year, with the explosion of CMBS conduit lending, I am looking to meet with other contemporaries that might not be participating in the growth of CMBS conduit lending to see if there is a way we can work together.”

Mike will be in San Diego from Sunday, February 3rd through Wednesday, February 6th. If you want to get together for a drink or chat between session presentations, please send Mike an email at msneden@valuexpress.com.

1.11.13: CMBS Begins 2013 with a Bang

The CMBS bond market began 2013 on a high note: Strong demand for the first conduit offering of the year pushed spreads to a post-crash low. The benchmark super-senior class of a $1.4-billion conduit offering by Morgan Stanley and Bank of America (BoA) priced at 72 basis points (bp) over swaps on Wednesday, 11 bp inside of the previous low achieved in November 2012.

“Our analysis concluded the quality of the collateral was high,” commented Jim Brett, who handles CMBS credit analysis at ValueXpress. “In addition, the underwriting metrics were solid in terms of pool LTV (61.3%), net cash flow DSCR (1.80x) and debt yield (10.78%).”

“Many of the classes of the issue were well oversubscribed,” noted Michael D. Sneden, Executive Vice President at ValueXpress. “We were buyers of the Class B securities, and we only received $1 million of a $5-million order as the Class Bs were 5x oversubscribed.”

The Morgan/BoA offering is backed by 64 mortgages on 123 properties; retail properties represent 37.1% of the collateral pool, followed by office at 21.4%. Hospitality properties were 16.0% of the collateral pool. The deal’s collateral was contributed by Morgan Stanley (88.9%) and BoA (11.1%).

The longer-dated triple A-rated super-senior classes all priced tighter than guidance. A $135.7-million tranche of 4.9-year bonds priced at 36 bp and $111.6 million of 7.5-year bonds priced at 60 bp over swaps. Meanwhile, $466.3 million of 9.9-year bonds sold at 72 bp. These prices tightened from guidance levels of 37 bp, 65 bp and 75 bp, respectively. The search for better yields strengthened demand for subordinate CMBS as well. In addition to the Class B bonds, which priced at 155 bp, 10 bp tighter than guidance, the junior triple A-rated class priced 15 bp tighter than guidance at 100 bp. The Class C bonds also were 15 bp tighter at 200 bp.

1.8.13: Commercial Real Estate CDOs Make a Comeback

Four Commercial Real Estate (CRE) Collateralized Debt Obligations (CDOs) totaling $1 billion were issued in the fourth quarter of 2012, suggesting that the new issue market has re-opened. These deals fill an important void in commercial real estate finance for transactions that cannot be included in traditional CMBS transactions.

The first CRE CDO was issued in 2000, and subsequently, deal managers began introducing commercial real estate loans into CRE CDOs, including whole loans and mezzanine loans. The structure is a particularly useful financing vehicle for commercial real estate loans on non-stabilized properties. Generally, the senior portion of the bond structure was sold to investors and the junior portion (typically 30%) retained by the deal manager, who was allowed to actively manage the collateral pool. However, in mid-2007, the market collapsed in the midst of the credit crisis and no CRE CDO was issued again until 2012.

In September 2012, Arbor Realty Trust issued a $125-million Collateralized Loan Obligation, or CLO, secured by a portfolio of loans on transitional multi-family properties. The underlying loans are to be refinanced through the Fannie Mae DUS program on stabilization of the properties. Arbor sold the 70% of the transaction structure and retained the 30% junior portion. Similarly, NorthStar Realty Finance issued a $351-million floating rate CMBS deal in October 2012 secured by a portfolio of 14 loans on various transitional commercial real estate properties. All of the principal from loan repayments goes to pay down the bonds in sequential order as the transitional properties stabilize and pay off. NorthStar sold the senior 65% of the capital structure and retained the most junior 35%.

“CRE CDO structures should help bolster the market for the origination of bridge loans on transitional properties, and we would expect to increase our production of loans for these CRE CDO programs in 2013,” commented Kevin Monahan, Senior Loan Originator at ValueXpress.

12.26.12: SBA 7(a) Premiums Reach the Stratosphere

Secondary market premiums on the sale of SBA 7(a) loan guarantees reached record highs in late December 2012 based on dealer pricing indications. The chart below shows the monthly trend in premium pricing during 2012:

2012 Premium*
Dec 117.50
Nov 117.00
Oct 117.00
Sept 116.00
Aug 116.00
Jul 115.50
Jun 114.50
May 114.50
Apr 113.50
Mar 113.50
Feb 113.50
Jan 112.50
*Based on Prime + 2.75%, Quarterly Reset, 25-year loan term.

Pricing steadily increased as 2012 progressed as investors sought decent relative yields on investments with short-term rate resets (the investor rate resets quarterly), driving up prices. The prices provide exceptional guarantee sale profits for institution selling guarantees. In addition, secondary market prices for larger loan guarantees above $1.5 million historically found lower bids relative to loan guarantees under $1.5 million. This is no longer the case as pricing is similar across all guarantee sizes. Note that the profit to guarantee sellers is partially reduced at prices above 110 as 50% of the proceeds above 110 are shared with the SBA.

“We continue to pursue SBA 7(a) loans in the five-state footprint surrounding New York City for our affiliated bank, Country Bank,” said Michael D. Sneden, Executive Vice President at ValueXpress. “We are working on a $5-million SBA 7(a) loan right now, and at 117.50, that would be a net profit of $426,562 on the $3,750,000 guarantee sale after the split with the government, a nice day’s work! Plus Country Bank will receive $37,500 annually in servicing fees during the life of the loan.”

12.28.12: CMBS Prognosis for 2013

CMBS bond spreads (and hence spreads to borrowers on their loans) and the Swap rate (the index used to set CMBS conduit loan rates) both fell as 2012 progressed; by year-end, the combination resulted in the lowest CMBS conduit loan rates ever recorded. In January 2012, Goldman Sachs priced the only multi-borrower CMBS deal for that month, a $1.15-billion offering that contained 80 loans with an average loan coupon to borrowers of 5.72%. In contrast, in late December 2012, JPMorgan and Ladder Capital priced a $1.07-billion offering that pooled 45 loans with an average coupon of 4.49%.

Can this downward rate trend continue through 2013? “I think not,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “My crystal ball says that if our leadership is unable to reach a deal to fix the automatic spending cuts and tax increases until well into the first quarter of 2013, then rates stay at these levels until the summer of 2013 before rising. But if a solution is reached quickly, I see the equities market rising at a steady pace (along with the economy) and the Treasury/Swap market falling, resulting in higher Swap rates by the end of the first quarter of 2013 and rising further as the year progresses.”

“I see some of the higher Swap rates offset by a modest contraction in CMBS bond spreads, but still see a net increase in loan coupons. I predict a 2.25% 10-year Swap rate by the end of the first quarter of 2013 and a 2.50% average loan spread resulting in 4.75% coupons to borrowers, so line up now to get your money while rates are at a possible low point in the lending cycle,” Sneden said.

12.24.12: Creating Efficiency in the CMBS Loan Diligence Process

ValueXpress has been arranging CMBS conduit loans for its clients for over 15 years. The typical client is a small balance borrower ($5-$10 million), and many do not have much or any experience in the diligence process (read: lots and lots of documents) required to close a CMBS conduit loan. Therefore, by default, our corporate mission has evolved to use our knowledge of the CMBS diligence process and our human resources to guide borrowers through both the underwriting diligence and legal diligence quickly and efficiently, resulting in the least-painful experience for the sponsor possible. At the same time, the diligence burden is reduced for the lender, whose thin staff can be reoriented to other transactions that are not moving as smoothly. “We end up adding value for both the borrower and the lender in each transaction,” commented Jim Brett, head of underwriting at ValueXpress. “This creates a win-win for us as a firm: Borrowers refer us to other borrowers and lenders move our transaction to the top of the pile as they know the transaction will not be time-consuming.”

On most new transactions, the ValueXpress deal manager is working on-site within a few days of the execution of a loan application. If the borrower does not have a scanner, the deal manager brings one. The sponsor and deal manager go through each item on the checklist; the deal manager explains what is needed and why, and reviews each item for compliance before it is submitted to Jim, who then catalogs all the diligence, usually in a file-sharing environment such as DropBox. “It’s all about organization and having the knowledge to work with the borrower to collect diligence documents that comply with the lender request,” notes Jim. “Once this is understood, the transaction proceeds quickly to close.”

12.18.12: Insurance Companies Grab Large Blocks of Subordinate CMBS

In support of the strong demand for CMBS securities, it was reported that insurance companies were active buyers of AAA-rated senior CMBS with 30% subordination (generally classes A1-A3 and A-SB), and were big buyers of subordinate CMBS (classes AS, B and C), which generally provided subordination levels of 12%-22% and are generally rated AAA, AA and single-A (Fitch/S&P), respectively. Although the classes provide lower ratings and subordination, they pay higher yields to compensate for the addition risk compared with senior CMBS.

To accommodate the large buyers of subordinate CMBS, issuers created the “EC” class in many issues. The EC class essentially combined the AS, B and C classes and allowed the buyer to purchase all the securities within the classes, eliminating other potential buyers of the securities. For example, in a UBS-Barclays CMBS issue (UBSBB 2012-C2) that priced in July 2012, Class AS, Class B and Class C -- a total of $207.7 million of securities -- were combined into an EC class and sold to one investor.

“The EC class structure is great for the issuer, but a bummer for the little guy,” said Michael D. Sneden, Executive Vice President at ValueXpress. “We got shut out of our typical $5-million order of Class B securities from UBSBB 2012-C2 for Country Bank and on another bunch of deals in 2012 as well.”

12.14.12: CMBS Issuance Poised to Surge in First Quarter of 2013

Commercial Mortgage Alert reports that a big fourth quarter has lifted U.S. commercial MBS volume for 2012 above $48 billion — and strong issuance will continue in the first quarter. CMBS activity has soared almost 50% in 2012 from $32.7 billion in 2011. The increase was bolstered by close to $18 billion of issuance in the past three months — by far the largest quarterly volume this year.

A first look at the 2013 pipeline has identified $19 billion of transactions scheduled for January through March. Other transactions are likely to be added, setting the stage for another substantial increase in issuance in 2013. Below is a summary of CMBS conduit deals in the works for January 2013:

Issuer Deal Type Rate Type Amount ($mil.)
Morgan Stanley/BofA Conduit Fixed $1,400
Deutsche/Ladder Capital Conduit Fixed $1,300
Morgan Stanley/BofA Conduit Fixed $1,300
Goldman/Citigroup Conduit Fixed $1,250
Wells Fargo/RBS Conduit Fixed $1,250

The surge in activity has stemmed partly from a big rally in the bond market that drove down the funding costs of securitization programs, enabling them to cut their loan rates and compete more effectively with portfolio lenders.

“The great rates available to borrowers, pretty much all in the 4.0%-4.75% range, are spurring an incredible amount of refinancing activity and an increasing amount of purchase activity as the lower cost of debt is helping support higher real estate equity prices,” noted Michael D. Sneden, Executive Vice President at ValueXpress. “2013 is looking real good for originations right now.”

12.10.12: B-Piece Buyers Forcing Issuers to Pay Up for Hotel Loans

Many CMBS borrowers are asking why CMBS conduit loan spreads are relatively high for 65%-70% LTV hospitality loans. Part of the answer can be found in the way the buyers of subordinate CMBS (often referred to as b-piece buyers) look at the pricing and risks of hotel loans.

As a refresher, the b-piece buyer acquires the most risky bonds from a CMBS issue. The bonds are subordinate to the senior CMBS and incur the first principal losses from loans that default in the CMBS issue. The subordinate CMBS incur a principal loss when a defaulted loan is resolved with a principal recovery that is less than the outstanding balance on the loan. When less-than-full principal recovery occurs, the subordinate buyer takes a loss dollar-for-dollar with the amount of principal lost on the defaulted loan. As a result, the b-piece buyer receives the highest rate of interest on the subordinate bonds that it buys to compensate for the risks. In addition, the b-piece buyer (or its advisors) has the right to review each loan that is included in the CMBS issue and “kick out” any loans that it deems to be poorly underwritten or pose a default risk according to the b-piece buyer’s analysis.

