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CRE Finance World Winter 2016
20
Mark Weiss:
One of the things we’re very focused on when talking
about structure are the mechanics associated with dealing with
master and special servicers who are forced to work within a
certain playbook. I’ll fight tooth and nail over issues such as what’s
the definition of a major lease and when are lease approvals
needed because those are the type of things that directly affect
our operation of the property. I want to have as much flexibility as
possible when it comes to dealing with servicers. They have a job
to do, but I try to limit that job through the loan documents. If I have
a 500,000 sf building, and a 100,000 sf lease pending; I understand
I’m going to need servicer approval. But if it’s a 30,000 sf lease in
a 800,000 sf building, that’s where – on the margin – you can fight
and win those battles, particularly if you’re a good sponsor.
Michael Lascher:
The obvious bucket
of assets that work really well for CMBS
lenders are large, cash-flowing assets
or portfolios. We finance projects in the
single-family rental space through the
CMBS market as well. In contrast, we
have financed many hotels, particularly select-service hotel portfolios,
with balance-sheet lenders more recently. But, there was a time
when select-service hotel loans were solely going to the CMBS
market. And yes, when we’re buying something or looking to
refinance it, I usually have a good idea of what I think would be the
best source of capital. I’m right a lot of the time, but not always.
There are always surprises and sometimes lenders come out of left
field and do something unexpected or out of the ordinary.
Farzana Mitchell:
There is a difference between life companies
and CMBS in terms of whom we prefer. The cash-trap and cash-
management agreements CMBS lenders put in place versus the
life companies make it compelling to avoid CMBS if possible. And,
I agree on the structure, negotiating to have minimal rights by
lenders to approve leases and other operational items is a huge
challenge. We like to stay nimble with a desire to run our business
with minimal constraints and costs. We see a difference between
life company and CMBS lenders on approvals, process, and cost.
Life companies are more flexible and allow us to operate because
we are great at it while CMBS tends to be more intrusive. CMBS is
also punitive in terms of the waterfall of operating cash flow. We’ve
closed on both CMBS and life company loans recently. Both were
fine from an execution standpoint. Yet, we believe we have more
certainty with life company lenders because we can lock in the
rate early and get it closed. All else equal, I would rather borrow
from a life company than a CMBS lender because the latter is time
consuming and it can be difficult to work with CMBS lenders in
servicing the loans, particularly when loans mature. I believe the
CMBS market is choppy right now. Great assets tend to get great
execution regardless of who the lender is.
Mark Weiss:
On the loan maturity point, we had a situation with a
loan coming due on February 6, 2016. Our first open period was
November 6, 2015. In CMBS, if you don’t pay off the loan on the
payment date, you have to pay the balance of the month’s interest.
We missed it due to a variety of good reasons and now have to
wait to pay off the loan on the next payment date on December 6,
so we don’t pay double interest. That’s
incredibly frustrating; if it was a life-company loan, I would just call them up
and say, “Hey, can we deal with this?”
And it’s much more flexible. But it’s a
quid pro quo; CMBS lenders provide
more aggressive loans than what I’m
able to secure in the life company market. CMBS provides me with
10-year interest-only money at relatively high leverage points on
New York City office; I’m not necessarily going to get that in the
life company market.
Stephanie Petosa: How much control do you have over loan
documents and the leverage points that you were talking about
earlier? Is it easier post crisis to be a CMBS borrower?
Mark Weiss:
CMBS documents have become quite standardized.
Yet, things like transfer provisions, preferred equity and what’s
allowed, as well as leasing approvals and cash traps are some items
where you can push around the margins. Ninety percent of the
document is what it is and it’s the remaining 10% that you push on.
Michael Lascher:
Our documents are pretty well standardized. For
CMBS loans, we tend to start with a document we used in a prior
deal. It is the same for most balance-sheet lenders. Mezzanine debt
is traditionally prohibited unless the loan documents specifically
allow for mezz following an improvement in property-level cash
flows or a declining LTV as stipulated in the loan docs. I don’t think
preferred equity is prohibited. It probably speaks to the transfer
provisions. So you can have somebody invest as preferred equity.
It’s also helpful to the preferred equity investor if you go to the
A Roundtable: Straight Talk from Industry Leading Borrowers
“We spend a lot more time focusing
on structure than on arguing over
a five-basis-point reduction in our
mortgage rate.”