Life Insurance Lenders Starting CMBS and More

By Marcelo Bermudez, Figueroa Capital Group

While there are an increased number of portfolio lenders such as commercial banks returning to the commercial property lending market, there are only about 25 lenders available currently to structure CMBS commercial real estate lending scenarios.

While there are an increased number of portfolio lenders such as commercial banks returning to the commercial property lending market, there are only about 25 lenders available currently to structure CMBS commercial real estate lending scenarios. More are expected to open up shop this year including life insurance lenders who are seeking 10 to 11 percent debt yields but are seeing them slide down to 8.5 percent. They will need to marry mezzanine to their life offer in order to win business or figure out a structure for CMBS to refer to when they cannot. The basic food groups of property (office, retail, industrial, and multi-family) are open for primary and secondary markets, but competition is pushing them to find yield in tertiary markets. This may help transition the liquidity trend from a trickle to a nice flow.

Most lenders are short on staff and time. For those deals that do get to loan committee, in-place income remains questionable in most scenarios. While market value isn’t usually the problem, in-place and future rents raise the most issues to determine if the investment thesis is viable. Borrowers tend to ‘forget’ that they have future rent abatements and discounts in place that affect net operating income and subsequently, leverage on their loan. Ten-year offers will likely put you at a 180 to 225 basis point spread, landing them in the mid five percent range. Five-year offers will be priced a little wider at 275-300 basis points over to land in the 4.3 percent range. With mezzanine in place at 8 percent and above, the blended cost of capital isn’t as high as most thought it would be when the flood of mezzanine and other high-yield lenders entered the market after the meltdown.

The hospitality sector is finally seeing some interest as RevPAR (revenue per available room) growth is expected. Most lenders don’t expect to see it exceeding more than 15 percent of their investment pool. Flags will be very important. Independents will likely have to focus on finding 504 dollars with the SBA. Lenders are beginning to feel better about retail, but remain cautious. Underwriters will continue to dissect tenants from net operating income deterioration to termination clauses in the lease to find an out to lower leverage or ask more questions. While some say there are two or three more years of NOI deterioration, the upside is that the conversation is improving and the velocity of deal flow is increasing noticeably.