Mid Atlantic Real Estate Journal — Financial Digest — April 13 - April 26, 2012 — 5A
www.marejournal.com
C REATIVE F INANCING
By Tom Graziano, HFF Entering Q2, the debt capital markets continue to show signs of strength
A
s we enter Q2, the debt capital markets con- tinue to show signs of
tizations coming to market in the next couple months. When presented, however, with a more transitional-type deal that requires more flex- ibility, banks, debt funds, and mortgage REITs have the abil- ity to structure deals to suit specific projects. Whether it’s your standard “bridge” deal or repositioning play, these bal- ance sheet lenders can offer competitively-priced, floating rate loans with flexible struc- ture: favorable prepayment terms, partial releases (for portfolios, condos, or pad sites), and the ability to provide fu- ture funding (for TI/LCs, Ca-
pEx). Debt funds andmortgage REITs are also setting them- selves apart by offering higher- leverage (up to 85% LTV) first mortgages (with rates of 6.5- 7.5%). Also noteworthy – in this ever-changing landscape, LifeCo’s are now competing more for mezzanine loans in an effort to chase yield. As to how aggressive they’ve been getting, we’ve had success re- cently in placing LifeCo mezz on top of firsts from banks (and other LifeCo’s) – in some cases achieving a last dollar of 85% – for an all-in, blended rate in the mid-single digits. Another area in which we’ve
had particular success has been in arranging fixed-rate, construction-to-perm loans with LifeCo’s. At the begin- ning of the year, there were only a couple groups that were even willing to entertain such a structure but we’ve now noticed more and more groups coming into the space. By way of example, we’re cur- rently working on a couple apartment construction deals where we’re implementing this structure. Deal points include term options of up to 15 years (I/O during lease-up, then 30 year am), limited pre- payment guarantees, which
burn off upon stabilization, and the ability to increase loan amounts, also upon stabiliza- tion . What makes this struc- ture compelling (vs. opting for a low Libor-based construction loan at, say, L+250), is that it acts as a hedge against a spike in rates. We have found that if you could lock in a rate with a 4-handle today, rather than waiting 2-3 years (the construction loan term) to find long-term, permanent debt – most borrowers would jump at the opportunity. Tom Graziano is a direc- tor in the New Jersey office of HFF. ■
strength, and have demon- strated that there is plen- ty of liquid- ity across the risk spectrum for commer- cial real es- t a t e . L i f e
Tom Graziano
companies, CMBS/conduit shops, banks, debt funds, mort- gage REITs, and the agencies (Fannie/Freddie) are all open for business and are actively competing to provide the best possible structure/terms for our clients. The financing landscape has certainly changed over the past few years (and continues to change, it seems, on a weekly basis) so it’s imperative, es- pecially as an intermediary, to know where the market is on a real-time basis. For your straight-down-the-middle, “core” deal, a LifeCo, CMBS, or agency execution is most likely going to be your best bet, but for deals that aren’t LifeCo/ CMBS-ready (i.e. those with lease-up risk or repositioning plays), you have to be a little more creative as these deals require more flexibility. LifeCo’s and CMBS groups continue to be the most com- petitive when pricing stabilized assets. LifeCo’s have tradition- ally targeted properties in primary markets while CMBS groups cast a wider net into secondary and (sometimes) ter- tiary markets. However, given the overall lack of transaction supply, LifeCo’s are also going outside their typical comfort zone, which has increased the competition among the two lenders and, ultimately, benefited the borrower. What’s more, we’ve also been seeing LifeCo’s go higher in the capi- tal stack – further increasing the competition between them and CMBS groups since the trade-off between rate and le- verage, which had usually dif- ferentiated the two, is leveling out. The good news is – both have a lot of capital to deploy. LifeCo’s are coming off a record year ($45 billion in 2011; with a mandate to originate even more in 2012) and with CMBS spreads continuing to narrow, as evidenced by the recent is- suances, the demand remains strong, which should bode well for the +/-$6 billion of securi-
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