Prior to 2007, it was common to have one or two loans kicked out of CMBS issues in which a typical issue tended to contain 150-200 loans. The originator would commonly stick the kicked-out loans in their next CMBS issue, usually successfully. With the tighter underwriting standards in CMBS underwriting today, it is uncommon for loans to be kicked out.

That said, hotels loans have been one of the worst performing in pre-2007 CMBS. The delinquency rate as of November 2012 was 12.24%, according to Trepp, nearly unchanged from the 12.28% reported in November 2011. In addition, principal recovery on hotels tends to be less than for other real estate asset classes because of the specialized nature of hospitality properties. So b-piece buyers, rather than kicking hotel loans out of CMBS issues, are requesting and receiving downward “price adjustments” on hotel loans, reducing the profit to the issuer. B-piece buyers are particularly critical of small balance, limited-service hotels located in tertiary markets with 65% LTV. As a result, issuers are quoting these deals with wider spreads than other asset classes to maintain profitability after these loans are “price adjusted” by b-piece buyers.

12.5.12: SBA 504 Program Still Best Opportunity for Owner-Occupied Purchases

The Small Business Administration's (SBA) 504 loan program provides long-term, fixed-rate financing for owner-occupied commercial real estate and for the purchase of long-term capital assets. SBA 504 loans are designed to cover up to 40% of a project's costs with a maximum of $5 million in funding; however, the Certified Development Companies (CDC) partners with a bank that provides 50% of the project financing and the borrower typically puts in 10% as a down payment. The rate on the SBA portion of the loan (the 40% piece) is fixed at 4% for 20 years for loans that were funded by the most recent SBA debenture in December 2012. This rate is the lowest recorded since the program’s inception. Below is a chart exhibiting the history of the SBA 504 rate over the past 24 months:

2012,%

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
4.83 4.70 4.58 4.74 4.45 4.49 4.45 4.44 4.27 4.25 4.16 4.00

2011,%

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
5.73 6.06 5.93 5.89 5.63 5.51 5.58 5.13 4.69 4.83 4.94 4.94

The SBA’s 504 loan program provides long-term, fixed-rate financing for small business owners nationwide. Since the program's inception, 504 loans have funded over $62 billion in loans to over 130,000 small businesses. In turn, those small businesses have created or retained over 2.1 million jobs for the U.S. economy. CDCs continue to work with small business owners who are taking advantage of these record-low interest rates to purchase, build and expand their facilities or purchase capital-intensive machinery and/or equipment.

11.29.12: ValueXpress Exhibits at 2012 AAHOA Washington District Regional Conference & Trade Show

On Friday, November 29, ValueXpress participated in the 2012 AAHOA Washington District Regional Conference and Trade Show at the Hilton Crystal City Hotel in Arlington, Virginia. The show featured the Asian-American Hotel Owners Association’s (AAHOA) current President Alkesh Patel and Washington District Regional Director Dharmendra Patel as well as the Washington District Regional AAHOA Ambassadors. The event focused on professional development in the areas of ADA compliance, e-marketing, debt restructuring and hotel trade area protection.

ValueXpress exhibited after the professional development forum. ValueXpress provided attendees with information on the exceptional interest rates available on commercial loans for hospitality properties.

“Although we have participated in the AAHOA annual convention and trade shows since 1997, we are exhibiting at regional conferences to educate AAHOA hoteliers on the great lending environment that exists right now,” explained Kevin Monahan, a Senior Loan Originator at ValueXpress. “Hotel borrowers are so beaten down by the 2008-2010 recession that they may not be aware that certain financing programs for hotels, including CMBS, are very active right now,” said Monahan, who manned the ValueXpress booth at the show.

ValueXpress is currently processing 10 CMBS conduit hotel loans for AAHOA members. For those new to the CMBS conduit loan product, the loans are fixed-rate (about 5% today) for 5, 7 or 10 years; are non-recourse (no personal guaranty); and allow for unrestricted cash-out. These loans are very popular for cash-out refinances. ValueXpress has completed over 125 CMBS conduit loans for AAHOA members over the past years.

For purchase transactions, the SBA 504 program remains the primary choice for AAHOA members as the program provides for 85% financing, much more than CMBS conduit. The 504 program allows AAHOA members to buy hotel properties with less equity contribution than CMBS. For conference attendees who visited the ValueXpress booth and want to follow up with Kevin, he can be reached at 973-579-6061.

11.26.12: CMBS Spreads Widen Amid Supply and Fiscal Cliff Concerns

While it seemed that the rally in CMBS securities would never end, the music stopped last week when dealers widened the price talk on a $1.4-billion conduit offering that was in the market. The offering, which priced on Friday, November 23, is backed by loans supplied by Jefferies LoanCore, Goldman Sachs, Citigroup and Archetype Mortgage Capital. The AAA-rated super-senior bonds priced 5 basis points (bp) wider than price guidance at 90 bp over swaps. The deal’s $111.1-million class of junior triple-A bonds, with 22% of subordination, was priced in-line with guidance at 123 bp. But the double-A-minus bonds priced at 185 bp, 15 bps wider than price guidance.

Contributing to the weakness in pricing is a seasonal drop in demand as many investors have starting closing their books for the year. In addition, the spread widening was attributed partly to uncertainty about whether Congress will avert $500 billion of tax increases and budget cuts scheduled to start kicking in January.

This week, Wells Fargo and RBS are expected to price their $1.3-billion CMBS conduit deal. The AAA-rated super-senior bonds are being offered at 95 bp over swaps, while the junior triple-A bonds are being shopped at 125 bp over swaps. The double-A-minus bonds were being marketed at 180 bp.

“For the first time since summer we received our full $8-million allocation of Class B CMBS from the Goldman/Citi deal,” said Michael D. Sneden, Executive Vice President of ValueXpress. “The spread widening helped a little, but the swap was in a bit so the overall yield of 3.45% on the Class B was not much better than our last purchase. Still, CMBS beat the yields on other fixed-income products with the same credit profile.”

11.21.12: Small Town Maul (Reported by the Wall Street Journal)

New York investor David Lichtenstein’s bet on four small-town malls didn’t pan out, leading him to forfeit the properties to his mortgage holders in 2009. It now appears the deal also was a big loser for investors in the malls’ $73.9-million securitized mortgage.

The last of the four malls recently was sold by the company that oversees the loan on behalf of bond investors, C-III Asset Management, and the final tally looks bleak: The bondholders recouped 22% of the initial loan amount, or roughly $16.4 million, according to real-estate research service Trepp LLC.

The loan was retired last month after C-III sold the fourth mall, Mount Berry Square Mall in Rome, GA, to Hull Storey Gibson Cos. for an undisclosed price. In 2010, Jones Lang LaSalle brokered the sale of the Martinsburg Mall in Martinsburg, WV for $11 million and Bradley Square Mall in Cleveland, TN for $4.4 million. The fate of another of the four properties, Shenango Valley Mall in Hermitage, PA, couldn’t be determined.

Mr. Lichtenstein said Tuesday he could have kept the properties if C-III had agreed to defer some of the mortgage’s amortization payments. A C-III representative declined to comment. Mr. Lichtenstein is better known for buying Extended Stay Hotels for $8 billion in 2007 and putting the chain into bankruptcy protection in 2009.

11.16.12: Low Rates Spur Surge in CMBS Loan Applications

With CMBS loan rates approaching historic lows, ValueXpress is seeing a surge in new loan applications. Loan activity is often high as year-end approaches, and in combination with low rates, fourth-quarter loan activity is expected to be extraordinary.

“We started November with 13 loans under application, many of which were signed up in October; subsequently, we added 3 more in the first week of November, for a combined total of about $100 million,” said Michael D. Sneden, Executive Vice President of ValueXpress. “We closed a portfolio of 3 loans yesterday for $20 million, and we have another 7 loans totaling approximately $40 million scheduled to close before the end of November. And the balance of the loans is expected to close in December.”

The surge in loan applications arises from very attractive loan rates. Loan rates are trending down; they are currently in the 4.0-4.5% area for 10-year fixed-rate CMBS loans secured by commercial properties and 5.0% for hotel properties. Fannie Mae loans for multifamily properties are even lower, under 4.0% for a 10-year term.

“The loans I am processing are 80% CMBS conduit loans, 15% Fannie Mae multifamily loans and a few community bank portfolio loans,” noted Jim Brett, Chief Underwriter at ValueXpress. “We are processing a significant amount of CMBS conduit hospitality loans in addition to retail and industrial properties.”

ValueXpress is working overtime to maintain closing schedules while continuing to deliver its typical high level of service to its clients. The company expects all transactions to be completed within the time frames required by its clients.

11.12.12: ValueXpress Teams Up with RBM Financial on Loan Diligence

With the surge of loan applications (see “Low Rates Spur Surge in CMBS Loan Applications”), ValueXpress has announced it is working with RBM Financial to ensure that loan underwriting and closing documentation required from CMBS conduit borrowers are managed in a timely manner to meet loan-closing time frames. RBM will assist ValueXpress on portfolio transactions and other transactions during peak periods in which there is potential that ValueXpress staff may not be able to handle the work volume.

“Our mission is to provide service to our clients by assisting them in understanding and completing the entire CMBS loan process in a timely and efficient manner,” said Michael D. Sneden, Executive Vice President of ValueXpress. “Should we experience peak loan volume, we want to ensure that service does not suffer; during those periods, RBM will assist us in maintaining the service level our clients expect.”

“My team has been completing diligence on real estate loans and assets for over 25 years,” commented Richard B. Marion, Principal in RBM Financial. “I have professionals who can hop on a plane at a moment’s notice should ValueXpress require resources on-site to work with its clients on loan diligence. My staff is instilled with the same service orientation as Mike’s team, and I am confident we will work well together.”

RBM Financial is a real estate advisory firm headquartered in Atlanta, Georgia. The firm provides due diligence services, underwriting and cash flow analysis for CMBS loans and CMBS securities for institutional investors and investment banks that originate CMBS loans for securitization.

11.7.12: CMBS Delinquency Rate Dips to 8.3%

According to Fitch Rating Services, the delinquency rate for commercial MBS loans inched down again last month, despite the addition of a big multifamily mortgage to the late-payment list. The percentage of securitized commercial mortgages that were 60 days past due stood at 8.29% on October 31, down 8 basis points (bp) from a month earlier, according to Fitch. After peaking at 9.01% in July 2011, the delinquency rate slid to 8.3% in February, cranked back up to 8.65% in May, and since then, it has dropped steadily. It is now at its lowest level since December 2010, when it was 8.23%.

The amount of debt removed from Fitch’s delinquency index continued to exceed the balance of loans added, although not by much. About $1.4 billion of mortgages were resolved via liquidations, modifications, or some other type of workout in October, while $1.3 billion of loans were newly counted as delinquent.

Meanwhile, the volume of outstanding CMBS stopped shrinking, at least temporarily. Some $4.6 billion of Fitch-rated CMBS was issued in October, outweighing the $3.4 billion of bonds that paid off or defaulted. The agency now maintains ratings on $390.2 billion of bonds backed by about 31,000 commercial mortgages. The rise in that balance, which serves as the denominator when calculating the percentage of delinquent loans, helped keep the rate down.

11.2.12: ValueXpress Up and Running Despite Sandy

With an ability to work remotely, the ValueXpress team is underwriting and closing loan transactions with its clients; closing schedule expectations remain on track. Jay Bhakta is with clients in Houston and Corpus Christi, TX finishing up due diligence on six transactions totaling over $35 million in loan proceeds; all are expected to close on schedule within the next 14 days. Jim Brett is coordinating this effort with our investment bankers from his home in central New Jersey. Mike Sneden is finishing three multifamily transactions that are scheduled to close in November and December. Gary Unkel is in the closing phase for two hotel transactions in San Antonio, TX that are expected to close as scheduled on November 14 and completing due diligence with Jim on an industrial transaction expected to close in December. Kevin Monahan and Ken Stevenson continue to send out loan proposals for new transactions to allow clients to take advantage of CMBS conduit loan rates in the 4.5% area that can close by year-end.

