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CRE Finance World Summer 2015
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in terms of documentation is one area that causes borrowers,
especially smaller borrowers, concern. Larger CMBS borrowers
tend to enjoy more tailored documentation, particularly as it relates
to release provisions in large portfolio loans.
Clay Sublett.
I think borrowers are still very much concerned about
the servicing aspect. We have borrowers — bank clients — that
say CMBS is their execution of last resort. Small- and medium-
sized borrowers in particular continue to struggle with things like
SNDAs, collateral releases, or collateral lease approvals of major
tenants. Knowledgeable borrowers tell us they’ll consider CMBS if
the loan is secured by a totally stabilized property. I’ve got a good
bank client today working to develop a multifamily property. He
wants to carve off a portion of the existing collateral and the special
servicer is saying, fine, but for me to consider this you need to
send me X amount of money. That really sits poorly with an awful
lot of borrowers.
Larry Brown.
Look, CMBS is a trillion dollar industry, so while any
system could always be improved, I often advise borrowers of both
the positives and negatives of CMBS. You often get the most
proceeds for the best rate, but there are
potentially more hoops to jump through
in the servicing of your loan.
Brian Furlong.
I think the difference
between winning and losing a loan
is about 5 to 20 basis points. If a life
company is quoting the same price or
is a basis point tighter than a CMBS lender, it is going to win 99%
of the time. Five or 10 basis points is about where things begin to
really matter.
Does Size Matter? Large Loan Single-Asset/Borrower CMBS
or Conduit Pari-Passu Notes?
Lisa Pendergast. Why are we seeing such a large preponderance
of single-borrower deals in the market today?
Spencer Kagan.
I think we have tension right now between how
large a conduit deal can get in terms of total size. This becomes
difficult, particularly when you’re trading triple-A bonds. Before the
financial crisis, it was not unusual to have $4 billion or $5 billion,
even up to $7 billion pools. Large loans that would previously go
into a conduit execution can’t in today’s environment, so larger
loans are currently being securitized as stand-alone transactions.
But we haven’t seen enough demand, particularly at the triple-A
levels, to accommodate what we would like to do for large loans in
conduit executions.
Stephanie Petosa. When would you do a large loan as a standalone
vs. splitting a large loan into pari-passu notes and placing it in
several conduit CMBS?
Spencer Kagan.
It’s a matter of managing spread risk and deal size.
There are many different things that we consider when determining
how to execute. Pari-passu notes create more granularities in
pools, but the elongated timing slows down the execution velocity
and thereby exposes the issuer to spread risk. The other thing I
would say is that a number of standalone deals to date have been
floating rate. The floating-rate market is not as strong as we all
thought it might be a year ago; so some of those deals are more
likely to be executed as standalone.
Brian Furlong.
As Spencer pointed out, I think there’s more depth
in the fixed-rate, very large single-asset/single-borrower space.
The floating-rate space is a bit more challenging given that it used
to be supported by European banks and SIVs that no longer exist.
The result is that the market is seeing less of that sort of debt and,
when it does come to market, it usually is a little bit off the run.
Clay Sublett.
The banks are a bit different
because we lend on less-stabilized
properties. So we look to the relationship
and the profile of the borrower. By
profile we mean are they holders of real
estate or just transactional? We’re not
as interested in a transaction borrower
because we think there is higher risk.
We want to have a relationship and lend money to people who are
long-term holders of real estate with a cash-flowing portfolio. We
are playing in a mid-tier market in terms of borrower and asset size
and in terms of financial strength. We generally target borrowers
with $50 million to $500 million of real-estate assets and less than
20% of their portfolios in new construction or under development.
The Wall of Maturities: Opportunity or Risk?
Lisa Pendergast. Do you view the ‘Wall of Maturities’ as an
opportunity or a risk?
Brian Furlong.
On the one hand, the refinance risk has been
scaled down from where it was just a few years ago. This is due
largely to the current environment in which values on almost all
commercial real estate have risen sharply as cap rates remain low
and capital availability high. On the other hand, I think we don’t
really know how bad it may get. The 2006-2007 underwriting was
really very bad and so it hasn’t been tested. I think the jury is still
out to some degree but it seems a little less scary than it did a few
years ago.
A Lender Roundtable: Real Talk from Real Lenders on Today’s Competitive Commercial and Multifamily Lending Environments
“Hopefully, the increased demand
for capital allows lenders to become
increasingly more selective about
the product they’re willing to lend on.”
Spencer Kagan