CREFW-Winter2016

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Winter issue 2016 sponsored by CRE Finance World Winter 2016
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servicer beforehand and request to get the preferred holder approved
so that if there’s a change of control they are automatically approved
by the senior lender to become a controlling party of the entity.
This is something I think most preferred holders would like to
see. In certain cases, you’re not able to do that today. Generally
speaking, I haven’t seen it be specifically prohibited; it’s not debt
even though in a lot of cases it has some debt-like features in that
there’s a current return and mandatory redemption date.
Farzana Mitchell: We’ve seen more standardization in CMBS
loan agreements. We don’t see meaningful accommodation for
mezzanine loans. Generally speaking, mezzanine debt has been
prohibited for a number of years now. In terms of maybe pledging
an equity interest, perhaps you can be a little creative and maybe
there’s an upper-tier pledge of interest allowed.
Stephanie Petosa: Pro-forma underwriting is most often cited as
one of the key negative developments during the latter stages
of the previous real estate cycle. Is any of that going on that you
see and to what extent? Where do you see today’s lenders being
most aggressive?
Mark Weiss: I’m not really seeing much on pro forma. If you have
rent steps in the next 24 months with good tenants, yes, can you
get that counted? Sure.
Michael Lascher: In the hotel space, the rating agencies seem
to be underwriting to 2013. This is happening even though the
performance of some of the hotels we’ve financed in the CMBS
space has improved tremendously since that time. So not only are
you not seeing pro-forma underwriting, if anything, the agencies
have drawn a line in the sand and said we’re not comfortable hotel
cash flows are sustainable at this point in history.
Lisa Pendergast: What do you think hotel performance will look
like 10 years from now when the loans originated today come due?
Michael Lascher: We think there’s still some more room for growth
in performance, but I see the point of the rating agencies. In 2015,
hotel cash flows are far from where they were in 2009 or 2010.
The one point we haven’t touched on is overall leverage, which I
think is important to bring up. I’m not seeing ridiculous amounts of
leverage re-enter the system. We get great receptivity for 75% or
80% financing on a deal. Beyond that, there really is not a deep
market for financing. Borrowers were typically able to finance
deals at 90% LTV back in 2007.
Mark Weiss: I think leverage is almost forced to be lower. If CMBS
lenders didn’t push leverage lower, they would be looking at debt
yields of 7%, for example, in New York City office. However, New
York City office is trading at a 4.5% cap rate, but the lowest debt
yield CMBS lenders will go to is closer to 7%. So there is imposed
leverage. The CMBS leverage points are a lot more reasonable
and that’s because it’s more cash-flow driven now than it was back
in 2007.
Lisa Pendergast: Let’s talk about life company lenders. Life
insurer lending picked up strongly early in the recovery. These
portfolio lenders were much more active in 2008 to 2010 than
CMBS lenders. How are life companies competing today? Are
they becoming more comfortable with added leverage or less
structure, or is it just that they’re willing to take less in terms
of pricing?
Michael Lascher: They definitely have picked up in terms of
their market share. The CMBS market is incapable of absorbing
what it once did and so there is a real need for portfolio lenders.
I think the life companies have really stuck close to their knitting
and I don’t see them providing outsized leverage or giving
on structure.
A Roundtable: Straight Talk from Industry Leading Borrowers
“One big difference between this cycle and the
last is there is a lot more equity going into deals
this time around.”