“Best of all, this work is being done with no one in our NY home office except Danny Dell,” said Michael D. Sneden, Executive Vice President of ValueXpress. “You don’t see Danny Dell on our web site as an employee? Well that’s because we keep him in a closet; Danny is our server. As long as Danny has power we can work from anywhere and our clients’ loans will close without us missing a beat.”

11.1.12: Deutsche Bank and Cantor Price CMBS Issue at Tighter Spreads

Deutsche Bank and Cantor Fitzgerald priced a $1.11-billion CMBS transaction today that found strong demand; it priced at tighter levels than the previous CMBS deal from Wells Fargo and RBS that priced on Tuesday, October 16. The AAA-rated super-senior bonds priced mostly in line with initial pricing guidance at 83 basis points (bp) over swaps and at tighter spreads than comparable paper in the previous Wells/RBS deal that priced at 85 bp. Spreads on the junior AAA-rated bonds priced 5 bp tighter than guidance at 122 bp (13 bp tighter than the RBS/Wells deal), and the AA-rated Class B bonds priced 8 bp tighter than initial guidance at 167 bp (13 bp tighter than the RBS/Wells deal) as investors moved down the credit stack to find decent yield. The class B bonds were 4.5x oversubscribed at the initial guidance level of 175 bp before pricing was tightened to the final pricing level of 167 bp. The deal’s collateral was contributed by Deutsche (48.3%), Cantor (38.6%) and Key Bank (13.1%). The offering is backed by 48 loans, with retail properties representing 40.6% of the collateral pool, followed by office and mixed-use at 24.5% and 14.6%, respectively. Hospitality properties were 12% of the collateral pool.

“The results of this offering continue an extraordinary rally in CMBS and are great news for CMBS borrowers and originators,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “We are seeing another decline in spreads to borrowers of about 5 bp to the swaps-plus-225-240 range for a conduit loan with a 10-year term, resulting in interest rates less than 4.5% and close to 4.0% for lower leverage commercial deals.”

10.24.12: Average Loan Coupon Declines for CMBS Loans

Weighted-average loan coupons continue to decline. The recent Deutsche Bank/Cantor Fitzgerald deal set a new post-crash low with a weighted-average coupon of 4.63%, continuing a trend over the past few months of declining average coupons. The chart below shows the weighted-average coupons for recent CMBS offerings.

Issue Date Issuer Deal Size (mm) Weighted Coupon
6/28/12 UBS/Barclays $1,216.1 4.980%
7/13/12 MS/BofA $1,352.2 4.738%
7/20/12 Wells Fargo/RBS $1,301.0 4.920%
8/8/12 Deutsche/Cantor $1,321.2 4.931%
9/10/12 Citigroup $1,040.2 4.954%
9/14/12 UBS/Barclays $1,082.1 4.985%
9/19/12 Wells Fargo/Ladder $1,277.2 4.807%
9/27/12 JPMorgan $1,136.6 4.701%
10/3/12 Deutsche/Cantor $1,251.4 4.833%
10/3/12 MS/BofA $1,123.5 4.693%
10/16/12 Deutsche/Cantor $1,111.0 4.633%

“These results are impressive as CMBS conduit loans become more competitive with insurance company rates on commercial properties and Fannie Mae/Freddie Mac rates on multifamily properties,” commented Jim Brett, underwriting chief at ValueXpress. “We recently secured a CMBS conduit multifamily loan quote on a $10-million student housing transaction in the 4.25% area that was within 25 basis points of a 75% LTV Fannie Mae/Freddie Mac quote. With the tendency for more-aggressive appraisal outcomes in CMBS, the borrower is seriously considering the conduit deal over the Fannie/Freddie deal.”

10.19.12: Watch Kevin Monahan Discuss Commercial Capital Training Group

Kevin Monahan of ValueXpress was interviewed by Commercial Capital Training Group (CCTG). Click the arrow below to listen to what Kevin has to say about CCTG:

10.12.12: Bharti Patel Wins NOOK Tablet at 2012 Northeast Conference of Mortgage Brokers Trade Show

Mortgage banker Bharti Patel won a NOOK Tablet e-reader at the ValueXpress booth at the Northeast Conference of Mortgage Brokers Trade Show, held recently at the Trump Taj Mahal Casino Resort in Atlantic City, N.J. Bharti is a broker associate, loan officer and manager of Richa Realty Inc. and Richa Mortgage Co. Associated with Richa for more than 20 years, Bharti’s clients include those seeking to purchase or sell residential and commercial real estate and those seeking to finance their home, investment property or small business property. Bharti prides herself on knowing her clients well and understanding their needs; her clients come back to her time and again to purchase, sell and refinance their homes and small businesses. Richa, based in Edison, N.J., is a leader in the N.J. Asian American Community.

“The trade show was highly successful for us,” commented Kevin Monahan, a Regional Loan Originator who covers the northeastern United States for ValueXpress. “I reconnected with a significant number of my colleagues and I am busy following up with the more than 300 mortgage professionals who visited the ValueXpress booth at the trade show.”

10.10.12: CMBS Buyers Focus on Lower-Tier CMBS

The CMBS rally that took hold at midyear has been changing shape lately, according to Commercial Mortgage Alert. Increasingly, yield-hungry bond buyers are clamoring for subordinate paper, typically junior classes AS, B and C, which carries lower subordination levels and is riskier than senior CMBS.

While new-issue prices for super-senior bonds have leveled off since late September, they have jumped sharply for the junior classes of investment-grade paper. Also, values have soared in the secondary market on the equivalent classes of both post-crash issues and legacy transactions.

“There is just not enough to go around,” said one investor. “The stuff that’s getting the most attention now is anything that’s yield-y, so people are moving down the capital stack. Meanwhile, prices for super-senior bonds appear to have stabilized following a summer surge because the resulting yields aren’t as attractive as they were just a month ago.”

“Country Bank is a buyer of class AS and class B CMBS, and we are finding the spreads grinding 5-10 basis points tighter as each new deal prices,” commented Michael Sneden, Executive Vice President of ValueXpress. “Plus, we are getting our allocations cut on each deal; most recently, we received only $3 million of class B bonds from the WFRBS 2012-C9 deal in which we placed an order for $8 million of bonds.”

10.5.12: ValueXpress to Exhibit at 2012 Northeast Conference of Mortgage Brokers

On Tuesday, October 9 and Wednesday, October 10, ValueXpress will be exhibiting at the Northeast Conference of Mortgage Brokers Trade Show in Atlantic City, N.J. Plan to stop by the Trump Taj Mahal Casino Resort Exhibition Hall and see us; ValueXpress will be in Booth 303.

The annual Northeast Conference of Mortgage Brokers brings together commercial and residential mortgage professionals, many of whom are affiliated with the Mortgage Bankers Association (MBA) in the eastern portion of the United States. Each state MBA is dedicated to promoting growth and good business practices in the real estate finance industry, and it is a resource that provides communication and networking opportunities for its members.

“ValueXpress is pleased to have this opportunity to meet with mortgage brokers at this Conference to explain in detail its SBA 7(a), SBA 504, USDA B&I, CMBS conduit and conventional commercial loans for owner-occupied and investment properties,” said Michael D. Sneden, Executive Vice President of ValueXpress. “We will be jointly representing our affiliated company, Country Bank, at the trade show. The timing of the show is perfect for us as we are seeing a substantial increase in CMBS conduit loan originations providing 10-year fixed rates in the 4.5% area on a non-recourse basis for income producing properties. The beauty of this product is cash out is permitted unrestricted for any purpose.”

ValueXpress will be heavily marketing its CMBS conduit program. “The CMBS conduit market right now is on fire, and we want to share the benefits, of long-term, fixed-rate, non-recourse commercial loans for larger balance (more than $5 million) transactions,” said Jim Brett, head of underwriting at ValueXpress.

Need a little incentive to visit us at the show? ValueXpress will be giving away a Nook Tablet e-reader from a drawing of business cards collected at our booth during the show. The drawing will be at 4:00 p.m. on Wednesday, October 10; the winner need not be present at the drawing.

Would you like a personal appointment with a ValueXpress representative during the show? Call now and book an appointment with Kevin Monahan (973) 579-6061 or Mike Sneden (212) 883-6447.

10.3.12: CMBS Volume Could Hit $46 Billion for the Year

A surge of fourth-quarter deals is expected to lift full-year U.S. commercial mortgage-backed securities issuance to at least $46 billion, far above earlier estimates. Some $14.9 billion of transactions are expected to price in the fourth quarter, according to a review by Commercial Mortgage Alert. That would be on top of the $30.9 billion of activity in the first nine months of the year.

At midyear, issuance totaled $18.3 billion. While that appeared to put the sector roughly on track to reach the $38-billion annual projection by a panel of CMBS bond pros, a blowout in spreads in May and June put a damper on lending, threatening to depress second-half activity. But a bull market that began in July bolstered the competitive position of CMBS shops, and lending has picked up significantly -- especially in the past month -- leading to new entries in the deal calendar.

Five issues totaling $4.4 billion are scheduled for this month, including two that priced this week. Seven offerings totaling $6.5 billion are in the queue for November. And three transactions totaling $4 billion are on tap for December.

The projected $14.9 billion of fourth-quarter deals would exceed the $12.5-billion average of the second and third quarters and more than double the first-quarter volume of $6 billion -- a sign that the sector is gaining momentum after a long slump caused by the financial crisis and the ensuing recession. What’s more, several single-borrower transactions now under discussion could be added by yearend, continuing a surge of such deals.

9.28.12: A Quick Look at New Issue CMBS Loan Underwriting

According to research by CS First Boston, one concern about the increasing rate of CMBS issuance is that the quality of underwriting has deteriorated quickly, as originators stretch in terms of credit quality, in order to increase the volume of loans coming to the market. With this in mind, CS First Boston took a quick look at some of the trends it has seen following the latest spate of conduit issuance.

In its view, the drop in credit metrics from 2010 to 2011 is much starker than the change in top-level metrics that has taken place over the first three quarters of 2012. While it certainly has noted some negative trends, such as the increase in more highly levered interest only loans, CS does not, at least at this point, find these trends overly troubling.

That said, CS generally looked at overall trends in this analysis rather than individual deals. While the overall averages may have exhibited only small shifts, surely some deals are better underwritten than others.

Deals still need to be evaluated on a case-by-case basis, especially as investors gravitate further down the credit stack. CS has, for example, seen loans in some deals that have again been made using pro forma assumptions. While these may be justified on an individual basis, as they have learned in the past, it can be a slippery slope; a quirk in a single loan can quickly manifest itself to become a common trend across all deals.

9.21.12: Fed Move Spurs Pickup in CMBS Rally

CMBS spreads fell to post-crash lows after the long-term, super-senior bonds from a $1.3-billion multi-borrower offering by Wells Fargo, Ladder Capital and RBS priced at 85 basis points (bp) over swaps on Wednesday, September 19, 2012, according to Commercial Mortgage Alert. This was down from the 95-bp spread at issuance on the equivalent class of a $1.1-billion offering led by UBS and Barclays that priced a week ago. In both cases, the bonds flew off the shelves with spreads 5 bp tighter than price guidance from their dealers.

The surge in demand followed the Federal Reserve’s commitment to boost liquidity in the fixed-income markets by launching a third round of bond buying under its “quantitative easing” program. The move accelerated a CMBS rally that began just after the benchmark spread hit this year’s peak of 160 bp in late June.

The spread-tightening trend should be a boon to CMBS lenders, which are slated to float another $7 billion of offerings by the end of next month. “This feels pretty sustainable,” one CMBS trader said. “I wouldn’t be surprised to see spreads [on long-term super-seniors] hit 80 bp before they level off.”

Until last week, the post-crash low for new-issue spreads on benchmark paper was 100 bp, achieved on just two deals: a $1-billion conduit offering by Citigroup, Goldman Sachs and Natixis that priced on September 10 (Citigroup Commercial Mortgage Trust, 2012-GC8) and a $1.3-billion multi-borrower issue led by Wells and RBS in February 2011 (WF-RBS Commercial Mortgage Trust, 2011-C2).

