At the 2013 Mortgage Bankers Association CREF/Multifamily Housing Conference, David Durning, president and CEO of Prudential Mortgage Capital Co., explains Prudential’s targets for balance sheet, Fannie Mae, Freddie Mac and FHA, CMBS and bridge financing for 2013.

Could the conduit financing recovery reverse course overnight? Not likely, according to some experts, who believe a sudden evaporation of conduit financing is less likely this time around because the economic recovery appears to have legs.

Make no mistake, spreads for conduit loans can spike, as has been demonstrated in recent history. “We have seen disruptions before. There were a few instances in the last years. Spreads can increase suddenly, and CMBS financing can become non-competitive very quickly,” said Gary Tenzer of George Smith Partners.

A recent false start in the CMBS market occurred in 2011, when the recovering market was derailed by the European debt crisis and concerns about the U.S. economic recovery. “Because of the volatility, it was difficult to price deals on the front end,” explained Rusty Fleming, partner at Morris, Manning and Martin L.L.P. When the loans were taken to market, the conduits were not able to obtain the yields they anticipated. “That shut down the market.”

However, though a reversal of the current CMBS financing recovery is “always possible,” it is currently unlikely, according to Fleming. “We feel the U.S. and world economy are at different places now compared to two years ago.”

Tom Muller, co-chair of the real estate and land use practice group at Manatt, Phelps & Phillips L.L.P., agreed that the conduit market “would not be as easily derailed again.” He elaborated: “We expect the conduit market will be sustained for the next several years because the U.S. general economic recovery will be sustained for the next several years.”

Tenzer said borrowers can protect themselves against possible CMBS market disruption by locking in rates. “CMBS is a volatile market. Until you get to the point of locking the rate, you do not know you have a deal.”

CMBS financing allows for early rate locks of about 30 days in advance. But Tenzer also stressed that the borrower should not lock the rate until the due diligence, such as environmental reports, has been performed. Borrowers could lose their deposit if they lock the rate and decide not to complete the transaction.

 For more on the conduit market’s performance, see “Comeback Redux” in the May 2013 issue of CPE.

Life companies and pension funds increased their market share of commercial property financing last year despite ongoing industry deleveraging, and the mortgage loans yielded a total return of 4.7 percent for the institutions in 2012.

According to the Giliberto-Levy Commercial Performance Index, 25.6 billion in new permanent mortgages were originated in 2012 by institutional balance-sheet lenders. The Index principal balance ended 2012 at a total level of 180.6 billion, compared to 178.7 billion in 2011. The Giliberto-Levy Index is a private debt market index that tracks senior loans made by balance-sheet lenders, primarily life companies and pension funds.

“The good news here is that the life company/pension fund activity is actually increasing and gaining market share in the overall commercial space,” said Michael Giliberto, co-founder of the Giliberto-Levy Commercial Performance Index. He noted the increase in principal balance was occurring at a time when the commercial property sector was still deleveraging.

Speaking at a webinar reporting on the Giliberto-Levy 4Q Index, Giliberto noted that office and industrial lending by the institutions lost market share last year, while apartment lending by the institutions gained share. Office mortgages comprised 26.3 percent of total mortgage lending by the institutions, industrial made up 12.6 percent, and apartments were 20.1 percent of the total. Sixty percent of the institutional senior loans consist of five- to seven-year loans.

The Giliberto-Levy Index showed total returns from the balance sheet loans was 4.7 percent for the institutions in the whole of 2012. Giliberto noted that this return was higher than 10-year Treasury returns.

The Index showed that while 10-Year Treasury yields increased from 1.65 to 1.78 percent in the fourth quarter, 10-year mortgage spreads narrowed from 2.60 to 2.35, resulting in a net decrease in mortgage yield of 0.12 percent for the institutional lenders.

Fannie Mae’s priority in 2013 will be to continue focusing diligently on loan quality. “We intend going into 2013 to pay careful attention to the market to make sure we appropriately buy loans that meet our credit standards,” said Jeffrey Hayward, senior vice president, head of the Multifamily Mortgage Business, Fannie Mae.

Hayward was speaking to reporters at a press briefing held during the Mortgage Bankers Association’s annual Commercial Real Estate Finance/Multifamily Housing Convention and Expo.

Fannie Mae has announced that it provided $33.8 billion in financing to the multi-family market in 2012, the third highest acquisition level in its history. The company said it remained the largest source of multi-family financing in 2012, financing nearly 560,000 units of multi-family housing.

The real significance of the total production volume achieved last year “is not necessarily the number, but the fact that we continue to serve all segments of the market, and that we did it through…Delegated Underwriting Servicing. In essence, every dollar that we advanced, there was risk sharing involved,” said Hayward.

Hayward noted the multi-family financing market was also bigger in 2012 compared to the year before. Fannie Mae reported that its loan production increased in the categories of multi-family affordable housing, small loans, large loans, manufactured housing communities, and student housing, while falling slightly for structured transactions and seniors housing. “[In] almost every segment of the market, we were at least flat, or in some cases way ahead of where we were in 2011,” he commented.

Hayward pointed out that Fannie Mae through the first quarter has earned more than $1 billion in net profits for U.S. taxpayers. “We understand that is part of our responsibility to deliver benefits to the taxpayer, and we are proud of our ability to have done that.” According to Fannie Mae, 88 percent of the units in its current book of business support families of modest means earning 100 percent or less of Area Median Income.

Fannie Mae and Freddie Mac are required by the government to reduce their investment portfolios by 15 percent annually. The targeted portfolio size for each of the GSEs is $250 billion, which is projected to be reached in 2018, four years earlier than expected. However, that does not mean that Fannie Mae’s level of participation in the multi-family market will shrink, as the agency is currently securitizing its multi-family loans and not retaining them on its portfolio.

In answer to a question, Hayward said he is not aware of any directive from the government for Fannie Mae to reduce its footprint in the multi-family space.

“Our participation in 2013 will be the larger result of what the DUS lenders ask us to do as we work in partnership with them. It will be the result of choices they make in the marketplace … We will be there to provide liquidity when we are called upon. That is how we see our mission.” He also said that Fannie Mae will continue to make financing available to primary, secondary and tertiary markets.

Last year, Fannie Mae multi-family financing achieved averages of 65 to 66 percent on LTVs and slightly below 1.50 in Debt Service Coverage, Hayward reported. He said that the likely greater competition in the financing marketplace this year would be welcome, and he acknowledged that if the conduits start providing greater loan proceeds or more favorable interest-only features, Fannie Mae’s will see its market share decline in 2013.

San Diego—Mortgage originations for commercial properties will increase by 11 percent in 2013, the Mortgage Bankers Association (MBA) forecasted. The market share of multifamily financing may tick down this year as capital supply to the other commercial real estate sectors make a comeback.

At MBA’s Commercial Real Estate Finance/Multifamily Housing Convention & Expo, MBA released its 2013 mortgage financing outlook. Originations of commercial and multifamily mortgages will grow to $254 billion in 2013, compared to $229 billion in 2012. (In its inaugural financing volume forecast, MBA had predicted the 2012 volume to be $230 billion.)

“Our forecast anticipates Fannie Mae, Freddie Mac and FHA, as well as life insurance companies, will all continue to have strong appetites for making loans, and—coupled with growth in originations for CMBS—the total market will continue to expand,” stated Jamie Woodwell, MBA’s vice president of Commercial Real Estate Research, in a press release.

At a press briefing during the conference, Woodwell predicted that multifamily financing will total about $105 billion in 2012. This financing volume far outstripped expectation, as only $77 billion was originally forecasted for the multifamily sector for the year.

Multifamily financing volume may experience a slight shrinking in 2013 and subsequent years to “a more traditional size” relative to the overall commercial property mortgage market, said Woodwell, during a press briefing held at the conference. Woodwell said multifamily financing had seen its share of the overall commercial property financing market increase due to funding availability and multifamily fundamentals. In 2012, multifamily financing was 46 percent of total commercial property mortgage financing. As mortgage funding for the other sectors are returning a little more strongly, however, “we’ll see more of that traditional balance” between the multifamily and commercial property market shares, said Woodwell.

