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CRE Finance World, Summer 2013

Our Hooks Catch Dinner A publication of Summer issue 2013 sponsored by CRE Finance World Summer 2013 15 character of who is winning. Maybe if the B-piece became a bigger investment at a lower return, maybe the investors on this roundtable could raise more money from pension funds that are going to need to hit core returns. Maybe somebody comes up with a new investor base; maybe the core property funds are more interested. Throughout my whole career, money gets raised to meet opportunities. I do think the money will be there. From a pricing standpoint, if we have a 5% market value or a 11% notional face B-piece, it’s going to drive the price to the borrower’s costs up. Today’s coupons are extraordinarily low, so if it adds 50 to 100 basis points, the market will adapt to it because it needs the financing. Frank Scavone: I come at this from a different side. Essentially, limitations and constraints on selling for a period of time impact valuation. We value our positions each month. I don’t know if required retention influences much of our behavior as we are hold to maturity investors, but I wonder if there are material implications for pre-sale eligibility valuations. Jon Strain: And if there is no market for it, how do you mark- to-market? Frank Scavone: Exactly right, we are sitting here accreting value towards maturity and the reality is you can’t recognize this gain prior to the sales eligibility date. Matt Salem: At the end of the day, if you think about the top of the tranche of 5% proceeds, which equates to 10% or 12% of face, potentially more, the top of that stack trades at swaps plus 200, or plus 250, so 5% yield, and the bottom 3 or 4% trades at, say 30% yield. So when you combine those it’s inefficient. I agree with Jon in that, will we be able to raise capital, will the market adjust? Absolutely, I think it will. But I don’t think it will adjust in the most efficient manner. I agree that the cost to borrowers will go up and when you take it to it’s logical conclusion, it means that CMBS will be less competitive. We will risk losing some of the better loans that we have been more competitive on to the life insurance companies or banks. CMBS may be left with higher levered loans or lesser quality loans given that our cost of capital is inefficient. That’s what I’m most worried about as we go through these regulatory changes. Paul Fiorilla: Some people I know question whether it appropriate for B-piece buyers to be the party that holds the risk when their investment is usually recouped in about five years, and credit issues within loans only show up after that. Frank Scavone: Well, we are not set up as traders. We look at B-piece investing as an on-going business and our funds are open-ended in nature. The idea here is just to be in the market at the right time, develop a pretty good portfolio of assets and then throttle back on investing in the latter stages in the game — and hopefully not make mistakes that would wipe out all of the good decisions of the first five innings. Sam Chang: At the end of the day, I think every investor should do their own due diligence. If this risk retention rule gets passed in some form in CMBS, an investor who bought the bottom X percent to hold for a certain amount of time shouldn’t be a sign-off that the collateral will not go awry. If you are buying the class that’s right above the B-piece or the first pay AAA or anywhere in between, every investor should do their own work and be comfortable with CRE Finance World Roundtable: The B-piece Buyer Signing the Scorecard www.BIGFOOTSPORTFISHING.COM


CRE Finance World, Summer 2013
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