In this week’s Wells-Ladder-RBS deal, the investment-grade bonds went out the door with spreads that were either in line with price talk or tighter by 5-20 bp. As for the UBS-Barclays issue, the investment-grade bonds, except for the benchmark class, matched guidance down to the double-A-minus level. The single-A-minus paper from that deal was placed at 300 bp, down 15-25 bp from talk, and the triple-B-minus bonds went for 575 bp, down 25-50 bp.

9.19.12: Tightening CMBS Spreads a Bonanza for Borrowers – Part II

In July I wrote that CMBS spread tightening has resulted in a very favorable rate environment for CMBS conduit borrowers compared with just a few months earlier. Well, based on the recent CMBS issues, borrowing rates are poised to drop further in upcoming weeks as the results of recent CMBS issues are reflected in new loan quotes.

“New loan quotes are expected to be in the range of 225-250 basis points (bp) over the 10-year swap rate,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “With the 10-year swap rate at 1.75%, borrowing rates are solidly under 4.50% and larger transactions are seeing rates under 4.25%.” As evidence, 70% of the recent Wells Fargo/RBS CMBS deal that priced on September 12 contained loans with rates under 5%, and those loans were based on wider spreads prevalent a few months ago when most of the loans were closed.

With the 10-year swap rate at 1.75% and anticipated loan spreads of 250 bp, the all-in rate to borrowers on a $10-million shopping center or office building underwritten to a 70% LTV and 1.35x debt-service coverage ratio is in the 4.25% area, very attractive indeed.

9.12.12: Small Business Capital and the Mark Feathers Saga…Cont’d

It appears that I was off base when I suggested the Securities Exchange Commission (SEC) might not understand the business model for Small Business Capital. In July, I wrote, “If you understand the structure of SBA loans, the two SBC funds conceptually make sense. The SEC alleges the returns on the Prime Fund that likely received the sales proceeds from SBA guarantee sales were “too good to be true,” but the market for SBA guarantees is indeed 115%, which is very high,” said Michael D. Sneden, Executive Vice President of ValueXpress. “Perhaps SBC is culpable, but I wonder if the SEC is not following how the business works; we shall see as the investigation unfolds.” Click here to read that post.

Well, the receiver charged with recovering assets on behalf of investors is estimating losses of $12 million. The receiver notes many “grey area” business practices, including failure of documenting his $650,000 equity injection, excessive compensation, patronage and using company assets for personal use. Compensation included $15,000 per month for Mr. Feathers and $15,000 per month for his wife. In addition, Mr. Feathers received $232,000 in consulting fees, and his children and their caregiver were on company payroll. Company records include payments for “expensive” cars and credit card charges for personal use. The receiver goes on to list other “improper” expenditures.

“It appears that this situation has nothing to do with the origination and selling of SBA guarantees and the distribution of profits,” said Sneden, “so I am quietly going to watch the outcome, as the situation does not appear to be good for Mr. Feathers.”

9.7.12: ValueXpress Welcomes Ken Stevenson

Ken Stevenson, a 20-year veteran in commercial real estate lending, has joined ValueXpress, effective September 1. Stevenson will be primarily responsible for commercial loan originations in the western United States.

“Ken brings an outstanding breadth of experience to the ValueXpress team,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “Ken cut his teeth at S&P, rating CMBS in the 1990s, and took that experience to Lehman Brothers, originating over $1 billion of CMBS transactions from 2002 to 2006. Ken took that experience to the next level when he was tapped to become Group Head of the Northeast Region for SunTrust Bank, which was making a big push into CMBS loan origination. We are very fortunate to have someone of Ken’s caliber on board.”

Since 2008, Stevenson managed the CMBS Structured Product Team at Vanguard Group, the largest U.S. mutual fund company. At Vanguard, he was responsible for $10 billion of CMBS held in actively managed and indexed mutual fund accounts.

“I am looking forward to returning to the origination side of the business after watching my CMBS accounts reap the rewards of the market recovery,” commented Stevenson. “I have always been a believer in the CMBS loan product, and look forward to assisting my former clients and new clients secure the record-low rates now being offered on CMBS loans.”

Stevenson can be reached at kstevenson@valuexpress.com.

9.2.12: Delinquency Rate Falls 21 BP in August – Largest Decline Since November 2011

The long-anticipated leveling off of the U.S. CMBS delinquency rate became a reality in August. Over the last few months, we predicted that the Trepp CMBS Delinquency Rate would hit a high in early to mid-summer then decelerate in the second half of the year. That prognostication came to fruition in August when the delinquency rate fell sharply. The delinquency rate for U.S. commercial real estate loans in CMBS fell 21 basis points (bp) to 10.13% in August. It was the largest one-month drop since November 2011. And the decrease occurred after five consecutive months in which the rate increased, including three months that set all-time records.

The improvement in the rate was driven primarily by two factors. First, loan resolutions remained elevated. Almost $1.5 billion in loans were resolved with losses in August. The removal of these loans from the delinquent loan category accounted for 26 bp of downward pressure on the delinquency rate. Second, most of the 2007 securitized loans have passed their maturity date. The upward pressure that these loans put on the delinquency rate when they could not be refinanced upon maturity is now largely gone.

Among the major property types, the apartment, lodging, and office segments all improved. The laggards were industrial and retail loans; their rates drifted higher in August. Loans that were newly delinquent -- around $3.3 billion in total -- put upward pressure of about 57 bp on the rate. This was a sharp decline from July when newly delinquent loans resulted in an increase of 81 bp ($4.6 billion). Loans that cured -- about $2.8 billion -- put downward pressure of 48 bp on the rate in August. Added together, the impact of the loan resolutions, the effect of loans curing, and the effect of newly delinquent loans created a net decrease of 17 bp in the rate. One category to keep an eye on is loans that are past their balloon date but are current in their interest rate (“performing balloons”). This category now accounts for 1.13% of loans in the database, down 16 bp in August. If we were to consider these loans late, the delinquency rate would have been 11.26%. On this basis, the delinquency rate for August was down 37 bp from the July rate with performing balloons included.

Delinquency Status Percentage
Current 88.74
30 Days Delinquent 0.56
60 Days Delinquent 0.30
90 Days Delinquent 1.74
Performing
Matured Balloon

1.13 (1)
Non-Performing
Matured Balloon

1.30
Foreclosure 3.08
REO 3.15
(1) Loans that are past their maturity date but still current on interest are
considered current.


Period % 30 Days
or More Delinquent
Aug-12 10.13%
Jul-12 10.34
Jun-12 10.16
   
3 Months Ago 10.04%
6 Months Ago 09.37
12 Months Ago 09.52


8.29.12: Brokers: How to Get an MBA in CLO

Since May, ValueXpress has been participating in the education and training of professionals in commercial loan origination (CLO) as part of Commercial Capital Training Group’s (CCTG) education program. The ValueXpress CMBS presentation, which includes a review of the company’s specialty niche of hospitality financing, is one of over 42 different product segments and financial instruments discussed during the week-long program. Each month, a new group of students gets together with CCTG’s Kris Roglieri and Jon Consentino to learn how to become successful commercial loan brokers or more effective brokers.

“Each month I’m impressed by the caliber of people participating in the CCTG program,” states Kevin Monahan, a senior loan originator at ValueXpress and CCTG educator. “The program provides students with the tools and support needed to understand and implement successful commercial loan origination techniques, hopefully resulting in some big paydays down the road.”

If you are interested in CCTG’s training program or you would like additional information, contact Kris Roglieri or Jon Consentino at 518-694-3047 or visit CCTG’s website at www.CommercialCapitalTraining.com.

If you are a CCTG graduate and you have a potential CMBS or hospitality deal requiring a lender, please contact Kevin Monahan at 973-579-6061.

8.24.12: Calm Before the CMBS Issuance Storm

After only one issue at the beginning of August, the CMBS market is preparing for a flurry of deals in September and October. CMBS conduit shops are expected to team up, mainly with their usual partners; in September, the market can expect deals from JPMorgan/CIBC, UBS/Barclays, RBS/Wells Fargo, Goldman Sachs/Citigroup and Deutsche Bank. In October, Morgan Stanley/Bank of America and JP Morgan are expected to have deals ready to market. Total issuance is expected to approximate $8 billion.

With year-to-date 2012 issuance of $25 billion essentially flat with 2011, the surge in issuance will position the market to exceed full-year 2011 issuance of $36 billion, perhaps landing in the $40-$45 billion range, the largest issuance since the market resumed in 2010.

“It will be interesting to see if the new supply provides upward pressure on spreads,” said Michael D. Sneden, Executive Vice President of ValueXpress. “In the last three deals, investment-grade classes were oversubscribed and we had our allocations cut by 75%. Perhaps there will be enough bonds to go around this time.”

UBS and Barclays figure to be first out of the gate as their deal is expected to begin marketing right after Labor Day, but the RBS/Wells and JPMorgan deals will be right on the heels of the UBS deal.

8.20.12: Energy Boom Boosting Texas Hotel Performance

Jay Bhakta, a senior loan originator at the ValueXpress Jackson, MS office, has lived in Jackson, MS for over 20 years. During that time he has become a well-known financier to the Asian-American community, having financed numerous hotels, gas stations and fast food/convenience stores in the past ten years. The market slowed during the economic crisis, but more important, Jay noticed that Mississippi, Louisiana and Florida, his bread and butter states, were slow to recover.

So a couple of weeks ago, Jay called me. “Mike, I am going on the road, just like the old days,” he said.

I remembered the old days when Jay often hopped in a car or jumped on a plane to meet clients personally. Not that Jay had stopped doing that; it was just not working as well. So I asked Jay where he was going.

“I got a call from my Uncle Raj,” said Jay. “He says he’s hitting the cover off the ball in Corpus Christi, TX. I am stopping in Houston to see Ajay as well.”

“Huh,” I said to myself. I wondered what was going on.

“Mike, it's oil and gas,” Jay explained. “With increased domestic drilling for oil and gas, transient lodging is needed all over the place, and Texas is a major beneficiary.”

Needless to say, Jay’s trip is yielding results. We have more than ten hotel deals with term sheets out to borrowers. One borrower just keeps adding more properties -- currently four with a loan total over $25 million, including the highest performing Staybridge in the state of Texas.

Jay…please stay on the road!

8.17.12: Barclays: More Investors Now Focused on Both RMBS and CMBS

Investors in the non-agency secondary mortgage markets are now looking at opportunities across asset classes, according to Barclays Capital. "Since 2009, non-agency RMBS and CMBS have posted extraordinary price returns," said Barclays analysts in an email late Friday. "We believe more investors are now focusing on both asset classes and need to make allocation decisions."

Both sectors went through a period of issuance growth in 2003-2006, according to the note. And then in 2006-2009, both asset classes went through a long period of underperformance and asset sales.

"Since then, both have attracted wide-ranging interest from alternative as well as traditional money managers," Barclays analysts said. "Both markets have posted very substantial price gains since mid-2009." And they pointed out that prices in the non-agency RMBS space are now 60%-80% higher relative to the March 2009 bottom.

The analysis also highlights the nuances of each asset class. For example, lately, commercial real estate prices are more volatile than residential. Also, investors who traditionally picked either asset class may be moving into other markets, but remain largely disconnected from one another. Barclays is hoping to bridge this gap.

8.10.12: ValueXpress Looking for Loan Originators

Last November, I put out a call for loan originators to join our team; at that time Kevin Monahan and Leon Elliott came aboard. Kevin has approximately 10 deals committed and Leon has well over $60 million in loans approved, including a $32-million hotel portfolio loan and a $24-million office portfolio loan. The primary demand has been for CMBS conduit loans, which provide higher fees and faster processing time.

“The CMBS conduit market is on a tear. ValueXpress is now originating CMBS conduit loans at a $200-million annual pace, not far off the levels we were producing prior to the market crash in 2007,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “So now I am repeating my efforts and looking to find additional originators as the market for CMBS loans is the best it’s been in four years.”