MBA forecasts GDP to increase to 2.0 in 2013 from 1.8 percent last year, while unemployment rate will fall to 7.6 percent, compared to 8.1 percent for 2012. MBA said the 10-year Treasury yield will rise slightly from 1.8 percent in 2012 to 2.2 percent for 2013. However, actions by the Fed, on which a large part of the interest rate prediction is predicated, could be unpredictable, noted Jay Brinkmann, chief economist and senior vice president of Research and Education.

In the fourth quarter of 2012, MBA reported that commercial and multifamily mortgage originations increased by 49 percent compared to the fourth quarter of 2012. “During the fourth quarter, commercial and multifamily mortgage borrowing and lending hit the highest level since 2007,” stated Woodwell. MBA’s mortgage bankers originations index shows originations for 2012 increased by 24 percent compared to 2011.

The fourth quarter increase in commercial/multifamily lending volume was driven by increases in originations for hotel and office properties, according to MBA. The mortgage financing volume increases, relative to fourth quarter 2011, were 331 percent for hotel properties, 78 percent for office properties, 49 percent for multifamily properties, 46 percent for industrial properties, 5 percent for retail properties and 26 percent for health care properties.

By investor type, the dollar volume of loans in the fourth quarter compared to the same period in 2011 rose by 228 percent for CMBS, 68 percent for commercial bank portfolio loans, 51 percent for GSEs and 18 percent for life insurance companies.

MBA President & CEO David Stevens

The low-interest-rate environment is driving the demand for relatively higher-yielding commercial real estate loans, and the commercial real estate financing industry cautiously greeted the rapid return of liquidity into the sector during the Mortgage Bankers Association’s (MBA) 2013 Commercial Real Estate Finance/Multifamily Housing Convention & Expo. The exposition opened on Monday with a record attendance level of about 2,600.

“As the year begins, we can see positive momentum,” said Debra W. Still, 2013 MBA chairman, at the opening session. “Commercial and multi-family real estate finance has enjoyed a relative calm amidst the storm.” Still, she noted favorable conditions for both financing and commercial real estate–interest rates are lower than ever before, and yields and cap rates remain attractive relative to those of other investments. “Multi-family markets have arguably never been stronger, and office and retail markets offer plenty of upside.” Still cited, however, challenges to the commercial property sector including the European sovereign crisis and federal deficit, and she referred to the current “artificially low” interest rates.

“You feel good about the business environment, and you should,” said David Stevens, MBA president and CEO, in addressing attendees during the opening session. Stevens said that delinquencies are at the lowest level since 2009, the $2.4 trillion in mortgage outstanding is increasing, and CMBS issuance is expected to grow this year to $65 billion from $45 billion last year. “This really reflects the demand and recovery on the private capital side.” Life insurance companies and banks, meanwhile, are also looking to retain mortgages, he said.

On the other hand, although the low interest rates provide many benefits, Stevens said, capital is struggling to obtain concurrently desirable yield levels and asset quality in the low-yield environment.

One fear among market participants is that debt investors’ bid for the relatively higher returns offered by commercial property could lead to lower underwriting standards and a weakened CMBS sector—all too soon–as lenders compete for the same deals.

Debt investor groups across the board are generally said to be increasing their appetites for commercial loans this year. CMBS and bank financing has returned to the market, while life insurance companies and the GSEs are expected by many industry players to maintain if not increase the dollar amounts of their financings in 2013. Fannie Mae closed 2012 with $33.8 billion in multi-family financings, while Freddie Mac announced $28.8 billion in new multi-family volume for the same year.

A key driver of increased liquidity for the overall commercial property sector has been the recovery in demand among investors for CMBS. “Sustained bond market rally in the second half of 2012 has helped drive down funding costs, enabling CMBS lenders to reduce rates charged to borrowers,” stated Jones Lang LaSalle in a press release.

In the session “The Search for Yield,” moderator E.J. Burke, executive vice president and group head of KeyBank Real Estate Capital, commented that it appears “there is far more capital chasing for a home than there are good deals.”

“A lot of this has come back too quickly. We are concerned about how fast things have moved in terms of risk tolerances,” said Kevin Riordan, president, CEO and director of CreXus Investment Group. “I can’t answer if $100 billion is a normal market [for CMBS financing], but I think we are getting there too quickly.” Riordan also said that the “creep” over time of lenders institutions to the secondary market has already turned into a “herd.”

Life companies are still under-allocated to the multi-family sector in the billions, estimated Brian Casey, managing director and head of real estate debt strategies of MetLife Inc., in responding to a question about how much financing life companies would execute under ideal circumstances.

And Diana Reid, executive vice president of PNC Real Estate, said that banks have resolved their balance sheet issues and become more competitive in multi-family construction financing in the fourth quarter. As a result “there are more lenders looking for the same deals,” she said. Still, pricing, rather than recourse, remains the point of competition.

There were also questions raised about the self-regulation of CMBS and whether B-piece buyers are holding onto the risks rather than selling them. “I do not believe we are at CMBS 2.0,” said Reid, referring to the new, safer regime of CMBS that will prevent a repeat of 2007. Reid noted the Dodd-Frank risk retention regulations are yet to be released.

MBA announced this week that it forecasts commercial multi-family mortgage originations to increase by 11 percent to $254 billion in 2013 from 2012. Commercial and multi-family mortgage originations jumped by 49 percent in the fourth quarter compared to the same quarter in 2012.

By investor type, the dollar volume of loans in the fourth quarter of 2011 compared to the same period in 2011 rose by 228 percent for CMBS, 68 percent for commercial bank portfolio loans, 51 percent for GSEs and 18 percent for life insurance companies. For the entire year, originations in 2012 rose by 24 percent, MBA reported.

JLL said it expects capital availability to drive transaction volume increases of 15 to 20 percent in 2013. “Competition for core product is opening up attractive opportunities for borrowers,” it stated, and that JLL’s capital markets experts are “seeing a variety of aggressive debt structures,” on core products such as debt yields between 8 and 10 percent and DSC ratios of 1.15 to 1.35.

While making possible many deals and rescuing mortgages from default, the extremely low interest rates also introduce another point of concern: refinancing risk in the future when and if interest rates should increase again, and many speakers referred to that risk. Financed at extremely low interest rates, properties may have difficulty finding refinancing if interest rates rise significantly in future, especially if they have not amortized, or property values do not rise, adequately.

The longer the low interest rates persist, the greater the buildup of stress, said Sally Gordon, managing director, Risk and Quantitative Analysis Group, of BlackRock, Gordon presented a general session on portfolio diversification strategy.

The seeming lack of euphoria among lenders despite the return of liquidity could also  be attributed perhaps to the recognition that the abundance of capital, especially that slushing in the CMBS markets, could disappear overnight and be affected by both foreign and domestic developments, as has happened in recent memory. “Liquidity can evaporate faster than you even thought possible,” commented Gordon.

The potential volatility of the capital markets tied in with the life lessons of guest speaker John Bucksbaum, founder of Bucksbaum Retail Properties LLC. Bucksbaum recounted his experiences with the financial crisis in the late-2000s as former CEO of retail giant General Growth Properties (GGP). One of his biggest mistakes, where the GGP bankruptcy was concerned, was to allow mortgage maturities to compress in the same time period, said Bucksbaum. The second mistake, in view of the fact that liquidity could disappear very quickly, was to not raise equity when there was the opportunity, and to wait for higher stock prices before making a stock offering for the public company. “You don’t always know when you can raise equity. The day may come when “you need equity, and you don’t have it,” said Bucksbaum.

And as Gordon said, once liquidity dries up, it may be too late to mitigate the risk.

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New York—Follow the job growth. That was the key takeaway during “Secondary and Tertiary Markets: Identifying, Finding and Investing in Commercial Real Estate Opportunities,” the recent Multi-Housing News and Commercial Property Executive webinar sponsored by Yardi and moderated by Executive Editor Keat Foong. Panelists, which included Gary Ralston, managing partner, Coldwell Banker Commercial Saunders Ralston Dantzler Realty LLC; John S. Sebree, vice president, national director, National Housing Group, Marcus & Millichap Real Estate; Albert M. Berriz, CEO, McKinley; and Ernie Katai, senior vice president, Berkadia, looked into commonly overlooked markets and provided insights for investors.

