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CRE Finance World Winter 2016
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competition and
at times a price
war. Debt on
assets that are
lower on the
quality spectrum
is harder to
obtain. We have
a strategy to sell
some of our properties with lower sales per square foot but that
are nonetheless stable performers. Some prospective buyers are
finding it difficult to attract lenders to loan on these properties,
primarily due to the lenders’ inexperience in underwriting loans for
malls in middle markets. The presence of JCPenney and Sears in
many major malls has been challenging due to the financial difficulties
faced by these retailers. We believe there is tremendous opportunity
to bring new retailers to our malls when either JCPenney or Sears
or both vacate the mall. New retailers add diversity and a brand new
experience for consumers. CMBS lenders are seeking certainty of
cash flow and that is understandable. If the borrower is experienced
and the sponsor strong then the debt market is available and the
CMBS market is open. I do believe the CMBS market has changed
for retail in recent months.
Victor Coleman:
I think this is one of those cycles that people don’t
really put a lot of weight on access to capital on the debt side; it’s
more about the equity side. More transactions are bought on cash
and then financed down the road. There’s greater discipline over
the last five years, with property investors seeking very low leverage
of 50% or less. From our standpoint, we don’t buy anything with
debt. We don’t need to close anything with debt. We close with
cash and we have access to credit facilities if we don’t have cash.
After that, we’ll figure out our debt structure, but overall we’re a
very low leverage company.
Lisa Pendergast: Given the size and scale of all of your businesses,
are you concerned about the health of the single-asset/borrower
(SA/SB) CMBS market once the new risk-retention rules under
Dodd-Frank take effect in December 2016? Expectations are
that such issuance will be plentiful through the third-quarter
2016 and potentially slowdown sharply or disappear altogether
thereafter. How will that affect the way in which you utilize the
CMBS market?
Michael Lascher:
We definitely access the single-borrower market.
Most of the loans that we finance via the CMBS market are single-
borrower deals. I am concerned about the risk-retention rules and
I’m surprised that there hasn’t been a decision made to exempt
single-borrower deals from the risk-retention rules where a bond
buyer is able to underwrite a single credit. I was under the impression
that the risk-retention rules would be helpful to buyers in the
conduit market, where there are just so many different credits that
no bond buyer could actually underwrite them all. So, you wanted
the guy who was responsible for issuing the bonds to put his
money where his mouth is and actually hold on to the bottom piece
of the risk. My guess is that — in terms of the piece the issuer has
to hold or has to be sold to a B-piece buyer who holds on to it for
the life of the loan — a market will be created and you will find that
there’ll be capital raised to hold on to those pieces of the deal. So,
I’m not really worried that, on December 31, 2016, the last single-
borrower issuance will come to be.
Victor Coleman:
I think that’s an excellent point. I also think
that we haven’t heard the end of the story on Dodd-Frank. There
are enough people becoming fairly vocal about it. At almost any
conference you go to somebody stands up and says something
to the effect that:
It’s quickly shifting from a humorous point to a serious one as
the realization sinks in. So I don’t think the end result has been
determined.
Lisa Pendergast: What’s most interesting about risk retention as
it applies to these single-asset deals is that regulators have set
the bar so high for them being considered ‘qualified mortgages.’
And yet, most CMBS investors deem SA/SB CMBS as safe
havens from both an asset quality, underwriting, and ability to
perform due diligence perspective.
Mark Weiss:
What’s a better definition of a qualified mortgage
than a single loan?
Farzana Mitchell:
I also want to comment on Dodd-Frank as it is
not only wreaking havoc on the CMBS side, but also proving to be
a major constraint on the banking industry. We recently experienced
this phenomenon while extending and modifying our lines of credit.
Many of the smaller banks and the regional banks couldn’t participate
in the current environment because their risk models have changed
quite a bit because of the reserve requirements imposed by
Dodd-Frank and the opportunity costs related to posting such
reserves. The larger banks are able to lend and provide capital for
an investment-grade company like CBL, but the spreads are fairly
tight for the smaller and regional banks to earn a reasonable profit.
A Roundtable: Straight Talk from Industry Leading Borrowers
“I predict some boutique lending
firm is going to fill the gap between
what the CMBS market is unwilling
or unable to loan on and capture
the opportunity to underwrite
conservatively and garner a larger
spread and investment return.”