“We’re looking for individuals who are seeking a flexible, entrepreneurial and financially rewarding career path,” Sneden continued. “If you are a mortgage banking professional with specific experience in the origination of CMBS conduit loans, contact me at msneden@valuexpress.com so we can set up a time to talk.”

ValueXpress has access to a database of every closed CMBS conduit loan that is outstanding. The database has historical property operating data, rate and term information, servicer commentary and, most important, loan maturity. The ValueXpress origination team has been mining this database, carving it up based on the location of ValueXpress originators; this allows our originators to make personal contact with owners who are approaching maturity to assist them in refinancing their properties. As noted below, many CMBS conduit borrowers are having a difficult time paying off their loans; they are in great need of the services provided by ValueXpress.

8.7.12: July Payoff Report: Percentage of Loans Paying Off Hits New 12-Month Low

The percentage of loans paying off on their balloon date hit a 12-month low last month, according to the just-released Trepp July 2012 Payoff Report. With only 26.3% of loans reaching their balloon date paid off, the July total was well under the 12-month average of 41.6%. (This number simply sums the averages of each month and divides by 12; there was no balance weighting across the months.)

By loan count (as opposed to balance), 33.3% of loans paid off, which means the 12-month rolling average is now 52.2%. The disparity between the volume-based total and the count-based total indicates that it was mostly small balance loans that managed to pay off in June.

In comparison, the May payoff rate registered a paltry 29.4%. At the time, that was the lowest reading since October 2010, when the payoff percentage was 22.3%. July’s 26.3% payoff percentage was even lower than May’s 29.4%.

Prior to 2008, the monthly payoff percentages were typically well north of 70%. Since the beginning of 2009, however, there have only been four months in which more than half of the balance of loans reaching their balloon date actually paid off.

“These statistics are not surprising to us,” noted Jim Brett, Senior Underwriter at ValueXpress. “We recently helped a borrower that had a matured CMBS conduit loan and the special servicer was putting substantial pressure on the borrower to close. We had to process the loan quickly, and when the special servicer demanded $500,000 in late fees and default interest right before closing, we stepped in and helped with negotiations. We are actively searching the CMBS conduit loan universe to help other borrowers pay off their maturing CMBS conduit loans as there are obviously a lot a similar situations out there.”

8.1.12: Second-Quarter Commercial/Multifamily Mortgage Originations Up 25% from a Year Ago

Washington, DC (July 31, 2012) – Commercial/multifamily mortgage origination volumes during the second quarter of 2012 were up 25% from second-quarter 2011 levels and up 39% from the first quarter of 2012, according to the Mortgage Bankers Association’s (MBA) Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations.

“Commercial and multifamily mortgage lending and borrowing continued to pick up in the second quarter,” said Jamie Woodwell, MBA’s Vice President of Commercial Real Estate Research. “Low interest rates and continued stabilization and growth in the commercial real estate markets are helping support new loan originations, and every major investor group increased their lending over the quarter.”

The 25% overall increase in commercial/multifamily lending volume, when compared with the second quarter of 2011, was driven by increases in originations for retail and hotel properties. The increase included a 56% increase in the dollar volume of loans for retail properties, a 22% increase for hotel properties, a 19% increase for multifamily properties, a 15% increase for office properties and an 11% increase in healthcare property loans. These gains offset a 5% decrease in industrial property loans.

Among investor types, the dollar volume of loans for commercial bank portfolios increased by 58% over last year’s second quarter. There was also a 50% increase in loan volumes for Government Sponsored Enterprises (or GSEs – Fannie Mae and Freddie Mac), a 16% increase in volumes for conduits for CMBS and a 10% increase in volumes for life insurance companies.

Second-quarter 2012 commercial and multifamily mortgage originations were 39% higher than originations in the first quarter of 2012. Compared with the first quarter, second-quarter originations for hotel properties saw a 147% increase. There was a 66% increase for office properties, a 47% increase for industrial properties, a 33% increase for healthcare properties, a 29% increase for retail properties and a 21% increase for multifamily properties.

Among investor types, between the first and second quarters of 2012, loans for conduits for CMBS saw an increase in loan volume of 302%, loans for life insurance companies saw an increase in loan volume of 37%, originations for GSEs increased 28% and loans for commercial bank portfolios increased by 9%.

7.26.12: CMBS Spreads Reverse Direction and Tighten

CMBS spreads reversed direction and tightened in the past two weeks after CBMS offerings from Morgan Stanley/Bank of America (BoA) and Wells Fargo/RBS priced at sequentially tighter spreads from peak levels seen in June when UBS/Barclays widened pricing of long-term super senior CMBS from its multi-borrower issue to 160 basis points (bp) over swaps.

On July 13, Morgan Stanley and BoA priced the long-term, super-senior class of a $1.4-billion conduit deal at 135 bp over swaps after originally offering it at 145-150 bp. Demand for all of the investment-grade classes was strong as the underlying assets were viewed as high quality, and investors were compelled to put cash to work, despite lower yields. Half of the junior AAA-rated AS class, B class and C class were carved out for one buyer; this reduced the amount available for other investors and resulted in the classes being oversubscribed.

Demand increased further when ten-year bonds from the super-senior portion of a $1.3-billion multi-borrower issue led by Wells Fargo and RBS priced at 120 bp over swaps on July 20. The dealers had been marketing those bonds with price guidance of 130-135 bp. Most of the classes were oversubscribed.

“Demand for CMBS in the past 30 days has been very strong,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “Although CMBS yields are relatively low, they are higher than comparably rated corporate securities and they provide diversity in the underlying income-producing assets to pay bondholders and transparency in cash flow reporting to investors,” said Sneden. “We received only 33% and 25% of our CMBS purchase orders on both the Morgan Stanley/BoA and the Wells Fargo/RBS deals, respectively, as the classes we ordered were oversubscribed.”

7.23.12: Tightening CMBS Spreads a Bonanza for Borrowers

CMBS spread tightening has resulted in a very favorable rate environment for CMBS conduit borrowers compared with a few weeks ago.

“Benchmarking borrower rates is becoming a daily event,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “Borrowing rates are once again solidly under 5.0% and larger transactions are seeing rates under 4.5%. In fact, the Morgan Stanley/BoA CMBS issue that priced on July 13th featured two large loans with borrowing rates under 4%.”

The Morgan Stanley/BoA issue contained 6 additional loans with rates between 4.0% and 4.5% and a total of 36 loans (75% of the entire CMBS issue) that carried a rate of less than 5.0%. Similarly, the Wells Fargo/RBS issue featured 3 loans with rates between 4.0% and 4.5% and 38 loans (67% of the entire CMBS issue) that carried rates under 5.0%.

With the 10-year swap rate at 1.55% and loan spreads just south of 300 basis points, the all-in rate to borrowers on a $10-million shopping center or office building underwritten to a 70% LTV and 1.35x debt-service coverage ratio is in the 4.5% area, consistent with the rates seen in the Morgan Stanley/BofA and the Wells/Fargo CMBS deals.

7.18.12: Small Business Capital and the Mark Feathers Saga

For lenders and intermediaries involved in SBA lending, the saga of Small Business Capital (SBC) and its CEO Mark Feathers provides more drama than the TV show "The Housewives of New Jersey." SBC is a licensed SBA lender located in Los Altos, CA. The firm holds 1 of 14 non-bank SBA 7(a) licenses that allows the firm to make SBA loans and, more importantly, sell the guarantees associated with SBA 7(a) loans in the secondary market. SBA 7(a) loans are 75% guaranteed by the SBA, and in today’s market, the guaranteed portion of the loan can be sold at a substantial premium of up to 15% greater than its face amount (i.e., a $1-million guarantee will sell for upward of $1,150,000, providing an immediate profit of $150,000).

SBC was capitalized by private investors through an offering memorandum. The offering memorandum pitched two funds, the Investors Prime Fund and the SBC Portfolio Fund. It is likely that the SBC Portfolio Fund was structured to hold the unguaranteed portion of SBA 7(a) loans (25% of the total loan), thereby generating interest income for investors from mortgage payments. The Investors Prime Fund probably recorded the income from guarantee sales and was structured to share that income among SBC and investors in the Prime Fund. In addition, SBC collected management fees from both funds, which is not unusual.

On June 29, 2012, the SEC shut down SBC alleging fraud in a “Ponzi-like” scheme. The SEC claims that SBC and Mark Feathers were paying returns that partly came from fund profits and partly from other investors, typical of a Ponzi fraud.

“I am watching this one,” said Michael D. Sneden, Executive Vice President of ValueXpress. “If you understand the structure of SBA loans, the two SBC funds conceptually make sense. The SEC alleges the returns on the Prime Fund that likely received the sales proceeds from SBA guarantee sales were “too good to be true,” but the market for SBA guarantees is indeed 115%, which is very high,” said Sneden. “Perhaps SBC is culpable, but I wonder if the SEC is not following how the business works; we shall see as the investigation unfolds.”

7.13.12: Trepp: Only 28% of Maturing 2007 CMBS Loans Paid Off in Full

According to Trepp, 2007 marked the year that commercial real estate values and the surrounding euphoria peaked. In the five years since, investors have spent countless nights fretting about the weak underwriting, optimistic revenue forecasts and inflated values tied to these loans. Prevailing wisdom indicated that the default rate would be high and many of the loans would struggle to refinance. Now that 2012 is half over, we can see how these loans have fared. For the most part, their performance has met investors' dismal expectations.

Almost 13% of the loans were paid off prior to their maturity date. Another 15% paid off at the balloon date or in the months after the maturity date. Therefore, only about 28% of the Class of 2007 loans paid off in full. The Class of 2007 loans that matured in the first half of 2012 in its entirety looks like this:

Total Balance of Loans: $18.6 billion
Extended: 30.49%
Disappeared Early:
(Loss): 8.26%
(Par): 12.94%
Paid Off at Balloon:
(Loss): 2.63%
(Par): 15.19%
Still Outstanding (includes extended loans): 60.98%

7.9.12: Apparently Discounted Payoffs Are Okay for CMBS Conduit Loans

A detailed read of the 699-page prospectus for the CMBS issue from Jeffries LoanCore, Goldman Sachs and Citigroup (GSMS 12-GCJ7) that closed in June 2012 revealed some interesting facts regarding refinance loans in which the prior lender was being paid off at less than the full amount due. Pages 29-30 of the prospectus state: “Seven (7) of the mortgage loans, representing approximately 13.7% of the aggregate principal balance of the pool of mortgage loans as of the cut-off date, were refinancings of defaulted loans or otherwise involved discounted payoffs.” The prospectus described a $5-million principal forgiveness from the prior lender on the 4th-largest loan in the pool, an $87-million industrial loan. In addition, the majority of the 10th-largest loan, the $47-million McCraney Industrial Portfolio, went to pay off a $63.5-million obligation for only $39.6 million.

“Whereas the commercial banking system is not inclined to finance a property in which the prior lender is taking a loss, the nature of CMBS underwriting is on current and sustainable cash flow, including appropriate vacancy, management fees, and capital reserve assumptions, that concludes an appropriate loan amount,” notes Michael D. Sneden, Executive Vice President at ValueXpress. “If the concluded loan amount is acceptable to the borrower, the amount it pays off is almost immaterial, allowing for discounted payoff situations.”

7.3.12: Fracking Boosts Hotel Business

Hydraulic fracking has positively influenced hotel performance in areas with high fracking activity. One such area in the eastern portion of the United States is in the “Marcellus Shale” region, mostly found under the states of Pennsylvania, Ohio and West Virginia. These three states allow fracking, a process of horizontal ground drilling in conjunction with injection of high-pressure water and chemicals to extract natural gas. The Marcellus Shale has resulted in a significant positive impact from gas exploration companies establishing operations in these areas and travel to these areas by a variety of natural gas specialists. As a measure of impact, Smith Travel Research reports increases in revenue per available room (RevPar) of 9.3% in 2010 and 9.9% in 2011.

“I am getting a lot of calls for hotel construction loans in central and north central Pennsylvania,” notes Michael D. Sneden, Executive Vice President at ValueXpress LLC. “My sources were reporting 100% occupancy at hotels in the heart of drilling areas. The concern is that the fracking process is an in-and-out effort. You drill the well, connect it to a pipeline and leave. Eventually, all this transient demand for hotel rooms will end.”