Gary Ralston

Focusing on the commercial property sector, Ralston said that investors are still concentrating on safe investments, and on an aggregate basis in secondary markets, the prices are still down. The annual population growth of the United States is almost 1 percent, so, according to Ralston, the goal of investors is to focus on states that are growing above that, such as Florida, Texas and Nevada. Additionally, investors and developers should pay attention to areas of employment growth, which he says has shifted to port-driven areas.

Other important tips that Ralston provided were to work with the best local professionals and to know the employment numbers and supply on a granular level.

“It’s a battle out there, and it’s fought with swords and not lasers, so get in close!” Ralston said.

On the multifamily side, Sebree also showed that the outlook for tertiary markets is appealing, especially in terms of employment.

“Tertiary markets tend to be more stable over time,” he said. “The change in [job growth] is dominated by tertiary markets.” However, in terms of employment, Sebree said that secondary markets tend to be more unstable.

Multifamily markets tend to follow employment rates, so according to Sebree, apartment vacancies correlate with employment rates.

He also suggested looking into these markets when it comes time to invest. According to Sebree, the markets with the lowest vacancies are New York (primary market); Portland, Ore. (secondary); and Salt Lake City (tertiary). The markets with the most positive movement in vacancies include Houston (primary); Charlotte, N.C. (secondary); and Columbus, Ohio (tertiary).

“Today is an incredibly good time to purchase,” Sebree said.

Berriz, who is involved in commercial and multifamily properties, provided a case study of the areas of the country his company focuses on. He echoed the other presenters in their assertions of looking to the areas of growing employment.

“Strategically, we’re very surgical,” he said. “We’re only looking in certain areas, and if you look in these areas, there’s terrific job growth.”

These areas, which Berriz said are commonly overlooked, include Cary, N.C.; Spartanburg, S.C.; and Gainesville, Fla.

“Most people don’t travel to these markets because they’re hard to get to,” Berriz said. “I urge the audience to think about [different] areas.”

Berriz also suggested some other secondary and tertiary markets with the most opportunity for investors. These include Houston, Atlanta and Las Vegas.

According the Berriz, investors should also be looking into Class-B and C multifamily properties, and the retail sector. However, do so cautiously.

“Be careful, because there are a lot of Class-C properties that can’t be turned around,” he said. “Not all assets are created alike.”

The final panelist, Katai, spoke about lenders and how they look at secondary and tertiary markets.

“Lenders define secondary and tertiary markets differently,” he said. “It’s still a bit of a wildcard how lenders will deal with it.”

According to Katai, lenders are primarily looking for jobs and economic growth and the financial strength of the borrower. They are also looking for quality assets that have a lower purchase price. Lenders are also finding a lot of desirability in college areas. Additionally, he suggested looking for different sources of financing, such as co-ops of small banks, instead of the usual large banks.

“There is no formula—everything is per the individual lender,” Katai said. It comes down to basic fundamental issues. You have to do your homework.”

New York City’s tallest building outside of Manhattan, the 1.4 million-square foot Queens trophy tower known as the Citigroup building, is coming under new ownership.  Paramount Group Inc. and Colony Capital L.LC.  are buying the property for about $475 million, sources  familiar with the transaction said Wednesday.

A report by Lois Weiss in today’s New York Post indicated that the deal was scheduled to close on Wednesday, although it could not immediately be confirmed that the Paramount/Colony joint venture had completed the acquisition from SL Green Realty Corp. and its investment partner, JPMorgan Chase & Co. If a closing occurred Wednesday, or is imminent, it would reflect a rather lengthy gestation period for the sale; SL Green first disclosed that the deal was under contract last November.  The REIT estimated at the time that it would earn about $42.8 million in proceeds from the sale.

Formally called One Court Square, the 50-story office building designed by Skidmore, Owings & Merrill has dominates the skyline of Long Island City, a section of Queens located directly across from Manhattan.  SL Green acquired the building in 2007 as part of its $6 billion acquisition of Reckson Associates Realty Corp. and its 9 million-square-foot office portfolio.  The building is fully leased to Citigroup, which sold the asset to Reckson in 2005 for a reported $470 million.

In a statement Wednesday afternoon, Cushman & Wakefield Inc. said that had arranged preferred equity for Paramount and Colony. “The investment features a bond-like income stream, along with a going-in basis well below replacement cost,” said Helen Hwang, an executive vice president in Cushman & Wakefield’s capital markets group.

Prudential Mortgage Capital Co. has closed a $108 million commercial real estate loan in the United Kingdom, its first financing since launching its European business less than six months ago, the company announced yesterday.

The loan is secured by a portfolio of U.K. properties comprising four multi-tenanted office properties in central London and a grocery-anchored retail property in Bath, a World Heritage Site in southwestern England with a population of about 80,000. The 11-year financing is Newark, N.J.-based Prudential’s first secured CRE debt transaction in Europe since the opening of its London advisory office in January.  No further details on the properties were immediately available.

The current market dislocation has provided the opening we have been looking for, and our plan is to be active in Europe for many years to come, said Thor Orndahl, a managing director who oversees Prudential Mortgage Capital’s non-U.S. mortgage platform.

The portfolio’s sponsor is the O&H Group, a privately owned, family-run business with more than 50 employees and net assets exceeding £600 million. Established in 1982 and headquartered in London’s Mayfair district, the company has substantial commercial and residential real estate holdings and development projects in central London and throughout the United Kingdom.

According to current data from Real Capital Analytics Inc., based on deals valued at $10 million or more, London has the world’s most active office investment market, followed by New York City, Paris, Tokyo and Seoul. Transaction volume was $18.7 billion over the past 12 months, with an average cap rate of 5.72 percent.  In terms of all CRE property types, London was a close second to New York City as the most active global market for all property types, Real Capital Analytics reported.

Prudential is targeting at least $500 million of long-term, fixed-rate senior debt transactions in Europe, initially focusing on office, logistics, multi-family and retail properties in and around large population centers such as London, Paris and major German cities.

Aided by a $200 million equity investment from private investment firm TPG, Parkway Properties Inc. completed its purchase of Hearst Tower, a 46-story, 972,000-square-foot office tower in downtown Charlotte, N.C., for $250 million.

At $257 per square foot, the amount Parkway paid for the 10-year-old building represents a significant discount to replacement cost. The building, which has a trading floor used by Bank of America as well as a 1,400-space parking garage and retail space, is 94 percent leased. There are no material expirations until 2017 and Bank of America is entering into a new lease for 322,000 square feet in the base of the building through March 2022 as part of the transaction. The property is expected to generate cash net operating income of about $17.5 million in the first year of ownership. Parkway is financing the acquisition with the TPG investment and borrowings from the company’s credit facility. However, it plans to obtain financing on the property to use as capital for future investments.

Parkway also announced that it had completed the sale of The Pinnacle at Jackson Place and Parking at Jackson Place in Jackson, Miss., for $29.5 million.  The Orlando, Fla.-based REIT had said that it was in the process of selling the Jackson properties in early April, when it announced the sale of 12 non-core assets. Those properties five in Richmond, Va.; four in Memphis, Tenn., and three in Jackson generated net proceeds of $88.1 million.  With that sale, Parkway had sold all its Richmond assets and had only one property in Memphis, the Morgan Keegan Tower, a 21-story, 337,000-square-foot office building in the CBD.

The dispositions are part of the REIT’s plans to transform its business and focus on office properties in growing SunBelt markets and submarkets.

We spent much of last year repositioning our portfolio. We sold close to $800 million of assets and acquired $720 million, not including Hearst Tower, David O’Reilly, Parkway’s executive vice president, chief investment officer and interim chief financial officer, told Commercial Property Executive. Through 2011 and early 2012 it’s been a portfolio recycling exercise and getting out of those non-core markets and focusing on the core markets. During that time, we also substantially deleveraged our balance sheet.

