Experts Clarify Credit Crunch’s Impact on Deal Financing

Financing deals during the ongoing credit crunch has left a lot of question marks, but three experts at this morning’s Commercial Real Estate Due Diligence conference, hosted by IncreMental Advantage in New York City, shed some light on the market and what both borrowers and lenders can expect in the near future. Today, life insurance companies and commercial banks are the most viable options for lending money, noted Rick Lechtman, director of The Ackman-Ziff Real Estate Group L.L.C. International balance sheet lenders have also appeared, but Michael Wachs, vice president of AMC Delancy Group, noted that borrowers should be concerned with the lenders’ deposit base, whether it is through branch or hot money. Asian banks, in particular, are looking in primary markets at sectors that command a lot of money, including multi-family and office. But whichever today’s lender, “what (they) want to see is cash flow,” Lechtman explained. “They don’t want vacant space or condo projects. They want to lend to people with money. They have a lower risk tolerance.” He added that most lenders are willing to finance the “major food groups,” but are pulling back on hotel financing with the anticipation that average daily rate is going to decrease. Special properties, like ice rinks, are also not high on lenders’ lists, as they prefer to stick to basics. But lenders are even looking at the basics with scrutiny, shying away from tertiary markets and an abundance of similar properties in saturated areas. Non-recourse borrowers are also having more difficulty finding a lender, because the lenders now want the deal backed by the property. Lechtman noted that he has been in the business for 17 years and is doing his first recourse loan ever, and Wachs followed that non-recourse loans have vanished and will not reappear until liquidity returns. Sol Levitin, senior vice president of Silverstein Properties, added that loan-to-values are also significantly lower; before the credit crunch, it was possible to get a 90-percent LTV, but that has since shrunk to 75-percent LTV. And as a sponsor, it is important to have a solid development plan in place, “with every pitfall thought out,” Lechtman cautioned. “If you can’t think of an exit strategy for the lender, he is more likely to say, ‘No.’ He’d rather pass then take on a bad deal.” Overall, balance sheet lenders are requiring more equity and cash flow, whether on a short-term or long-term deal. “Lenders today are real lenders, concerned with risk and not just passing it on to bond lenders,” Wachs explained. “Their relationships (with borrowers are back.)” The time it takes for a borrower to find the right lender has also changed. Lechtman noted that it used to take a couple of days, but it now takes about four weeks to find a lender and three months to do a transaction. Borrowers should go to as many capital sources as they can, and go in with due diligence. And borrowers have been more conservative with putting hard deposits down, and some lenders have walked away at the last minute because there was something missing in the due diligence. And how can borrowers reduce the amount of equity put into a transaction? “Get the seller to reduce the price,” Wachs joked. Lechtman added that sponsors should bring in a stronger joint venture partner, which will get both parties some money rather than none at all. Some sellers have been cognizant of the market and have reduced prices, structuring the deal to fill in the bid/ask gap, Wachs said. Other sellers, however, are “very jittery” right now, Levitin added, “but need to understand that they don’t have to sell.” The panel, titled “Financing Deals During The Credit Crunch,” was moderated by CPN Editor in Chief Suzann Silverman. IncreMental Advantage’s two-day conference also included sessions on: best practices in development; rehabilitation and environment; title insurance; TICs; sustainable development; transaction financing; pre-emptive due diligence; and property valuation and evaluation.