On the Subjects of Onions and Honesty

Onions are a very interesting vegetable.  An onion can generate a mild odor or fill up the room with its smell.   Onions can taste sweet, pungent or downright nasty. Onions make many dishes sing with flavor. ( Sounds downright lyrical doesn't it.)  Onions can make your eyes water more than watching Bambi's mother get shot by the evil hunter.  Yes onions are our friends---- most of the time.

The more you peel an onion, the more it smells. If you really want the good stuff, you have to peel and peel to get to the juicy insides that make your eyes water;  that is when an onion can get really nasty.  If not handled properly, you end up with a foul taste or massive heartburn.

It seems like many of the deals I get lately are like onions.  At first glance, they look pretty good.  But, as I peel away the thick skin,  the deal suddenly starts to stink..  The more I peel, the more it stinks.  Finally, the deal smells so bad, that no one will lend on it.

Now very smelly onions, even after many layers have been peeled away, can taste great if put in the right dish.  The great chefs know exactly when to use and onion and what kind! Smelly deals can get done as well when you have great chef's ( like us!) preparing the deal!

Lately I have been dealing with a number of clients that think that hiding the ball from us will somehow make the weak parts of a deal disappear.  Nothing could be further from the truth.  Due diligence these days is akin to being examined by a forensic accountant using a proctoscope.

By the way, the underwriting on the deal is only the half of it.  In my 25 years in this business, I have never seen underwriting of the borrower be as critical to the decision process as it is today.  Credit score and liquidity are key all elements but just as important is .........HONESTY.

In the bridge loan world, all of the deals have hair on them.  Without hair,  you would probably not need a bridge loan. These days lender focus on the character and capability of the borrower. This is particularly true when a borrower is looking to refinance his deal and take out the original lenders.

Recently I have had to wash my hands to get rid of the onion smell after handling transactions where the borrower was not forthcoming with all of the dirt in the deal.  Sometimes its a personal credit problem, sometimes a problem with the existing lender or former partners.  Any number of issues can be a problem.   HOWEVER, all issues that are undisclosed turn into problems.  If we know the problem in advance and disclose it, we can often overcome it and move forward.

Case in point:  I have a borrower in application on a multi-family deal that has a maturity AND payment default.  However, the payment default occurred when the lender put in a receiver and refused to accept payments on the loan.  We over-came that by pointing out that the borrower had an impeccable ten year history of payments on this property and that not a single payment was missed until the receiver was put into the property.  This issue was addressed in the initial presentation of the deal and that solved the problem.

The bottom line is that the smell of the onion can be mitigated by full disclosure and careful planning. Please, if you are asking us to get you financing, tell us EVERYTHING.  Think of us as your priest, minister or rabbi.   We can't provide guidance and a solution without knowing everything.

Joe

Mid Year Review

I am frequently asked at the golf club if things are getting better in our business.  The mere question sends my golf ball flying to the right in a gigantic slicing arch.  Of course that is an excuse, virtually anything can cause me to slice or yes, even sha..k the ball.  You golfers know that one cannot utter the word, "sha..k" with out tempting the wrath of the golf gods.

So, after watching my ball go OB,  "Yes and No" I reply. On the yes side, we do have some more institutional money.  Life Companies are more aggressive, a few banks have entered the fray, and we even have some credit unions stepping up to the plate.  We also have an ever increasing group of private money sources stepping to the table.

On the "NO" side the problem is that all of these institutional investors are being so conservative and values have dropped so much that many deals do not work.  Borrowers  with distressed assets or credit issues are having a hard time grasping that they may have to go with the double digit private money deals if there are no other options.

