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CRE Finance World, Winter 2012

Roundtable: Outlook 2012 Jack Taylor: troubled period like the one we have just gone through and are still Dramatically, in multiple ways. I would say the first is that in the in, each GP relationship becomes a sink hole of time. So, there’s a early part of that four year period, there were many mezzanine consolidation process into the larger managers. lenders, more properly called mezzanine “buyers” then, who were treating mezzanine interests as cusip securities. They were looking The second driving factor is the need for the GPs to have a lot of at them not as real estate investments but as cusip securities that resources to be able to attend to the greater needs for reporting, they could buy in, maybe resecuritize, and buy like you would a transparency. Some limited partners feel that they were abused by bond. I think that that has now, thankfully, gone by the wayside. some GPs during the financial crisis and are demanding greater More and more participants in the market are now, and will continue transparency, rightly so. to be, looking at these investments as real estate investments that have to be fully underwritten from a real estate perspective. Brian P. Lancaster: How has the more recent volatility changed the relationship Along with that, during the period of momentum trading leading up between the senior and subordinate lenders? to the financial crisis, mezzanine investors were taking equity-like risks for very poor debt returns. They were effectively lending at Jack Taylor: advance rates that were so high and speculative that they were The relationship changed both with respect to commercial banks really taking equity risks. Often times they were buying from CMBS as senior lenders and also with CMBS lenders. Especially in securitizers that were making the mezzanine buyers play a game of CMBS, there was a dramatic change in the summer. Many of the jump ball, without adequate time to underwrite the assets before CMBS lenders were becoming, I would say, more over-enthusiastic they bid. Then the winning buyer would turn around, once they won than was justified, and thought they were reverting to the pre- the jump ball bid, and put leverage on top of leverage — levering crash days and that type of business could and would continue on. the mezzanine interests. The volatility, and other factors, put an end to that over enthusiasm. Earlier there was a desire to move more towards the “jump ball” Today, it’s the reverse. A subordinated debt investor has greater again. Some of the CMBS originators were saying “Give us price pricing power and can exercise greater credit discipline. So, lower guidance on where you might own the subordinate piece. We’ll go leverage against the assets are being advanced, there are higher, originate and we’ll come back and put it out to bid to you and to equity-like returns, without having to employ leverage on leverage, others who have also given us price guidance.” That’s changed. and it is a totally different ball game. It’s back to the days in which That’s over, not 100%, but it’s moving more firmly towards a co- mezzanine investments were first emerging and were treated like origination relationship with the CMBS lenders, because they are real estate assets, as they should be. de-risking and trying to ensure execution by having a co-originator. Now, I’m talking about trends, not the actions of everyone. Brian P. Lancaster: Has the relationship changed between general partners of funds As for the commercial banks, they have a greater concern that and limited partners? the mezzanine holder be capable of managing the underlying real estate if the asset is taken over. They are also more focused in this Jack Taylor: respect with regards to syndication. If it’s a larger loan and they In our business, we manage third party funds for institutional investors; are syndicating the loan, the other syndicate participants want to there has been a dramatic change across not just the mezzanine know that if there is a problem at the asset level, it is not just some or subordinate capital part of the market, but throughout the real hot money capital source sitting beneath them. They want to know estate investing and third party money management business. I that the organization has ample resources to actually take over would say the hallmark of the change is there is a consolidation the asset, if need be, and take on the operational risk and duties. process going on, where the limited partners Ts are consolidating Also, importantly, I would also say the commercial banks don’t want their investments into larger managers. That’s being driven by two a predatory mezzanine lender in the capital stack. The banks are factors — one being the need of the limited partners to have fewer doing most of their business with their more-valued clients. They relationships. During the secular bull market, they could receive are focusing more on reducing their own risk and ensuring the positive information from a variety of different GPs. During a borrower relationship holds up even if there is trouble in the deal. So, they want someone in the subordinate capital position who CRE Finance World Winter 2012 18


CRE Finance World, Winter 2012
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