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14C — September 25 - October 15, 2015 — Fall Preview — M id A tlantic
Real Estate Journal
M ortgage B anking
By Brenner Green, Real Property Capital, Inc. The current commercial mortgage market
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ou do not need to be a real estate professional to notice that there is a
multifamily and single tenant retail, experiencing levels of de- velopment that rival the peak of the 2000’s boom. Our firm is experiencing this phenomenon firsthand through a larger por- tion of the pipeline being com- prised of development deals. However, many of these de- velopments currently under- way received financing before the rules abruptly changed at the beginning of 2015 when the next wave of the Basel-III reforms on bank capitalization and risk mitigation were ad- opted by all state and federally chartered banks through their
respective regulators. If you haven’t heard it already, you will soon hear the term “High Vola- tility Commercial Real Estate” which effectively means a real estate loan on a project without cash flow which is what these rules are intended to address. These new rules apply to all financial institutions with $500 million or greater in assets. While I am certainly not the first person to write about Basel III and its effect on lend- ing, there are two components to these new rules that should be of particular note to real estate developers because of
how deep their implications could run and how far they could skew things from the previously accepted “norm.” Two potential examples of how these rules could impact a development are as follow. First, let’s say you own a piece a ground in your multi- generational development company for 30 years, and during that time there has been an entitlement change and a demographic shift that has greatly enhanced the value of your asset. You decide now is the right time to build and you go to get a loan for your
$10 million project. Your land appraises for $2 million so you expect the bank to treat that as your equity (since you own it free and clear). The new rules require 15% actual cash equity into a development project re- gardless of land value, so your banker is now asking you to reconstruct your cost basis in the asset for the last 30 years as that is what he can give you credit for as equity. You will get exactly zero credit for any appreciation or value creation that has occurred over and above the number that was paid for the asset. Notably, this 15% rule car- ries beyond the equity into the project cost all the way through the project completion and value created. As a developer, you are going to see (if you have not already) bank term sheets that read “the greater of 15% cash equity on the project cost or the as-completed value” of the project. I will give you a second to take this in… You read it correctly. As a real estate developer, you are in the business to build stuff that is worth more when you are done than it cost to build it. But if you do, you could be expected to come up with more equity if you do not meet the 15% threshold. In the second example let’s say you have a piece of ground and a Walgreen’s lease falls in your lap (wouldn’t that be nice). You need $3 million in loan to build the store and you have $600,000 in hard cash in the deal with no debt (roughly 17% equity). When your Walgreen’s is done, it’s worth $5 million. Most people would categorize this as a big win, right? Well when the bank gets the ap- praisal back, you are going to a call or an email on a Friday afternoon stating that you need to write a check for an addi- tional $150,000 to get to the 15% equity on the as-completed value in order for your bank to close your deal. Otherwise they are going to get slapped around by the bank regulators under the new Basel III rules. And as stated above, it will say you are required to do this in the term sheet you signed a month or so ago. Sounds like fun, right? It is real and it’s here… R. Brenner Green is a 15 year veteran in commercial real estate finance and presi- dent of Real PropertyCapital, Inc. based in Philadelphia. n
great deal of development activity go- ing on in the region pres- ently. New c o n s t r u c - tion projects abound ev- erywhere you
Brenner Green
turn in urban and suburban locations alike. Commercial real estate is clearly in a period of economic expansion, with certain asset classes, namely
Recently Closed Loans
$8,100,000
$6,650,000
$5,510,000 Non-Recourse Hotel Refinance
Non-Recourse Cash Out Retail Center Office Refinance Acquisition/Redevelopment
Sharon Hill, PA Dover, DE 75% LTV, 10/30, 4.78% 85% LTC, 78.5% LTV 170 bps over LIBOR 75% LTV, 10/27, 4.93% Philadelphia, PA
Real Property Capital is a Philadelphia based full service commercial mortgage banking firm with a regional focus and national capabilities. Our business model emphasizes client satisfaction through a high-touch, analytical approach that distinguishes us from the competition. Learn more about our distinct approach and proven track record of success at www.realpropertycapital.com.
FOR MORE INFORMATION: R. Brenner Green, President 75 East Butler Avenue • Ambler, PA 19002 • 610-456-9644 • bgreen@realpropertycapital.com
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