The core markets Parkway is targeting where it owns assets are Buckhead in Atlanta; Jacksonville, Tampa and Orlando in Florida; Houston; Phoenix and Charlotte. It is also seeking to acquire properties in two new markets Miami and Austin, Texas, O’Reilly said.

Parkway is getting out of Chicago, Richmond, Jackson and Memphis. In January, Parkway sold 111 East Wacker, a 1 million-square-foot office building in downtown Chicago that was 80.5 percent occupied for a gross sales price of $150.6 million.

We are pleased to have completed these important steps in the evolution of Parkway as we continue to position ourselves for long-term growth. We remain firmly committed to improving operations and cash flow, and on pursuing new acquisitions to grow the company, said Jim Heistand, Parkway’s president & CEO. With TPG’s financial commitment and strategic partnership, we will continue to take advantage of attractive opportunities such as Hearst Tower, as we strive to become one of the leading owners of high-quality office properties in select submarkets throughout the fast-growing Sunbelt region.

TPG now owns approximately 43 percent of the company. Parkway has issued TPG 4.3 million shares, or approximately $48.4 million of common stock and about 13.5 million shares, with an initial liquidation value of $151.6 million, of newly-created, non-voting Series E Cumulative Redeemable Convertible Preferred Stock.

O’Reilly said that even with the dispositions and debt reduction, Parkway needed incremental capital to go back out into aggressive growth mode.

TPG viewed this and we view this as a long-term partnership, O’Reilly added.

Parkway’s high-quality office portfolio, which is concentrated in attractive Sunbelt markets, provides a unique investment opportunity. Hearst Tower is a great example of the type of investments Parkway’s talented management team will seek to identify and secure in the future, said Avi Banyasz, a partner at TPG.

As a result of its investment, TPG gets four board of director seats at the company. Banyasz and partner Kelvin Davis along with Adam Metz, a TPG senior advisor, have been appointed to the board. A fourth appointment will be named in the future. Those board members leaving are Daniel P. Friedman, Michael J. Lipsey, Leland R. Speed and Troy A. Stovall.

Parkway now owns or has an interest in 42 office properties in 10 states with a total of approximately 10.7 million square feet of space. Wholly owned subsidiaries also provide fee-based real estate services and manage or lease approximately 12.2 million square of space for third-party owners.

TPG was founded in 1992 and has $15.5 billion in assets under management and 17 offices in 10 countries including the United States, China, Australia, Russia, Brazil, Japan and India. It has committed more than $1 billion in equity to real estate investments in recent years.

Rudy Clark penned the song “I Got My Mind Set on You” in 1962, a half-century ago, in an era when America’s current economic problems were probably beyond imagining. But as the long, slow recovery drags on into 2012, the lyrics resonate:

It’s gonna take money/
A whole lotta spending money…
It’s gonna take time/
A whole lotta precious time…
To do it right.

Much has been made of the role of the consumer in the U.S. economy. Personal consumption expenditures (PCE) account for about 71 percent of the $15 trillion U.S. economy. That in itself is a major change from the structure of the U.S. GDP in 1962, when consumption represented just 61 percent of total output. More significant, though, is the change in the distribution of consumer spending. In 1962, 13.4 percent of PCE was allocated to durable goods, 38.8 percent to non-durable goods and 47.8 percent to services. Currently, durable goods have an 11 percent share of all expenditures (a slight drop in share), but non-durable goods have seen a steep decline to a 23.1 percent share, while services have soared to 65.8 percent of consumer outlays.

The implications of this structural economic shift for retail property are, of course, immense. But they are, I believe, poorly understood by policymakers, by the general public and even by commercial real estate investors. Allare addicted in a very unhealthy way to the headline news that sways sentiment in the polls and moves the financial markets on a daily basis. Services spending—which includes housing and utilities, healthcare, financial services and insurance as its largest components—has been steadily crowding out the funds that households have available for purchases in shopping venues of all kinds.

Thus, reports like one that noted PCE contributed 1.24 percentage points of the third quarter gain of 1.8 percent in real GDP completely disguise the implications for demand in the stores sector of the real estate market. Services consumption accounted for 0.9 percentage points of the overall gain, and relatively good performance in the durables sector added 0.42 percentage points. This was offset by a negative contribution of 0.09 percentage points from non-durables—the heart of most retail center tenant rosters—with clothing and footwear most seriously challenged.

Remembering that consumer price inflation was 3 percent in 2011, it is hardly surprising to find that while real retail sales were up 3.5 percent last year, the gains were led by the automobile dealers and gasoline stations. General merchandise, sporting goods, book, music, electronics and appliance stores all posted negative sales, when adjusted for inflation. Encouragingly, though, stores related to the housing sector showed some signs of reviving, with a real gain of 2.6 percent for furniture and home furnishings outlets and 2.8 percent for building materials and supplies stores. Restaurants and bars, as well as apparel, also closed the year in the plus column.

Mixed patterns of demand need to be unpacked to sort out the conditions and prospects for retail real estate. These also vary considerably by geography and by income cohort. In this context, broad measures such as the Consumer Confidence Index have very little utility for commercial real estate executives. Further complicating matters, the retailing sector is still suffering from the self-inflicted wounds of undisciplined expansion in the chain stores that are the supposed “credit tenancy” anchoring shopping center cash flow.

The story of the boom years was unbridled additions to the physical footprints of virtually every retailer. As a result, merchandisers now acknowledge that they are over-stored in just about every U.S. market, diluting profitability and shifting attention (rightfully) to improving operations at the best-performing locations while shedding excess capacity. That means more dark stores for owners of retail property in 2012.

Pricing for retail assets is reflecting this risk, at least compared to the low capitalization rates that characterized the boom years. Average retail cap rates are higher than for multi-family and office properties, and within the retail sector smaller centers and secondary markets have higher required risk premiums than the norm for all retail centers. This bespeaks a flight to quality as wellas an understanding that much of the overbuilding occurred in the so-called growth markets that have been hammered in the housing collapse.

So to return to the insights of Rudy Clark, it’s gonna take patience and time. Retailing, both from the demand perspective of the economically stretched consumer budget and from the supply perspective of too many stores chasing too few customer dollars, is far from equilibrium. At this point, the sector is volatile and rents are fairly inelastic with respect to overall economic trends. That won’t last forever, of course, but it does describe the landscape in 2012.

To get through this period, it’s gonna take money—patient capital; capital invested for the long haul—to do it right in the cut-throat competition of U.S. retailing and the stores sector of the property market.

—Hugh F. Kelly, PhD, CRE, is a clinicalassociate professor at the NYU Schack Real Estate Institute.

The purchase of a mezzanine loan in a loan-to-own strategy typically proceeds as follows:

Step 1: Acquire the mezzanine loan;

Step 2: Foreclose on the equity interests in the mortgage borrower; and

Step 3: Work out the mortgage loan.

If Step 3 is unsuccessful, the mezzanine lender might add:

Step 4: Put the mortgage borrower into bankruptcy (the “foreclose-and-file” variation).

The typical impediment to a bankruptcy is the nonrecourse carveout guaranty. A loan that would otherwise be nonrecourse to the guarantor becomes fully recourse if the borrower files for bankruptcy. However, when the mezzanine lender takes control of the mortgage borrower without also assuming the guaranty, that impediment (magically) disappears. Two recent judicial rulings are causing mezzanine debt investors to rethink this strategy.

In the 2010 case of Bank of America, N.A. v. PSW NYC L.L.C., an investor purchased the mezzanine debt relating to a high-profile apartment complex in New York City (at a discount of approximately 85 percent from the $300 million par value). The investor then sought to foreclose on the equity interests securing the mezzanine loan. Press reports also suggested that a foreclose-and-file strategy was afoot. The mortgage lender filed a lawsuit to enjoin the mezzanine lender. The mortgage lender asserted (in part) that the intercreditor agreement between the lenders required that all defaults under the mortgage loan (including the accelerated debt of $3 billion thereunder) must be cured before a foreclosure on the mezzanine loan.