Sure enough, with the collapse of natural gas prices to below $3.00/mcf in 2012 from over $9.00/mcf in 2008, drillers are shutting down their efforts, capping wells and going home. As a result, growth in hotel demand has slowed considerably in the Marcellus Shale region.

6.29.12: CMBS Spreads Widen Further, Affecting Loan Rates

After holding relatively steady in the face of rising CMBS spreads, conduit loan rates are starting to increase; spreads on the two most recent deals from JP Morgan/CIBC and UBS/Barclays widened at pricing. Prior to these deals, CMBS spread widening was offset by decreases in the swap rate that left the all-in rate to borrowers on a $10-million shopping center or office building underwritten to a 70% LTV and 1.35x debt-service coverage ratio in the 4.75% area.

The swap rate is no longer declining in tandem with the increases in CMBS spreads. While the 10-year swap rate hovers around 1.75%, CMBS loan spreads have increased to the 3.25% area, resulting in an all-in rate to the borrower of 5.0%.

The JPM/CIBC deal, a $1.3-billion transaction, priced on June 22 its $346.9-million super-senior class of 9.9-year bonds at 150 basis points (bp) over swaps; up from 140 bp on the prior deal by RBS and Wells Fargo that priced on June 7. UBS and Barclays priced a $1.2-billion offering on June 28 with its $479.7-million super-senior class pricing at 160 bp, 10 bps wider than the JPM/CIBC deal and 20 bps wider than the RBS/Wells deal.

“The widening of spreads on CMBS issues is putting upward pressure on borrower loan rates,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “The supply of CMBS is greater than what the investment community can absorb, considering the yield on 10-year super-senior CMBS is a relatively low 3.25%.”

6.22.12: Characteristics of Hotel Loans in CMBS 2.0

Jim Brett, senior loan underwriter, head closer, CMBS research analyst at ValueXpress and all-around good guy, recently prepared a study of the 222 hospitality loans that have been included in 35 CMBS issues since 2010. The effort discovered trends that can be utilized to advise our hospitality borrowers on expected deal structure, underwriting parameters and rates for a CMBS conduit loan.

Here are some of the basics:

  Low
High Avg.
Loan Size (millions) $3.2 $145 $15.9
DSCR 1.36x 4.13x 1.80x
LTV 21.8% 74.9% 57.4%

Some caveats to the data: Only two loans report DSCR < 1.40x and 12 < 1.45x. In regard to LTV, only 10 loans of the 222 reported LTV > 70%, and 26 reported LTV between 65%-70%. The data support market quotes for hotels requiring a minimum DSCR of 1.45x and LTV < 65%, but suggest that LTV of 65%-70% with a 1.45x DSCR might be possible.

Rate dispersion:

Up to 4.99%
5.00 - 5.49%
5.50 - 5.99%
6.00 - 6.49%
6.50 - 6.99%
7.00 - 7.49%
8.00 - 8.49%
17
42
74
68
18
2
1

It is difficult to obtain specific takeaways on rate, except to say that rate is really based on market timing. The largest loan, at $145 million and secured by the Intercontinental Hotel in Chicago, IL, received a rate of 5.61% based on 1.57x DSCR and 50.2% LTV. Clearly, many other hotels did better than this, including a $7.7-million Candlewood Suites in Killen, TX, with a rate of 5.05%.

Many limited- and full-service franchise brands in the “mid-scale” and better franchise scale (as defined by Smith Travel Research) are represented. No “economy” brands are represented. Better independent hotels can be found in CMBS as well, represented by approximately 15 hotels. Another theme is most hotels are located in primary or secondary markets. Hotels in smaller markets, typically limited service, are underwritten with higher DSCR and lower LTVs.

6.19.12: SBA Appropriation May Increase by $237 Million

In this election season it has become nearly impossible to pass bills that were once routine, but there may be at least one exception: related to the Small Business Administration (SBA). Last week, the Republican-led U.S. House Appropriations Committee unveiled its bill to finance the SBA and several other government agencies. And what is most notable about the four pages dealing with the SBA is the prospect for comity, not conflict.

In all, House Republicans have proposed appropriating $1.16 billion to the SBA -- $989 million excluding disaster funding -- about $40 million more than the Obama Administration has sought and $237 million more than the agency received this year. In its broad outlines, the funding proposal from the House is remarkably similar to the administration’s request. The main difference is that the House finances subsidies that would permit the SBA to guarantee more lending in its main loan programs than the administration would. The increase may not have a meaningful impact on lending, though, since these figures are ceilings, and it’s not clear that lending will reach them. (If the first eight months of the 2012 fiscal year are indicative, the agency won’t come close to bumping up against the 2013 ceilings.) More meaningfully, the House would direct $112.5 million to small business development centers, as much as the centers received last year and $11.5 million more than the administration requested.

On June 14, the U.S. Senate Appropriations Committee produced its own bill financing the SBA (among other agencies) and largely followed the same template, proposing $1.12 billion. That is less than the House bill, but it directs more money to microlending and to the counseling programs than either the House proposes or the administration wants. At the same time, it pares back the House’s loan subsidy (and corresponding lending limits) to the administration’s request.

6.15.12: CMBS Conduit Loan Rates Steady Despite Capital Market Turbulence

CMBS conduit loan rates are holding relatively steady despite market turbulence surrounding the European debt crisis. Fixed income professionals are increasingly worried about whether Greece will exit the European Union and whether debt-related trouble will spread to Spain, Italy and Ireland. Relative volatility in financial markets is high, potentially affecting CMBS spreads and hence CMBS conduit mortgage spreads, but so far the impact has not had a dramatic impact on rates to borrowers.

CMBS spreads did widen on the most recent CMBS issue, a $1.1-billion transaction that RBS and Wells Fargo priced on June 7. The $418.0-million super-senior class of 9.9-year bonds priced in line with guidance at 140 basis points (bp) over swaps. But among the subordinate bonds, the $82.8-million junior triple-A rated bonds and $58.0-million double-A rated bonds both priced 5 bp wider than guidance, at 205 bp and 280 bp over swaps, respectively.

Although CMBS spreads have widened and spreads on loan quotes to borrowers have widened by about 15 bp, all-in borrower rates have not changed much because the swap rate has decreased by approximately the same amount. A typical $10-million shopping center or office building underwritten to a 70% LTV and 1.35x debt-service coverage ratio is seeing a CMBS conduit spread quote of 290 bp over the 10-year libor swap. Four weeks ago, the resulting interest was 4.80%; two weeks ago, the rate was 4.60%; and today with the 10-year swap at 1.80%, the borrowing rate is 4.70%. So the all-in rate has been range-bound despite all the debt challenges in Europe.

CMBS spreads will be tested in the next few weeks as issuers prepare to sell $6 billion in CMBS in five multi-borrower CMBS issues that are expected to price by the end of July. The supply of bonds, together with market uncertainty, could result in additional spread widening.

6.7.12: Kevin Monahan to Return as Instructor for Commercial Capital Training Group

Kevin Monahan, Senior Loan Originator at ValueXpress, addressed the May 2012 class of the Commercial Capital Training Group (CCTG) in Albany, NY. CCTG is a one-of-a-kind training company that provides a one-week, comprehensive commercial training and education program tailored for new and experienced commercial loan and mortgage brokers.

Monahan’s presentation provided an overview of ValueXpress and its loan products, an overview of the CMBS product, and a closing that explored “Why it’s a great time to be brokering hotel loans.” The presentation, enthusiastically received by the CCTG students and instructors, was followed by a lengthy Q&A session that covered specific loan product details, loan scenarios, and the proper pricing and structuring of deals. “The Q&A portion was a lot of fun, as it allowed me to get to know the students a bit and to tailor the ValueXpress products to their particular business,” Monahan said.

The class, which consisted of a mix of commercial lending rookies and veterans, was eager to hear about the unique product mix offered by ValueXpress, the CMBS product in particular, and our hospitality lending expertise. Monahan noted, “They appreciated that we offer them a unique mix of loan products, both CMBS and SBA, combined with a strong desire to assist them with their hotel deals. I feel they walked away gung-ho on finding hotel deals and understanding that ValueXpress can help them make a lot of money.”

The presentation was so well received that CCTG Instructors Kris Roglieri and Jon Consentino invited Monahan back to speak on June 20.

6.5.12: Country Bank Active CMBS Buyer

Country Bank, a New York state community bank affiliated with ValueXpress, has been actively buying new issue CMBS for its investment portfolio, attracted to their high relative yield, underlying asset diversity and attractive capital risk weighting.

The bank first began investing in CMBS during the 2008 financial crisis when the value of CMBS plummeted well in excess of their intrinsic value based on the expected performance of the underlying loans. The bank engaged Mortgage Investment Group, a company headed by Michael D. Sneden, Executive Vice President of ValueXpress, to perform analytics on the loans underlying 200 2005-2007 CMBS issues to determine the issues that were expected to perform better than their peers. The company created a list of about 50 CMBS issues that were expected to outperform, and in 2008-2010, the bank purchased and sold approximately $150 million in CMBS, recording significant capital gains over the period.

When the CMBS market fully recovered in 2010, the bank shifted its focus to new issue CMBS. CMBS loans underwritten since the market resumed in 2010 have been conservatively underwritten, contain no “pro-forma” loans, and are structured to provide better lender protection; most loans feature collected TILC and structural reserves, cash flow sweep escrows in advance of key tenant expirations to collect cash for TILC/debt service should tenants vacate, and many loans feature cash clearing accounts that capture property cash flow in the event of declining property performance. As a result, Country Bank has been comfortable investing in junior AAA-rated CMBS and AA-rated CMBS that are providing yields in excess of 4.5%, which are attractive relative to alternative fixed-income investments.

6.1.12: ValueXpress to Assist Marine Corps Heritage Foundation in Development of Hotel

ValueXpress is working with the Marine Corps Heritage Foundation in its efforts to develop a new hotel at the National Museum of the Marine Corps in Quantico, VA. The National Museum of the Marine Corps, a 100,000-square-foot facility located along Route 1 and Interstate 95 in Quantico/Triangle, is a standing tribute to the service men and women of the U.S. Marine Corps. Completed in 2006, the museum has become the number-one tourist attraction in Virginia, exceeding a reported 500,000 visitors annually.

The museum site contains a 10-acre parcel of land directly opposite and facing the museum in a wooded setting that has been earmarked for a hotel and conference center. ValueXpress is engaged with the Marine Corps Heritage Foundation in evaluating potential franchise affiliations and room count, in addition to the optimum size for meeting space to be contained within the conference center. It is expected that the hotel will be an upper upscale (i.e., Embassy Suites) or upscale franchise (i.e., Hilton Garden Inn). The museum and hotel site are immediately accessible to I-95, which is expected to help drive room demand from a variety of sources beyond the military.

ValueXpress is involved in the effort as a result of its experience financing more than 100 U.S. hotels, including nearly every franchise affiliation. This experience has allowed ValueXpress to become intimately familiar with the most successful brands in the United States, and ValueXpress will bring that experience to the Marine Corps Heritage Foundation team.

“I am excited and honored to be a part of the team charged with securing hotel development for this extraordinary site,” said Michael D. Sneden, Executive Vice President of ValueXpress. “Working beside two U.S. Marine Corps Generals on this project has been awe-inspiring and I hope my knowledge of the hospitality industry can lead to a highly success hotel and conference center project for this great organization.”

5.30.12: Legacy CMBS Delinquency Rates Continue to Rise

In a sign that the troublesome class of 2007 loans has not yet made the grade, the CMBS delinquency rate hit a new high in May after steadily creeping up over the last three months. New research from Trepp shows that the delinquency rate is now 10.04%, up 24 basis points (bp) from last month (9.8%) and a whopping 67 bp since February (9.37%), an indication that the rocky CMBS market has not yet reached solid ground.

