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CRE Finance World, Autumn 2013

A publication of Autumn issue 2013 sponsored by CRE Finance World Autumn 2013 15 Larry Brown: My two cents is that we are very big into sponsor behavior in bankruptcy. I work for a subsidiary of LNR, the world’s largest special servicer, and so we get a pretty good window into things. So we ask ourselves whether the borrower is simply “guilty” of being in a tough economic environment but was otherwise a wonderful operator and it was just wrong place wrong time, or was he using bankruptcy as a weapon against his lender and how did he behave during that period, and things like that. So that’s a big deal for us. We feel like we can’t have it both ways where we whine, and say, ‘Oh this guy is a newbie, he hasn’t been in the business long enough, we don’t feel good about him as a sponsor,’ but then you want a nice experienced sponsor, who may have been through some cycles — he may have had a bankruptcy or two — so then you look into why he went into bankruptcy. Poor/reckless/ dishonest management or a tough economy? And how did he behave once the market crash hit. Greg Michaud: I’m there with Larry. We experience the same thing. Bankruptcy typically knocks you out, but why did they go bankrupt? Did they go bankrupt because the bank got taken over by the FDIC or a new bank and they said all of the loans here are going to get called and the guy just got stuck in a bad market? That’s one story. The other is the guy with little or no equity who filed bankruptcy to fight the lender and keep the lender away from the property. We are not going to touch that guy. For the most part, it’s non-recourse lending, so we’re really looking more at the property but we do try to avoid the litigious borrower. We want guys that are going to act honorably. Mitch Resnick: I know this sounds cliché, but something I learned very early on in my lending career is there is no such thing as a good loan to a bad borrower. I think that is what we are getting at here. You really get to see the character of a borrower when the tide goes out. Do they use bankruptcy as a weapon? It really is a very important factor in evaluating a potential borrower. Lisa Pendergast: Samir, the Dodd-Frank re-proposed risk retention rules do not exempt issuers of single-borrower or single-asset CMBS from the risk retention requirement. Do you think the rules have the potential to sharply reduce the issuance of these deals and bring back conduit/fusion CMBS with large loans split pari passu across a number of transactions? Samir Lakhani: I think that is possible. The way the rules are written right now, it can increase cost on single-asset, single-borrower execution and that may push some loans in the direction of being cut and sprinkled into conduits if that execution is better. Our hope is that the rules evolve to a place where these loans can remain as single borrower transactions, as aside from higher quality, these tend to be 144A transactions where investors get detailed information and have the ability to do a deep study on one asset or one property. Lisa Pendergast: At the last conference, Jack Cohen hosted a roundtable discussion at which a conduit lender made the comment that, in times of heightened volatility, conduit lenders tend to become far more conservative. And yet, over the last several months, we’ve seen a good amount of volatility and I think underwriting has become less conservative. I still think underwriting remains based on in-place cash flow and the amount of disclosure as to underwritten cash flow is as good as it has ever been, and those are all positive factors. But it’s clear that proceeds are on the rise, and reserve levels are not what they used to be just a year or so ago. How do you see this unfolding over the next year? Does commercial and multifamily mortgage lending grow even more competitive? Who are the new lenders? Larry Brown: The first thing I’ll say is guilty as charged, and what I mean by that is, as you alluded to earlier, there is no way anyone can look you in the eye and say, ‘You know, 2013 is as conservatively underwritten as 2011 deals, let alone 2012 deals.’ It’s just not the case. What I’ll say is this, which may not be much of a feel good moment, but – with the CMBS business now being somewhat mature 20 years later – I think one can feel when it’s getting frothy. With the deals I’m losing now, 90% or more aren’t like in the mid- 2000s when you started losing deals to really poor underwriting, and you’re saying, ‘sold to my competitor if they want no reserves and things like that.’ At present, when I lose a deal it’s due more to spread, which sometimes leads to a head-scratching moment during times of volatility—but I don’t think it speaks to irresponsible underwriting. It seems like some shops are a little bit “risk-on” that I wouldn’t have necessarily expected. Starwood Mortgage Capital may be more conservative on occasion when others may not be, but it’s not at that stage now where I’m shaking my head because people are doing stupid things from an underwriting standpoint. And by the way, I don’t mind adding the word ‘yet.’ What you’re hearing from me is, I think we’re in the fourth inning of that nine inning game –I do think we may eventually get to the point where things get overly aggressive, you’ll hear the dreaded word ‘CDO’ and things like that – I think we could get there. But I don’t think it’s an imminent 2014 or 2015 event. But it’s fair to ask, ‘if you can see it coming down the pathway, what can we do about it?’ Then it goes back to the last question you asked me about new entrants. So yeah, with the wall of maturities that are coming due, I think there is pressure on folks to do high volume, and when there is pressure to do high volume, that means some will say ‘yes’ to stuff that they otherwise wouldn’t say yes to. So you have some new entrants, but ‘new’ doesn’t equal ‘bad’ by the way. So my bottom CRE Finance World Roundtable: Macro Issues Facing CRE Finance


CRE Finance World, Autumn 2013
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