The trial court agreed with the mortgage lender. The PSW ruling focused primarily on a specific provision of the intercreditor agreement stating that if the mezzanine lender acquires the interests in the mortgage borrower, the mortgage loan “shall not be accelerated by (the Mortgage) Lender solely due to such acqusition and shall remain in full force and effect; provided, however, that … all defaults under the Senior Loan … which remain uncured or unwaived as of the date of such acquisition have been cured by (the Mezzanine Lender).” The court interpreted this language as “unambiguous(ly)” requiring the mezzanine lender to pay the outstanding balance of the mortgage loan prior to foreclosing on the equity interests (even if the mortgage loan had been accelerated).

Distressed debt investors expressed disagreement. Mortgage lenders proclaimed it the “right outcome.” Others argued that the PSW court was policy driven—the underlying real estate asset is so important to the New York City community that a bankruptcy must be avoided if at all possible.

In December 2011, the same outcome was reached by a different court. The facts in U.S. Bank National Association et al. v. RFC CDO 2006-1, Ltd. were nearly identical to those in PSW. A mezzanine lender sought to foreclose on the equity interests in a mortgage borrower (in an alleged foreclose-and-file strategy). The mortgage lender sought to enjoin that action. The U.S. District Court concluded that the same language, also present in the intercreditor agreement of the RFC case, was again unambiguous and imposed a condition precedent to the mezzanine lender’s enforcement actions.

Up for Interpretation?

Without regard to whether or not the rulings in PSW and RFC are correct, the language is certainly not unambiguous (as demonstrated by the vigorous debate in the legal community on various listservs). One could interpret the intercreditor language to mean that the mortgage lender will not accelerate the mortgage loan solely as a result of the mezzanine lender taking over the mortgage borrower, as long as the mortgage loan defaults are cured.

In other words, the “cure condition” is not a condition to the foreclosure on the equity by the mezzanine lender but is a condition to the mortgage lender agreeing not to accelerate. Importantly (though not so much to the courts), other provisions of the intercreditor agreement explicitly stated the conditions to a mezzanine lender’s foreclosure action—with phrases such as “Mezzanine Lender shall not exercise any rights it may have … unless … .” The cited language on which the courts relied is not drafted with such conditional phraseology. Whether the outcome was the “right outcome” focuses less on language and more on what was intended and what the outcome “should be.” Mortgage lenders contend that if the mezzanine lender can effectively do an “end-and-around” in this manner, then an unintended weakness in the structure becomes apparent. Mezzanine lenders disagree as to whether such weakness was intended. We would expect a revision to the standard intercreditor agreement to address this issue.

Related Tip for Borrowers and Guarantors:

The foreclose-and-file strategy should prompt borrowers and guarantors to seek limitations on springing recourse provisions of the carveouts guaranty (for bankruptcy) to periods “when the Guarantor remains in control of the Borrower.”

Michael Hamilton is a real estate and finance attorney based in the Los Angeles office of DLA Piper L.L.P. (US).

Image courtesy Flickr user futureatlas.com

The U.S. Department of Commerce reported on Tuesday that retail sales were up by 0.4 percent month-over-month in January, which is more than in recent months — December’s increase was only 0.1 percent — but not as much as economists had expected. Most of the difference between the expectation and the end result stemmed from the fact that car sales weren’t quite as brisk in January as previously, even considering seasonal adjustments (and provided those adjustments are correct; retail sales sometimes get revised quite a bit after the first report).

Take-out auto sales and retail sales were up a more robust 0.7 percent, which is the highest non-auto retail sales uptick since early 2011. The likes of Walmart and Target, which count as general merchandise purveyors, saw sales increase 2 percent, while department stores — which suffered greatly during the recession — bagged a 1 percent increase in sales in January. Grocery stores, sporting goods stores and even bookstores did better than in December. So did gas stations — but that was because consumers were paying more last month for gas, not because they were getting more.

With employment up and retail sales up, businesses seem to be adding to their inventories at a greater pace as well. A separate report on Tuesday by the Census Bureau noted that business inventories rose 0.4 percent in December, which is a decent increase, though not quite as much as in November.

Volcker Rule Inspires Mountains of Comment

Monday was the deadline for public comments on the Volcker Rule, a part of Dodd-Frank that prohibits banks from trading with their own money, and an estimated 200 letters were filed with the Securities and Exchange Commission seeking to influence the final shape of the regulations based on the rule. The prospect of not being able to play with their own money — which Volcker rule advocates say establishes a conflict of interest for the banks — has clearly hit a nerve among the big-money banks and those industries that feed on their business. Many of the letters were from them.

Goldman Sachs, Morgan Stanley and Citigroup each submitted letters (typically 10 to 20 pages of argument), but so did Wall Street trade groups (such as the Securities Industry and Financial Markets Association), law firms and others, all seeking to eviscerate the rule. Consumer advocates, lawmakers and none other than former Fed chairman Paul A. Volcker also sent letters, urging strong regulations based on the rule.

Also on Tuesday, as the sun was setting on Capitol Hill, it looked like a deal would be made between the House and the Senate to extend not only the payroll tax cut, but also unemployment insurance payments and higher rates of Medicare reimbursement for doctors. Did it reflect a spirit of bipartisanship and putting the nation’s interest ahead of party considerations? Or the fact that Congress didn’t want to miss its long Presidents Day weekend?

Pulse of Commerce Index Runs Contrary to Other Indicators

The UCLA Anderson School of Management and Ceridian Corp. said on Tuesday that their Pulse of Commerce Index, which tracks diesel-fuel consumption data for over-the-road trucking as an indicator of the direction of the U.S. economy, dropped 1.7 percent in January, following a 0.4 percent decrease in December. January’s reading puts the index 2.2 percent below year-ago levels, meaning that there’s been essentially no growth in the index since the summer of 2010.

The organizations acknowledged that it’s an odd result, considering the forward momentum of the economy. “It seems difficult to square the behavior of the [index] with the evident improvement in a number of economic indicators, most notably the increase in payroll jobs and the decrease in initial claims for unemployment,” Ed Leamer, chief economist for the Ceridian-UCLA Pulse of Commerce Index and director of the UCLA Anderson Forecast, said in a statement.

Wall Street was down until the last minute on Tuesday, but the markets ended essentially flat. The Dow Jones Industrial Average eked out a gain of 4.24 points, or a vanishingly small 0.03 percent, while the Nasdaq was up even less, 0.02 percent. The S&P 500 ended for a loss, but not a very large one, down only 0.09 percent.

Hard on the heels of the United States’ economic recession, the nation’s commercial real estate market appears to be on a gradual but uneven path to recovery. Increased transaction flow, driven by real estate investment trusts and distressed deals—in turn aided by improved access to debt and equity capital—has helped revive the commercial real estate markets as property fundamentals continue to improve across sectors.

A bright spot in the commercial real estate recovery process is transaction activity, led by REITs, foreign investors and distressed assets. Net positive acquisitions of $34.1 billion by REITs and $6.1 billion by foreign investors have significantly impacted investment recovery post-recession (2008), according to Real Capital Analytics Inc.

Distressed property transactions continue to rise due to improved financing conditions and favorable convergence of bid-ask spreads. Real Capital Analytics data found that during the first half of 2011, distress-driven sales increased 125 percent year-over-year, to $15.7 billion, and comprised 17 percent of total U.S. commercial real estate sales.

Distressed assets may be nearing a peak, as new additions to the inventory decreased for the sixth consecutive quarter in second quarter 2011, to their lowest level since 2008. Total loan workouts also exceeded new distress additions during the first half of 2011.

However, transaction opportunities still exist for distressed assets, with nearly $182 billion in troubled assets estimated in the marketplace, according to Real Capital Analytics. Indeed, an increase in real estate owned by lenders will help feed these trades, as these entities seek to permanently resolve troubled mortgages.

However, a broad-based transaction market recovery, requiring increased demand for “non-trophy” assets, may be delayed in light of current economic uncertainty. Transaction growth appears to be moderating, as global economic uncertainty begins impacting investor appetite and real estate debt availability and pricing.