“It is definitely not exactly as we and others have thought over the last three to five months,” said Manus Clancy, senior managing director at Trepp. Clancy predicted earlier in the year that the market could easily see a spike of 70 bp in the short term, as five-year loans that were securitized in 2007 began to reach their maturity dates. The good news, he said, is that these loans were “heavily” front loaded.

“We should see another month or two where we kind of bump along in a negative direction, but after that, we should start seeing the delinquency rate start to level off beginning in the middle of the summer,” Clancy said, noting that the rate could continue to edge up in the next couple of months. Out of the five major property types, the delinquency rate was driven by large increases in hotel and industrial loans. According to the report, the hotel delinquency rate surged 172 bp and is now back over 12%, and the industrial delinquency rate is up 46 bp and remains the second-worst category at 12.82% currently versus 11.96% in 2011.

And despite its strength in the overall marketplace, Clancy said the worst sector is multifamily, at 15.17%. “On bank balance sheets, multifamily has done pretty well, and in the REIT sector, it has done well,” he said, explaining that a large chunk of the 15.17% is made up of loans that were done like Stuyvesant Town, which holds a delinquent $3-billion loan, amounting to 4% of the total number, but we “should see a leveling off in the second half of the year.”

5.22.12: 504 Poolers Begin to Shut Origination Window

Lenders that are originating SBA 504 loans (both in the construction/acquisition and refinance program) purely for pooling the first mortgage loan for sale in the secondary market are beginning to shut down those operations in anticipation of the expiration of the program on September 23, 2012. Since SBA 504 loans cannot be pooled until 504 debenture funding, the last opportunity to pool loans will be the September 12, 2012 debenture funding date, and even that date is cutting it awfully close to the program expiration date. Realistically, lenders are looking at the August 15th debenture funding date as the last opportunity for closed 504 first mortgage loans to be pooled and sold. To make the August 15th date, all documents need to be with Colson by July 24th, and given a 60-day period to efficiently close an SBA 504 loan, that would imply any application taken after May 24th is not likely to make the cut-off for pooling and sale in the secondary by the end of the program.

“When we sat down and looked at the timeline, we decided to effectively cut off applications of 504 loans originated for pooling and sale in the secondary market as of June 1, 2012,” said Tim Moffett, Vice President and head of Government Guaranteed Lending at Country Bank. “However, we like the SBA 504 program and will continue to originate 504 loans for the bank’s balance sheet.”

5.18.12: CMBS Conduit Loan Rates Decline with Treasury Rally

CMBS conduit loan rates have fallen to the lowest levels since the restart of CMBS lending in 2010. Interest rates on CMBS conduit loans are set based on a spread over the libor swap rate corresponding to the loan term. Recently, libor swap rates have declined in tandem with the 10-year treasury rate, while spreads have remained stable. Just a few weeks ago, the 10-year swap rate was 2.05% versus 1.84% at the market close on May 18.

A typical $10-million shopping center or office building underwritten to a 70% LTV and 1.35x debt-service coverage ratio is seeing a CMBS conduit spread quote of 275 basis points over the 10-year libor swap. Two weeks ago, the resulting interest was 4.80%. Today, that loan closes at 4.59%.

“Rates are solidly in the mid- to high 4% area across the board for 10-year CMBS deals,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “These are exceptional levels and they are driving a significant amount of new CMBS loan applications. Even hotel loans are slightly below 5% now.”

It is possible swap rates and Treasury rates will not stay at these levels for long, but for quick moving borrowers, the window presents an excellent opportunity to lock in a very low interest rate.

5.14.12: Rates on 5-Year CMBS Conduit Loans Worse Than 10-Year Deals

Rates on 5-year CMBS conduit loans are higher than loans with a 10-year term, and the difference between the two appears to be increasing. Normally in commercial lending, when the 5-year Treasury or libor swap rate is lower than the 10-year Treasury or libor swap rate, loan rates on deals with a 5-year term will have a lower interest rate than deals with a 10-year term. Oddly, this is not currently the case with CMBS conduit loans.

“We recently closed a $12-million hotel loan with a 5-year term,” said Jim Brett, senior loan underwriter at ValueXpress. “The loan was committed at the end of April and the application was signed in March. The borrower was given both a 5-year and a 10-year option.”

“The 5-year option was offered at the 5-year swap rate plus 485 basis points (bp), while the 10-year option was at the 10-year swap rate plus 360 bp. At application, the proposed rate on the 5-year deal was 5.85%, while the proposed rate on the 10-year deal was 5.75%. While the difference between the two deals was relatively small, it still seemed odd that the 5-year deal carried a potentially higher rate. The borrower selected the 5-year rate because it provided more flexibility should values increase in the next five years.”

“When the deal was committed, the difference between the two deals worsened. The spread on the 5-year deal increased to 500 bp, while the spread on the 10-year deal declined to 340 bp. The proposed rate on the 10-year deal was 5.40%, while the 5-year deal had soared to over 6.0%, based on the corresponding 10- and 5-year libor swap rates of 2.0% and 1.1%, respectively, at commitment.”

“The increase in the 5-year rate was distressing to the borrower,” Brett said. “The deal manager from the investment bank explained that 5-year CMBS bonds do not trade well in the market, translating to higher rates to borrowers.”

5.7.12: Cash Management and CMBS Conduit Loans…Not Perfect Together: Part II

A recent post of ours outlined the insistence on cash management accounts for nearly all CMBS conduit loans. In summary, cash management accounts are set up for each transaction as a bank account in the name of both the borrower and the lender, but it’s primarily under the borrower’s control. Depending on how the loan documents read, the lender can seize control of the property cash flow in the event of declining performance or default.

After reading many CMBS prospectuses, cash management can be broken down into three types of “lockboxes” and cash management accounts. It is important to understand these pieces to negotiate the least-burdensome structure for borrowers. Below is a matrix of possible lockbox/cash management structures:

 
Lockbox
Cash Management
 
None
None
 
Soft
Springing
 
Hard
Up Front Cash Management

 

Lockbox/Cash Management Options:  
   
None Prevalent in pre-2008 CMBS transactions, the loan documents provide for no lockbox or cash management, and the lender has no control of borrower cash flow. This option is generally only available for low leverage deals.
   
Soft/Springing All funds from the property are deposited into a lender-controlled bank account. As long as the property debt-service coverage ratio is above a pre-determined level (typically 1.10-1.20x), cash deposits pass immediately to the borrower’s operating account. This is the most desirable lockbox structure other than none.
   
Hard/Up Front CM All funds received by the borrower or property manager must be deposited into a lender-controlled bank account within one day of receipt. Deposited funds fill “buckets” in the following order: (1) monthly principal and interest, (2) real estate tax and insurance escrows, (3) replacement reserve escrows, (4) late fees and charges, and (5) operating expenses. One day before the loan payment date, funds in bucket (5) are released to the borrower, but only in accordance with an expense budget approved by the lender.
   

As you can see, a hard lockbox with up-front cash management is extremely burdensome to the borrower and must be negotiated up front to obtain relief. This structure is most often prevalent on hotels and often, at a minimum, the operating expense portion of the “bucket” filling can be negotiated so the borrower receives all cash flow after buckets (1)-(4) are filled.

5.4.12: Mahesh (Mike) Patel Wins iPad 2 Drawing at AAHOA Show

Hotel owner Mahesh (Mike) Patel won a new 32GB iPad 2 at the ValueXpress booth at the Asian-American Hotel Owners (AAHOA) Convention and Trade Show in Atlanta, GA last week. When we first called Mr. Patel and told him he’d won the iPad, he responded, “No, I already received the iPad that I won.” We learned that this indeed was Mike’s lucky day; earlier, he had won an iPad drawing sponsored by AAHOA. Mike went home with 2 iPads!

Mr. Patel is the owner of the Super Inn Motel located on 4200 Wesley Drive in Decatur, GA, 20 miles west of downtown Atlanta. The property has immediate access to I-20 and the I-285 loop that surrounds Atlanta. According to Mike, his motel features very friendly hotel staff and clean rooms that fit travelers on a budget. Mike noted that the property is in close proximity to McDonalds, Popeye’s Chicken and Golden Dragon Chinese; hungry guests don’t have far to travel to get a meal.

“We were thrilled that Mike was in the trade show hall when we drew his winning card,” said Jay Bhakta, who runs the Mississippi office for ValueXpress. “It was a pleasure to meet and speak with Mike and laugh about his winning 2 iPads in one day.” Over 400 cards were submitted for the ValueXpress iPad drawing, which we consider a big success.

5.1.12: Opportunities & Challenges for Portfolio Lenders and CMBS

On May 1st CRE Finance Council sponsored a seminar on the prospects for commercial real estate lending in the near and longer term. Panelists were a mix of CMBS conduit pros and insurance company lenders; they included Jon Martin from Wells Fargo, representing both a portfolio bank lender and CMBS originator, and Philip McKnight of Easdil Secured, representing the brokerage community that places commercial loans with commercial banks, insurance companies and CMBS shops.

The universal opinion expressed is that insurance companies will continue to capture the choice assets, with interest rates in some cases that begin with a 3, but in most cases in the low 4% range for a 5- to 7-year loan and not much higher for a 10-year deal. General agreement is that the CMBS conduit loan originators cannot compete at that level; however, the CMBS panelists were quick to point out that the spread gap between insurance company quotes and CMBS is shrinking in 2012, with sub-5% rates on CMBS possible for the right asset. In addition, general opinion is that CMBS will capture all of the insurance company scraps: higher leverage, tertiary location, older assets and perhaps some less-than-mainstream asset types. Strong feelings were expressed that there will be lots of this business for conduit lenders.

But not enough to feed all the CMBS origination machines when the conversation turned to underwriting. The panelists shared concern regarding competition among originators leading toward a slow erosion of underwriting standards.

“As a buyer of CMBS securities for our affiliated bank, Country Bank, I was listening intently,” said Michal D. Sneden, Executive Vice President of ValueXpress. “I need to know when to stop buying new issue CMBS when the underwriting gets out of hand.”

4.30.12: Cash Management and CMBS Conduit Loans…Not Perfect Together

One of the more burdensome structural features of CMBS 2.0 (post-2010 CMBS conduit loans) has been the insistence of cash management accounts for nearly all CMBS conduit loans. In summary, cash management accounts are set up for each transaction as a bank account in the name of both the borrower and the lender, but it’s primarily under lender control. Depending on how the loan documents read, the lender can seize control of the property cash flow in the event of declining performance or default.

The reasoning for cash management accounts stems from borrowers not considering the lender a top priority in uses of cash during periods of property stress and diverting cash flow to uses other than paying debt service, real estate taxes and the like on properties secured by CMBS conduit loans. So to protect themselves, lenders have inserted themselves in the cash flow stream.

The way cash management works is all property cash flow must pass from the property source (tenant rent payments, credit cards receipts from a hotel room sales, etc.) through the cash management account. As long as the property is generating a DSCR greater than a prescribed level (generally 1.15-1.25x) the funds pass immediately into the borrower’s operating account. This is known as a “soft” or “springing” form of cash management, as the lender’s right to control the cash “springs” upon a “trigger event,” such as the property falling below the prescribed minimum DSCR, whereby the lender stops the cash pass-through and begins to collect debt service, escrows and capital reserves and remitting the balance of the cash only in accordance with an operating budget. While “springing” cash management sounds bad, “hard” cash management is worse.

“Hard” cash management requires all of the above; however cash flow does not pass immediately into the borrower’s operating account. Instead, cash flow is directed into buckets for debt service, escrows, capital reserves, operating expenses, and once a month, the operating expense bucket is released to the borrower to pay operating expenses.

“One of my borrowers asked why the lender doesn’t simply take the property at closing since they have all the cash anyway,” said Michael D. Sneden, Executive Vice President of ValueXpress. “But he was right, it is important to negotiate into a less-onerous “springing” cash management and water down the provisions of “hard” cash management on properties such as hotels. ValueXpress has been successful in reducing the burdens of “hard” cash management in all the CMBS conduit loans that have required it,” said Sneden.

