James DuMars: CMBS Provides Necessary Liquidity to a Capital Starved Market

By James DuMars

As the commercial mortgage banking market has been discussing for the last few months, CMBS as a debt vehicle is essential to the functioning of our real estate capital markets. However, it is important to grasp how vastly different CMBS is from a portfolio loan at a life insurance company. When it comes to the choice between the calm life company environment and CMBS, there is just no comparison. For example, during the period when spreads were blowing out, one of my clients locked rate on a 50% LTV for a grocery anchored retail center with a life company.
We simply got on the phone together and locked the rate at 4.80% fixed for 10 years. The life company didn’t pursue the loan so they could sell it. They see the loan as an investment to cover a promised return they owe to a policy holder. The trade-off for the borrower was to put an additional 10-15% cash down to buy the deal and lock in an extremely low rate and simplified execution. In this instance, the customer saw the value and had the means to invest the extra cash and settle for less leverage and a 25-year amortization versus 30. We had other life companies sandwiched between the CMBS loan quotes and the winning life company quote, but they wanted to get paid for offering the additional dollars. For example, their rates were closer to 5.25% – 5.40%.

Manage Your Expectations
If a life company can’t hit the dollars and amortization you need, a CMBS loan may be your best option. However, expect a choppy, uncertain experience and make sure and grasp that the process has changed since 2007. These changes include lender legal fees running at least $25,000, as all the loan documents have been modified “to restore confidence.” Other changes include some CMBS lenders outsourcing the underwriting and borrowers may get a bill for it. A market auditor will show up and verify that your rents are truly at market. If they aren’t, you’re going to get a haircut. Go into the process with your eyes wide open and full candid disclosure.

Finally, if a mortgage broker calls you and starts the conversation that CMBS is back and a great option before they understand your business model, beware! They probably don’t represent any life insurance companies and CMBS is their only way to survive. Think of a CMBS loan application as a nonbinding letter of intent, with the intent of the CMBS loan originator to sell the loan. If for any reason the market changes and the originator doesn’t believe they will be able to sell the loan for a profit, they will modify the loan to make it saleable or they won’t make the loan.

James DuMars is managing director of NorthMarq Capital’s Phoenix office.