A Pause in the Recovery Momentum

The U.S. economic recovery appears to be stalling, following Standard & Poor’s Corp.’s sovereign debt rating downgrade, the Eurozone sovereign debt crisis and concerns over U.S. fiscal policy.

The continued economic uncertainty has resulted in lower consumer confidence and business expectations; consequently, unemployment may remain high, and housing demand could stay muted. In addition, the U.S. residential real estate market appears to be years away from a full recovery. The mortgage market faces significant uncertainty amid continuous change, and looming debt maturities through 2017 continue to act as a potential impediment to the recovery of commercial real estate. A constant theme of the recent downturn was the “amend and extend” strategy, in which lenders were willing to extend terms for troubled loans at below-market interest rates.

But lenders have gradually moved away from this strategy as a result of a rise in commercial real estate values due to higher transaction activity and a boost in distressed-debt resolution through loan sales, refinancing and foreclosures. This uptick in loan restructuring and improved property fundamentals has decreased commercial real estate loan delinquencies: to 7.1 percent in the second quarter of 2011, compared to 8.8 percent in the second quarter of 2010, according to the Federal Reserve.

Adding further uncertainty to the recovery of commercial real estate is the residential housing and mortgage market. The residential mortgage market was the root cause of the sub-prime crisis and a major contributor to the 2008 economic recession. While mortgage debt levels continue to drop, new non-agency securitization issuances remain at record lows. Further, delinquencies hover at historic highs despite several bank and government loan modification efforts. The residential mortgage market may continue to evolve significantly over the next few years as a result of the regulatory environment, declining home prices, foreclosure practices and troubled-loan resolution.

Despite improved financing conditions due to availability of capital from increasingly diverse sources, issuance continues to be focused primarily on high-quality, stable assets, especially in gateway cities like New York, Washington, Boston, Chicago, San Francisco and Los Angeles. Prospects for a broad commercial real estate market recovery likely will be enhanced when lenders resume loan originations for non-trophy as- sets and refinancing options increase to respond to growth in debt maturities. According to Trepp L.L.C., at least $1.8 trillion in commercial real estate debt matures prior to 2015, with nearly 60 percent of this debt estimated to be “underwater,” as the amount of existing debt exceeds the market value of the property itself.

Slower recovery of non-prime properties and continued economic un- certainty remain challenges for the commercial real estate market. The industry will need to take on these challenges in 2012.

For further information, see Deloitte’s “Commercial Real Estate Out- look: Top Ten Issues in 2012—A Potential Pause in Recovery Momentum.” A copy of the report is available from Deloitte.

Steven Bandolik is a director for Deloitte Financial Advisory Services L.L.P. and Mark Wojteczko is a senior manager for Deloitte & Touche L.L.P. This article contains general information only and is based on the experiences and research of the authors. Deloitte Financial Advisory Services L.L.P. and Deloitte & Touche L.L.P. are not, by means of this article, rendering professional advice or services.

The most recent downturn has given equity a new role. Where once lenders were satisfied with as much as 75 percent debt, and in some instances even 80 percent (in previous years, even more), this much-more-chastened market has made it increasingly challenging to fill the gaps in the capital stack.

Equity providers, however, are not eager to market themselves. In fact, responses to our latest survey of equity providers found many leading players hesitant to disclose too much information about their proprietary tactics. Under those circumstances, rather than publish a list of the companies and their overall volume, we decided it would be more beneficial to provide insights derived from survey results and discussions with respondents that illustrate where equity offerings are trending.

The firms that responded to this survey represent a significant portion of the industry. Together, they provided $11.8 billion through investment partnerships during the time period including fiscal year 2010 and the first two quarters of 2011. That value was dominated by joint venture investments, with small portions of preferred equity and limited partnership moves dotting the landscape. While the respondents to the direct lenders survey discussed in the November 2010 issue were generally optimistic about the market improving for 2012, two-thirds of the equity providers surveyed believe investment activity will neither increase nor decrease over the next two quarters.

As one might expect in this market, the majority of equity (about 54 percent in this case) has been used for acquisition activity. Properties continue to change hands, and investors are still hunting down assets in core markets while the price is right. That being said, equity for development activity comprised a large chunk, at 27 percent of the total provisions. While new developments are only trickling in due to the sluggish economy and limited access to capital, certain regions and property sectors are hotter than the rest. More than 37 percent of equity provided for development, for instance, was for assets in the Eastern states. Western states came in a close second with 32 percent. The South saw a hair over 20 percent, while the Midwest received just under 10 percent of the pie.

Among property types, multi-family received more than 43 percent of the equity disclosed by respondents. This was not surprising considering the demand from shifting renter demographics and the lagging single-family recovery. Partnering up has proven a successful approach for landing the large properties in the core areas with high rents and low vacancies.

The equity questionnaire also asked for a breakdown of active funds. Core, value-add and opportunistic strategies were equally represented. A lack of funds geared toward distressed assets suggests that investors believe the sector has been dug through. The average return requirements varied a few percentage points by category, with a median return requirement between 15 percent and 17.5 percent.

As of press time, Congress is still unable to arrive at a consensus that will provide any kind of meaningful debt reduction. Commercial real estate remains very sensitive to the overall economy, and when markets decline (stock, bond and commodity), the sector gets an almost-immediate boost before succumbing to the decline in market prices.

We believe that after remaining stable for the balance of 2011, equity volume will begin to rise in 2012 as both inflation and economic uncertainty take hold. We do not believe there will be huge gains in rates, but instead terms for equity will tighten even more. Underwriting will have to recognize more realistic preferred returns, changes in fund structures and different ways to assess carried interest between partners.

To be included in upcoming surveys, contact Mike Ratliff at mratliff@cpexecutive.com.

“Debt” is going to be the name of the game for the European real estate markets in 2012, according to Emerging Trends in Real Estate Europe 2012, the industry forecast published by PwC and the Urban Land Institute. With daily reminders that interest-rate cuts on Greek bonds are still in limbo and debt-rating decreases for Euro-zone nations are on the rise, a turnaround looks to be tied directly to banks’ willingness to make commercial loans and whether the financial industry could face another collapse. The survey took responses from more than 600 commercial-property professionals across Europe to determine the overall course of the industry.

“The profound instability is affecting the providers of equity and debt,” Joe Montgomery, chief executive of ULI Europe, said. “We are operating in an environment that is very difficult to model. The uncertainty over the level of banks’ exposure to sovereign-debt default, coupled with uncertainty over the regulatory changes introduced as a result, has caused significant elements of the capital markets to be reduced to a state of near paralysis.”

In general, lenders are facing a level of pessimism over debt at levels not seen in years, according to John Forbes, the report’s author. Only 6 percent of lenders think that debt will be as available this year as it was in 2011, and a full 52 percent feel it will be substantially less available.

But not all news is gloomy, however. “The good news is that the view of respondents regarding the availability of equity is much more positive,” Forbes wrote. “Most promising is the response from institutional investors: 65 percent believe that equity will be moderately more available, with a further 10 percent believing that equity would be substantially more available.” And those lenders will play a significant role in the economy’s health, as all the players are interconnected. Mezzanine lenders need senior lenders to push debt into the marketplace, and insurance companies need time to build the right infrastructure to deploy capital.

With such uncertainty, it was difficult for the survey’s respondents to make sweeping generalizations about market sectors, but geography will certainly play a role in how investments will roll out from city to city. Istanbul, the report noted, has been the top market for commercial real estate investment for the past two years, “but that ranking is more a reflection of its long-term economic future than a sign that investors are about to rush to place their capital in the market.” And, while debt concerns continue to plague Spain and Italy, opportunistic investors may still see possibilities as banks begin to release assets later this year.

Overall, 2012 could be a turning point, the year that investors have been waiting for – or it may turn out to be a bust. Pressures from all directions could make finding funding solutions for banks an imperative, but whether investors get the bargains they would like is still very much an unknown. In general, the report’s bearish mood reflects the larger overall picture, and the coming months will certainly tell a clearer story.

