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CRE Finance World, Winter 2013

CRE Finance Roundtable: Outlook for 2013 of increased leverage and a slight deterioration of credit metrics experienced the greatest stress. We found many borrowers that over time – however, that is natural and should be expected as had numerous projects under construction since we didn’t have the the market restarted. We have a market that is functioning again, cash flow and the portfolio to get them through the crisis. So there that is accepting of risk again, that is growing again, but I think is a much heightened sensitivity to overall cash flow of our sponsor, everyone would admit that, that we are no where near the leverage and a focus on effectively managing how much construction lending points of where we were heading into the crisis. The industry has we are doing. We are closely watched by the regulatory agencies, been hovering around a fairly consistent stress LTV of approximately and supporting the construction loans that we are doing. Like I 100% for the past 6 months or so. And, we continue to see solid said earlier, there is a much greater focus on stabilized and or structure on loans. near-stabilized properties. Nelson Hioe: Brian P. Lancaster: Dave brings up a great point. One of the material differences between How far out would you go on a stabilized loan? Are you going CMBS 3.0 and 1.0 is that banks have a heightened sensitivity to out to 10 years, or staying within 5 years? holding loans on their balance sheet. This is definitely also the case with kick-outs, which is another way of saying that their Clay Sublett: capital is more cautious from a balance-sheet perspective, which There is an overlap. Certainly the longer debt, especially on a is a governor on risk taking on the part of the banks when they fixed-rate non-recourse basis has certainly been the territory of originate loans. And that is good thing for investors and for the deals. life insurance companies in CMBS and the GSEs. On the banking side, 3-year, 5-year, upon occasion a 7-year and a consideration for a Clay Sublett: 10-year. But there continues to be a focus on staying shorter than I can’t speak for other institutions, but if we originate loans with the other institutions. That’s not to say that a bank on a case-by-case intention of selling them, we have to classify them from an accounting basis won’t jump out and do a 10-year fixed rate non-recourse stand point as held for sale rather than held for maturity. We don’t loan. That is going on. And there is some overlap and competition have the luxury of flipping them back and forth based upon kick-outs between banks, which has been traditionally been shorter term, or what is most convenient. We have accounting firms and auditors and life insurance companies which have been traditionally longer who look very closely at whether or not we’ve originated with the term. We are seeing a little bit of confusion of the players in the intention securitizing or selling, or whether or not we’ve originated marketplace, especially in a market where everyone is looking for them for the balance sheet with the intention of holding them for a the best yield. So banks are making more fixed-rate loans than long time period. You don’t get to have it both ways. what they have done historically. Brian P. Lancaster: Brian P. Lancaster: Clay, give us KeyBank’s perspective. What type of loans are It makes sense, everyone has to pick their risk to get yield you looking to do? Are you more focused on construction and somehow, either extend duration, go down in credit, add leverage floating rate loans? That is traditionally where commercial banks or go into more esoteric products. Speaking of that, how has have been very active. Or are you now looking at longer term the regulatory environment affected your CRE exposure and fixed rate loans, recourse, non-recourse. Are you competing with your approach to the business? the conduits? How are you making money these days? Clay Sublett: Clay Sublett: Certainly the regulatory environment has an impact. One is the It’s challenging. It’s challenging to make money in the low interest rate formal regulatory environment with Dodd-Frank, Basel III, the environment. But there is a lot more interest on stabilized cash- Durbin amendment, and the hard-core regulatory changes. There flowing properties. A lot of focus on acquisitions and repositioning is also the tenor of the regulatory agencies taking a much more as opposed to ground up construction. That’s not to say banks active role in terms of scrutiny. We spend a lot more time answering aren’t making ground up construction loans, they are, especially to the regulatory agencies and loan review and things of that nature. in the multifamily space. A lot of the problems that we saw in the Certainly I don’t think KeyBank is alone in that the compliance area last cycle were caused by large holdings in the construction land of the institutions, which I’m sad to say, has been a growth area loans sector. When the music stopped, those were the loans that as we deal with compliance issues and oversight, such as covered A publication of Winter issue 2013 sponsored by CRE Finance World Winter 2013 15


CRE Finance World, Winter 2013
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