4.23.12: ValueXpress Exhibiting at AAHOA Trade Show in Atlanta, GA

ValueXpress will be exhibiting at the annual Asian American Hotel Owners (AAHOA) Trade Show in Atlanta, GA, May 3-4, 2012. ValueXpress will be located in booth 739 at the Georgia World Congress Center noon-6:00 p.m. on both Thursday, May 3 and Friday, May 4.

“ValueXpress is an Allied Member of AAHOA and has been exhibiting at the AAHOA Trade Show for over 15 years,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “We have completed over 100 hotels loans during this period with many of those loans to AAHOA members. The trade show presents an excellent opportunity to allow hotel owners to meet personally with us to learn how we can assist them with their financing needs.”

“This year it’s particularly important for us to talk with our clients,” stressed Jay Bhakta, a senior loan originator at the ValueXpress Jackson, MS, office and active AAHOA member. “Many hoteliers are not fully aware that the CMBS conduit loan market is aggressively seeking quality hospitality loans from owners of hotels that performed through the 2008-2009 recession. In addition, with the increase in SBA loan limits to $5 million and the expansion of the SBA 504 program to allow refinancing, hoteliers have more options than ever to secure financing for their hotels.”

ValueXpress welcomes the opportunity to meet with hotel owners at the trade show to explain in detail its SBA 7(a), SBA 504, USDA B&I, CMBS conduit and conventional loans for hospitality properties. Call Jay Bhakta at 601-918-2850 for your personal appointment.

4.19.12: Lending Rebound Bolstering CMBS Pipeline

According to Commercial Mortgage Alert (CMA), commercial MBS issuance is picking up steam. After a slow first quarter, volume is now on track to reach $20 billion by midyear. That would surpass the $17.1 billion of activity in last year’s first half and put the sector on pace to exceed the $38-billion annual issuance forecast by a panel of CMBS professionals. Ten more transactions totaling $11.8 billion are expected to price by midyear, according to a review by CMA. Coupled with the $3 billion of transactions that have already priced this month, second-quarter volume would total $14.8 billion -- more than double the $6 billion of first-quarter activity.

According to CMA, the pipeline through June 30 contains eight multi-borrower transactions totaling $10.2 billion, a $1.4-billion single-borrower deal and a $200-million distressed-loan securitization. By month, that breaks down to $2.9 billion for the rest of April, $2.9 billion in May and $6.0 billion in June. The pickup in activity reflects somewhat better lending conditions for CMBS shops in recent months. What’s more, lenders said borrower inquiries have increased steadily over the past few weeks, raising hopes for a busier second half.

4.16.12: AAHOA Heads to Washington, D.C. in Support of SBA Program Extensions

Asian American Hotel Owners (AAHOA) leaders met with members of Congress to discuss two legislative priorities. In recent months, discussions in Washington, D.C. have centered on eliminating the SBA 504 Loan Refinancing Program, which is scheduled to expire in September. AAHOA has asked Congress to make its first priority this year reauthorizing the program under the Small Business Jobs Act. Additionally, AAHOA asked lawmakers to remove some onerous program eligibility requirements that prevent many hoteliers and other small business owners from taking advantage of the SBA 504 program.

“We believe Congress needs to make the criteria simple,” explained Anurag Varma, AAHOA Legislative Counsel. “We want to say those who have received [SBA] loans all these years should still be able to get the loans.” Varma was referring to hard and fast rules that, for example, disqualify a borrower unless the borrower can certify that timely loan payments were made for the previous 12 months. Varma suggested that the loan underwriting criteria should be sufficiently flexible to accommodate alternative ways to demonstrate a borrower’s creditworthiness. The association also suggested special exemption for borrowers who miss a payment due to circumstances beyond their control, such as a bank failure.

“People on the Hill are more interested to hear our ideas about simplifying the process,” Varma said. “This is truly a costless idea and something Congress can get behind.”

4.6.12: After Slow Quarter, CMBS Volume Should Pick Up

CMBS issuance in the United States got off to a slow start in the first quarter, but activity is expected to step up in coming months, according to Commercial Mortgage Alert. Only $6 billion of CMBS priced January-March, down 32% from a year earlier and virtually flat with fourth-quarter 2011. The depressed issuance reflected the slowdown in originations in the second half of 2011 because of fallout from the European debt crisis and concerns of a potential double dip in the U.S. economy.

Volume is now on pace to reach just $24 billion this year -- well below the $38 billion forecast by a panel of bond pros. But lending by securitization programs picked up in the first quarter as CMBS spreads tightened. That will accelerate activity in the second and third quarters, although it’s too soon to say whether the $38-billion prediction can be achieved. All told, 11 private-label U.S. transactions priced in the first three months -- four multi-borrower CMBS deals, three single-borrower CMBS offerings and the junior portions of four Freddie Mac issues.

In April, UBS and Barclays plan to team up on a $1.5-billion conduit deal instead of floating separate offerings. ValueXpress has originated loans for the UBS/Barclays issue. Meanwhile, J.P. Morgan, which didn’t have any partners in its last four conduit issues and was expected to go it alone again in March, will join forces with Ladder Capital on a $1.3-billion deal in April. And the buzz is that Cantor Fitzgerald is in talks to join forces with Deutsche on an upcoming deal. The three transactions are expected to total approximately $3.8 billion.

4.3.12: What’s the Direction of Debt Yield on CMBS 2.0 Issues?

Since the restart of the CMBS market in June 2010 when JPMorgan issued $716 million of CMBS, market participants have focused on a metric called debt yield. Debt yield is the property net cash flow (generally defined as actual income and expenses including management fees less capital reserves regardless of whether actually incurred) divided by loan amount. Debt yield for a CMBS issue would be the weighted-average debt yield for all the underlying properties. CMBS professionals believe debt yield is a better measure of leverage compared with debt-service coverage ratio because debt yield recognizes that in low interest-rate environments, a property may exceed the required debt-service coverage ratio for the loan amount, but may not be able to refinance at maturity if cash flow has not improved and rates are higher when the loan is refinanced at maturity.

When analyzing CMBS issues, debt yield is an excellent metric as it is possible to have two CMBS issues each with a weighted-average debt-service coverage ratio of 1.50x, but with two different risk profiles that can be identified through debt yield. Suppose one pool has a weighted average interest rate of 7% and the other 5%. The debt yield on the 7% pool will be higher than the 5% pool, indicating the 5% pool has a much greater balloon refinance risk than the 7% pool.

In 2010, there were six multi-borrower CMBS issues. The weighted-average debt yield is currently 13.44%, a benchmark for low leverage. At the other extreme, the debt yield for the benchmark legacy (pre-2008) CMBS issue GSMS 2007-GG10 is currently 6.94%. In 2011, there were 18 multi-borrower CMBS issues with the average debt yield of 11.22%, a significant reduction from 2010 levels as the market became more comfortable with CMBS risk. In 2012, four multi-borrower CMBS issues have average debt yield of 11.44%, indicating that debt yields are remaining relatively steady in the mid-11% area.

“We are buying CMBS 2.0 for our affiliated bank, Country Bank, and we are using debt yield in our bond analysis,” said Jim Brett, CMBS analyst and loan underwriter for ValueXpress. “We are comfortable with deals that have debt yield north of 11%; hopefully, underwriting does not loosen to allow debt yields to fall below this level.”

3.29.12: Chris Hurn Speaks to Congress in Support of Small Business

Chris Hurn, founder and CEO of Mercantile Capital Corporation and a leader in the SBA 504 finance industry, testified on March 29 before the Senate Committee on Small Business and Entrepreneurship to recommend extension of the SBA 504 refinance program and the SBA 504 First Mortgage Loan Pooling Program (FMLP). Both programs, which provide very competitive commercial loans to business owners, are set to expire in fall 2012.

The SBA 504 refinance program allows business owners to use the SBA 504 program, traditionally allowed for construction and acquisition of businesses only, to refinance existing business loans to capture more favorable terms. Historically, only the less-competitive SBA 7(a) loan program provided for refinancing of business loans into an SBA program.

The FMLP program allows banks and finance companies that fund the conventional first-mortgage portion of an SBA 504 loan to sell a portion of the loan in the secondary market, earning fees and providing capacity to make additional loans.

While Chris was only provided about 7 minutes of speaking time, he submitted 12 pages of testimony. When asked about the outcome, Chris said, “It’s going to take a while (to move this agenda), but we may have moved the ball a bit today.”

3.26.12: CMBS Conduit Loan Rates Decline with CMBS Spreads

CMBS conduit loans rates are declining in concert with the powerful rally in the CMBS market that began in January. Strong demand for CMBS continues based on the results of a $925-million conduit offering led by Wells Fargo and RBS that priced on Friday, March 22. All but one of the investment-grade classes in the Wells-RBS deal priced at or below spread guidance. The benchmark class of the Wells-RBS deal, encompassing $385 million of super-senior bonds, sold with a spread of 105 basis points (BP) over swaps. That was in line with price talk and matched the spread at issuance on equivalent paper from the $1.1-billion conduit deal that Morgan Stanley and Bank of America (BOA) priced a week earlier.

Wells and RBS placed the rest of the super-seniors with spreads 5-10 BP tighter than price guidance. The junior triple-A class priced at the low end of guidance at 140 BP. Similar bonds in the Morgan-BOA deal priced at 155 BP at issuance. The double-A bonds in the Wells-RBS deal priced at 225 BP, down from price talk of 240-250 BP. The single-As went for 350 BP, after being talked at 350-360 BP.

“After the Wells-RBS deal priced, CMBS originators scurried back to their desks to re-price downward existing loan applications,” said Michael D. Sneden, Executive Vice President of ValueXpress. “We received our first sub-300 BP spread quote shortly thereafter. That puts the interest rate at about 5.25% for the CMBS conduit borrower, which is very attractive.”

3.22.12: Increased CMBS Loss Severities

While new CMBS issues are the rage with investors, legacy CMBS is still a challenge for subordinate bondholders that continue to take it on the chin. On Thursday, March 22, Moody’s reported that the weighted-average loss severity for commercial mortgage-backed security loans liquidated in the fourth quarter increased 130 basis points (BP) to 41.0%, the highest since first-quarter 2010.

For the five major property types, loans backed by hotel properties [have] the highest weighted-average loss severity at 46.2%, while loans backed by office properties have the lowest weighted-average loss severity at 36.4%, according to Moody's fourth-quarter Loss Severities report. At 45.1% loss severity, the retail sector’s loss severities ranked second, followed by multifamily at 39.2% and industrial at 38.0%.

The report said $14.6 billion of CMBS loans were liquidated between January 1 and December 15, 2011, a $4.1-billion increase from a year ago.

"The three vintages with the highest loss severities are 2008, 2007 and 2006 at 55.5%, 51.6% and 50.8%, respectively," according to the Moody’s report. "These vintages comprise 57.1% of CMBS collateral and 71.1% of delinquent loans. The 2005, 2006 and 2007 vintages are ultimately expected to experience aggregate losses of 6.9%-12.3% of the total balance at issuance, with most of the losses yet to be realized as the aggregate loss for those vintages is below 2.5%."

3.14.12: Mike Delafraz Wins NOOK Tablet at Regional Conference of MBAs Convention and Trade Show

Mortgage banker Mike Delafraz won a new NOOK Tablet e-reader at the ValueXpress booth at the Regional Conference of MBAs Convention and Trade Show held recently in Atlantic City, N.J. at the Trump Taj Mahal Casino Resort. Mike was excited to win the e-reader, as he was just about to purchase one.

Mike is the President of City Capital Mortgage Banking Corp., an FHA and conventional home loan lender based in Floral Park, NY. The firm is a licensed Mortgage Banker with the NYS Banking department and is very active in the origination of FHA and conventional loans in the N.Y. boroughs and Long Island.

When asked how he would sum up his firm and business model, Mike said, “I have a great staff that can expedite the entire loan transaction. They know how to communicate. The high level of service results in long-term customer relationships, which is the key to our success.”

“The trade show was highly successful for us,” commented Kevin Monahan, a regional loan originator for ValueXpress; Kevin covers the northeastern United States. “I reconnected with a significant number of my colleagues and I am busy following up with the over 200 mortgage professionals who visited our booth at the trade show.”

3.6.12: CMBS Spreads Tighten Across the Board in February