Ziegler has facilitated a tax-exempt bank direct purchase on behalf of Covenant Retirement Communities. The direct purchase, completed by JP Morgan Chase, came in the form of two series of bonds totaling approximately $59.1 million.

The bonds included approximately $15.8 million of Series A product and $43.3 million of Series B. The majority of the proceeds were utilized to refund outstanding Series 1999 , Series 2004 and Series 2006 bonds. Additionally, a sum of roughly $6 million was reserved to finance capital improvements for several CRC facilities in Colorado, Illinois and Michigan. The seniors housing company has 15 continuing-care retirement community, independent living and assisted living locations in eight states from coast to coast.

The closing of the Series 2011 bonds marks a milestone for the Illinois Finance Authority, as the bonds constitute the agency’s first multi-state issuance after becoming a multi-state conduit issuer in July 2010.  “Gov. Pat Quinn and the Illinois General Assembly recognized that multi-state conduit issuance authority is an important tool to both retain and create jobs in Illinois,” Chris Meister, IFA executive director, noted in a prepared statement.

The banking industry should not hold its breath for a rollicking good time in 2012, as indicated by Trepp L.L.C.’s 2012 U.S. Banking Sector Outlook. The New Year is not expected to provide a flashback to 2008, but it will not bear any resemblance to the glory days either.

It’s been a good year for banks in terms of profits, but the industry can bid adieu to forward progress in that arena in 2012. After two years of earnings growth, banks will earn less next year. In an attempt to offset lost revenue, they will turn to customers by adding new fees and advocating the use of credit cards. However, this plan will only do so much as, according to Trepp, it will add only a nominal amount to non-interest revenue.

From a regulatory standpoint, things are only going to get more complicated and more expensive for banks. With any number of challenges still in place, in 2012 and 2013, bank failures will continue, albeit at a slower pace.

As it pertains to commercial real estate, the banking industry forecast is neither completely gloomy nor blindingly bright. Commercial real estate loan performance is anticipated to slowly but surely improve over the next year. However, stringent lending standards and the continuation of high delinquency rates will continue to prevent a full recovery next year and for quite some time into the future.

Scheduled to close in the first quarter of 2012, the transaction comes five years after Morgan Stanley acquired Saxon for $706 million in cash. Upon the December 2006 completion of the purchase, Anthony Tufariello, then global head of the company’s Securitized Products Group, said, “This acquisition is another important step in our long-term strategy of building a global, vertically integrated residential mortgage business.”

As of April, Saxon’s servicing portfolio included upwards of 169,300 loans totaling $29.2 billion in value, Fitch Ratings reported in affirming Saxon’s ‘RSS2+’ residential special servicer rating.  “The company’s strategy remains focused on subservicing of distressed mortgage assets,” Fitch stated in August.

“In 2010, Saxon increased its capacity through sales of mortgage servicing rights and sub-servicing arrangements for its legacy subprime portfolio,” Fitch said. “As a result, Saxon’s current infrastructure and excess capacity have positioned the company for significant growth through its pursuit of subservicing opportunities.”

CubeSmart is about to move to the head of the self-storage class. The company just signed a deal to purchase a 1.6 million-square-foot collection of premier properties in metropolitan New York City from Storage Deluxe for $560 million, including the assumption of $88 million of debt. The purchase will make Wayne, Pa.-headquartered CubeSmart the largest owner of self-storage properties in the Greater New York City region.

The group of Class A assets consists of 22 properties, 16 of which are spread out among three of the Big Apple’s five boroughs. Three facilities are located outside of New York City proper, in suburban Westchester County, and two more are in Connecticut. Rounding out the group is a property in CubeSmart’s home state of Pennsylvania. At mid-year, the facilities had an average occupancy level of 84 percent, which translated to an average realized rent of $26.07 per square foot.

CubeSmart, known as U-Store-It Trust until last month,  found ample financing for its half-billion-dollar purchase. The REIT will rely partly on $300 million of preferred and bridge debt financing from Wells Fargo. The remainder of the price tag may be financed through the company’s existing $250 million line of credit.  Additionally, the company will use a portion of the proceeds from its recently announced offering of 20 million common shares, which is expected to generate a gross sum of approximately $184 million. The acquisition dovetails with CubeSmart’s current goal of expanding its footprint in its core markets, which also include Chicago, Dallas, Miami and Washington, D.C.

The first phase of the transaction, involving the $357.3 million purchase of the 16 unencumbered assets, is on track to close during the fourth quarter.

Of note, it is anything but easy for investors to get their hands on a self-storage portfolio exceeding one million square feet. The self-storage sector, with its consistent cash flows, high returns and low loss ratios, is enjoying increasing popularity. “The imbalance between few offers and plentiful buyers has led to a greater interest in portfolio acquisitions, which are trading for a premium,” R. Christian Sonne, senior managing director with commercial real estate services firm Cushman & Wakefield’s Self Storage Industry Group, explained in a mid-year report. And the low level of new construction over the last few years is only heating up the competition.

Innkeepers USA Trust’s deal to sell a 64-hotel portfolio to a joint venture consisting of Cerberus Series Four Holdings L.L.C. and Chatham Lodging Trust as part of its Chapter 11 plan of reorganization is back on again. The agreement was announced in June, then fell apart in August. Now it’s been tweaked, and Cerberus and Chatham will acquire the assets at the previously agreed upon price of just over $1 billion, $1 million less than the previously agreed upon price.

The original deal called for Chatham and Cerberus to acquire the 64 Innkeepers hotels for roughly $1 billion, and in a separate transaction, Chatham would purchase an additional five properties (pictured) totaling 764 guestrooms for $195 million. Chatham completed its acquisition of the latter group of assets in July, but in August, Chatham and Cerberus put the kibosh on the 64-property deal. The joint venture partners explained that their decision to terminate the agreement was based on “the occurrence of a condition, change or development that could reasonably be expected to have a material adverse effect on Innkeepers’ business, assets, liabilities (actual or contingent), operations, condition (financial or otherwise) or prospects.”

Innkeepers cried foul and filed a breach of contract complaint with the U.S. Bankruptcy Court against Chatham and Cerberus. The complaint noted that “the Defendants’ last minute change of heart has nothing to do with any change in the performance or prospects of the fixed/floating Debtors’ business and everything to do with a calculated effort to renegotiate the terms of the parties’ deal.”

Now, two months later, any issues regarding the fixed/floating debtors–Midland Loan Services and Lehman ALI Inc.–have been rectified with the revised agreement. The modified deal calls for the fixed-rate debt serviced by Midland to be altered to the amount of approximately $675 million, and for Lehman, holder of the floating-rate mortgages, to receive a cash payment totaling $224 million to address its claims.

“The updated agreement provides a significant cash premium to the original stalking horse bid and a meaningful return to our creditors, and it allows us to move ahead with a timely exit from Chapter 11,” Marc Beilinson, Innkeepers’ chief restructuring officer, noted in a prepared statement.

Still, nothing is set in stone quite yet. The Bankruptcy Court must green light the new arrangement.

Seniors housing and healthcare powerhouse Ventas Inc. expanded its borrowing capacity with the closing of a new credit facility. Subsidiary Ventas Realty L.P. confirmed a $2 billion unsecured, four-year revolving credit facility, replacing a $1 billion facility scheduled to mature in April 2012. The new facility was priced at 125 basis points over LIBOR, an improvement over the 280-basis-point pricing of the earlier financing provision. The new facility matures in October 2015, with the option to extend the maturity date for another year under certain conditions, and includes a $500 million accordion feature that allows the company to expand its borrowing capacity.

Ventas chairman & CEO Debra Cafaro in a release attributed the company’s capacity to expand its borrowing capacity to its acquisition of Nationwide Healthcare Properties, a $7.6 billion deal that added more than 600 seniors housing, skilled nursing and medical office properties to the REIT when the deal closed in July. The deal was eight years in the making but resulted in “arguably the leading healthcare REIT by equity value,” noted Zacks Investment Research, which at the time of the deal lauded it for bringing “two of the most complementary customer franchises together in the healthcare real estate market” that “creates a diversified company with a better scope of operations.” The deal resulted in a company with more than 1,300 assets and an equity market capitalization of $17 billion.

