Small balance ($2-$10 million) CMBS conduit borrowers no longer enjoy programs that feature fixed transaction costs for third-party reports and lender’s legal charges that are a relative bargain. Those programs, in effect prior to the 2008 CMBS conduit loan market meltdown, no longer exist. Today’s borrowers are being hit with $25,000-$40,000 in up-front charges to process a CMBS conduit loan without full assurance that the loan will be approved at the requested loan amount. Formerly, fees for these expenses were $10,000-$15,000 as conduit lenders subsidized the costs by charging a few extra basis points in the loan spread to recover the expenses through securitization profits. The current charges have made it difficult to convince small balance borrowers to proceed through a conduit loan application.
“We have always been careful to complete substantial due diligence up front before accepting a conduit loan application and deposit,” notes Michael D. Sneden, Executive Vice President at ValueXpress. “Now we are even more cautious. We are requesting more detailed operating data for longer periods of time, investigating market rents, cap rates, occupancy and other market factors more in-depth than we did prior to 2008. We cannot afford to damage our reputation with a transaction that does not close at the borrower’s expected levels.”
“Our models now value properties in advance of application, using our appraiser’s cap rates for the particular market, market rent adjustments and expense comparables,” Sneden said. “Following this regimen lessens the chance of an appraisal falling short of expectations. I cannot recall the last time we had a transaction under application that did not appraise at expected levels. By following this protocol, we are able to provide comfort to our clients that their large, up-front deposit will result in a closed transaction at expected levels.”