Ventas has been actively acquiring companies in the past several years. Earlier this year, it purchased Atria Senior Living Group, the fourth-largest U.S. operator of assisted living facilities, for $3.1 billion. In July of last year, it acquired Lillibridge Healthcare Services for $7.6 billion. Also in recent years, it purchased Sunrise Senior Living REIT (2007), Senior Care (2006), Provident Senior Living Trust (2005) and ElderTrust (2004).

For more on Cafaro’s strategy for Ventas, click here to access “Winning Streak” in CPE’s October 2011 issue.

Image Courtesy Flickr Creative Commons user Jack W Reid

SunEdison must be glowing over a recent milestone. The solar energy services provider just obtained a $300 million three-year project finance revolving credit facility through Deutsche Bank Securities Inc. and Rabobank. SunEdison says the transaction marks one of the largest non-recourse revolving credit facilities ever closed for financing photovoltaic projects.

SunEdison will use the capital to finance the construction of utility and rooftop solar projects across the U.S. and Canada. The company, which has already deployed upwards of 500 solar energy systems in the two countries, appears to be on a roll when it comes to securing construction loans. Wells Fargo is providing $200 million for SunEdison’s five-plant project in New Mexico, marking the bank’s biggest renewable energy construction loan to date.

While the credit markets have not completely defrosted, banks appear to be warming up to renewable energy projects again. “Our recent research shows that a corner has been turned in lender attitudes to the renewable energy sector,” Ernst & Young reported recently. “Statistics show that 2010 and 2011 lending levels are returning to pre-crisis levels.”

However, lenders’ increasing activity does not come without some trepidation. “Rooftop solar PV showed a less favorable –at a high-level– view from the population of lenders,” the report said. “This is primarily driven by the need to reach a sufficient scale to justify transaction costs. In many markets, rooftop-aggregation increases risk of an overall portfolio. Large rooftop projects were perceived as lower risk.” SunEdison’s projects frequently fall into that latter category.

Sabal Financial Group L.P. has purchased a portfolio of more than 100 commercial real estate loans from a leading Midwestern bank. Secured largely by retail, office and industrial assets, as well as land, the group of performing and non-performing loans is valued at $153 million.

The assets serving as collateral are located in regionally diverse states, including Illinois, Wisconsin, Arizona and Florida, where a bevy of properties secure the distressed loans. Sabal’s purchase comes two months after the financial services management firm relieved a major Midwest bank of a $212 million collection of performing and non-performing loans secured mostly by income-producing commercial real estate properties and land in Florida, Illinois and Wisconsin.

“The need for banks to clear their balance sheets of problematic loans remains strong and this latest portfolio acquisition is representative of our ability to assist,” said Sabal CEO R. Patterson Jackson (pictured). Six bank failures last month brought the total for the year to 74, according Trepp L.L.C. Commercial real estate loans were largely to blame, accounting for 82 percent, or $365 million of the financial entities’ aggregate $445 million in non-performing loans, Trepp reported.

Sabal will provide loan servicing and asset management for its newly purchased portfolio, as it does with the portfolio acquired in August. “Our team’s real estate and banking expertise is significant and we are able to work out and enhance the value of these real estate assets more effectively than the banks, which are confined by regulations,” Jackson said.

RiverOak Investment Corp. L.L.C. is setting its sights on urban retail primed for repositioning with the initiation of a new investment vehicle, RiverOak Urban Retail Investors Fund I, with the goal of securing commitments totaling $300 million.

Urban Retail Fund I will target street-level retail predominantly at mixed-use properties with reasonable price tags in live-work-play central business districts. “The fund is really value-add so anything where our money can come to the rescue of the property, we will be interested in,” Stephen DeNardo, CEO of RiverOak, told Commercial Property Executive. “We’re not looking for properties that are already leased up with long-term leases on them where we can’t do much with them.”

While acquisition activity will focus on urban locations, there is one vital caveat: the area has to have a retail market capable of a relatively successful performance even in the midst of a less-than-stellar economy. Not every urban locale fits the bill. RiverOak did its research.

“To choose them, we did sort of a complicated statistical overview of every market of 500,000 people or more and then applied our criteria and weighed the criteria and so on, and it spit out seven markets as the top markets,” DeNardo explained. “They may seem self-evident, but it makes sense for a couple of reasons.”

Those top markets are Boston, Chicago, Los Angeles, New York, Philadelphia, San Francisco and Washington, D.C. “There are a few things they have in common,” he noted. “They’re all 24-hour cities, they have significant pedestrian traffic, they are among the top cities in the country for tourism and transportation systems and they all have a fairly significant university presence.”

Acquisitions will be limited to a very specific in property type as well. “No malls and we’re not looking at strip centers or anything like that,” DeNardo said. “There are plenty of people out there that already cover that. We feel that [the fund's target] is a niche that there are not a lot of players in. There are not many funds focused on it.

Already, he added, Urban Retail Fund I has attracted a fair amount of interest from institutional investors in the U.S. and abroad.

Through the FDIC’s Small Investor Program, Sabal Financial Group has acquired a $158 million portfolio of performing and non-performing commercial real estate loans from FirsTier Bank of Louisville, Colo. The acquisition represents the commercial component of a larger $297 million loan sale mandated by the FDIC after the seizure of FirsTier’s assets in January 2011.

“We are pleased to continue building on our existing relationship with the FDIC with the addition of this portfolio,” R. Patterson Jackson, CEO of Sabal, said. “This portfolio is a blend of commercial real estate loans and acquisition, development and construction assets that uniquely matches the broad expertise of Sabal in the management of small-balance distressed assets.”

The SIP is designed to increase investor access to smaller asset pools, widen participation in structured sales and maintain a level playing field for investors through a competitive bid process. Sabal will perform management, servicing and disposition services for the 116-loan pool amid the company’s ongoing expansion of its servicing portfolio, now totaling nearly $3 billion in assets. The acquired portfolio includes 116 loans and is secured by a heavy concentration of properties in Colorado, including retail, industrial, office, apartments and undeveloped land. The acquisition represents the increasing number of loan portfolios being sold by both failed banks and those banks seeking to shed assets as they work to improve their balance sheets.

The Small Investor Program has been busy of late, with the $139 million acquisition of a loan pool last month by Hudson Realty Capital L.L.C.

Courtesy Flickr Creative Commons user AMagill

Archstone can breathe a big sigh of relief. With the conclusion of financial restructuring, the national apartment investment and operations company has eradicated $5.4 billion from its total debt.

Like so many other property developers and owners, Archstone was unable to escape the financially devastating ramifications of the credit crunch and the commercial real estate downturn. But, though few had likely divined it, the company’s real troubles actually began in October 2007 when the now-defunct Lehman Brothers Holdings Inc. and affiliates of Tishman Speyer Real Estate Venture VII L.P. acquired Archstone–known as Archstone-Smith until a 2008 name change–in a $22.2 billion deal that included the assumption of existing debt and the privatization of the company. Of course, one year later, Lehman filed for Chapter 11 bankruptcy protection.

A little time and a great deal of effort, however, can sometimes change things for the better. Now it is a new day for Archstone, as the trouble-ridden road that followed the Lehman collapse has been cleared for the apartment company.

As per a U.S. Bankruptcy Court document, in May, the court signed off on a plan for the financial restructuring of Archstone as agreed upon by Lehman and other debtors and affiliates, including Bank of America and Barclays Capital Real Estate Inc., thereby resulting in the recently completed reduction of $5.4 billion via a debt-to-equity conversion.

“This restructuring resolves legacy financial issues and will allow the company to focus on growing our best-in-class brand and operating platform,” Chaz Mueller, COO of Archstone, noted in a prepared statement.

Currently, Archstone owns or has an ownership stake in 441 completed or in-progress multi-family properties totaling more than 81,600 units in coveted locations in the Washington, D.C., Los Angeles, San Diego, San Francisco, New York, the Seattle and Boston areas, and Europe.