The following are random thoughts about changes in the market:

• Hotel Cap Rates Are Improving:  the gurus of the hotel industry are reporting that cap rates for limited service hotels which were double digits through 2009 have finally started to come down.  Recent sales indicate that performing properties in solid, mainstream markets are trading in the 8.5 t 9.9 cap range.  Financing still is a problem and the cap rates are based on very deflated NOI numbers.  However, at least there is some improvement on the valuation side.
• Shocking as this may be, class "A" properties in the major food groups (office, industrial retail and multi-family) are trading in the "5.5 to 6.5" cap range.  Yes cub scouts, insanity has returned.  Of course these are major markets with improving economies and where there are not a lot of foreclosures but its really hard to believe how quickly we have returned to insanity.  Now you should note that these properties are going to the "flush with cash" REITS who have to buy something or give the money back.  My buddy John who runs one of the countries' largest multi-family companies told me that every property he tries to buy has multiple bidders.  These very low cap rates are for very select properties.  Cap rates JUMP when when the market is not solid or the the deal has other hair on it.
• Until this year, church loans had been one of the market sectors that seemed to have avoided the problems of the commercial loan world.  It now seems that the defaults and foreclosures were merely delayed; not avoided.  I have been the investment banker for one of the nation's largest church funds for over ten years.  This lender is one of the absolute best in the business.  Historically they had almost no REO and their ratio of non-performing loans were the envy of any commercial lender.  Now, they have significant REO and sub-performing loans jumped from less than 1% to over 6%.  As my friend Dave said, the church loan market seems to have had a delayed response to the recession putting them 18 months behind the rest of the market.  Now Dave's team is doing a fantastic job of managing their sub-performing loans to the point that they are collecting about 75% of the scheduled amount of payments.  Great by market standards but still shocking to their collective experience.  Churches can't pay their bills if the membership stops or reduces giving.  Hopefully that will improve soon because folks need their churches more than ever.

Past, Present and Future

THE COLLAPSE:  WE REMEMBER ALL TOO WELL

I first felt the tremors  in the CREF (commercial real estate finance) world in about April of 2007.  We were just starting to hear about sub-prime residential problems and my friends at the investment banks were suddenly not stupidly aggressive.

By June of 2007 we  stopped originating loans in our name and selling them to the investment banks.  I did not trust that the commitments made to us would be honored.  I had seen this movie before in August of 1998. ( the great Russian ruble meltdown) The investment banks, walked on their commitments leaving mortgage banks and borrowers holding the bag.  I did not want to be in the line of fire when it happened again.

So, in June of  2007, we stopped functioning as a lender with the investment banks.  With the support of our borrowers, we moved into a brokerage mode.  We still closed over two hundred million dollars of deals in the first half of the year but that was the beginning of the end of the ultra aggressive conduit business.  In fact, we had to move a number of deals to credit unions or banks because we simply did not trust that the investment banks would execute. It was the right decision.

A Bridge to Somewhere

IN THIS ISSUE OF THE CREF BLOG Three Years And Counting........It is hard to believe that it has been three years since the money machine started leaking oil.  In April of 2007, we began downsizing the company and rethinking our core business. Many questions presented themselves at that time.  How deep a problem would we have?  How long would lenders be out of the market?  What would the commercial real estate landscape look like in the coming years. Would my golf game get any better? Visit thecrefblog.com for my thoughts on days gone by, where we are today and where we will be in the near future.  One hint: there is no going back to the go, go days of 2002 to 2007.  Also, my golf game is better.....why? (too much time on my hands, perhaps?) A BRIDGE TO SOMEWHERE Lets face facts.  The institutional financing world will not be normal for the foreseeable future. So, I am here to tell you that (sound the trumpets!!!)  Creative financing is back! Yes, we now have investors reentering the market in creative ways.  While borrowers may wish for the financing choices of days gone by,  2010 at least brings us some options to help borrowers stay afloat until some sanity returns to the market. Below you will find two "creative programs.  They fill the gap for borrowers with special needs. HEATH CARE BRIDGE PROGRAM Loan Amount $5,000,000 to $50,000,000 LTV Up to 75% (possibly higher) Property Type Health care related:  Independent/Assisted Living, Skilled Nursing, hospitals, medical office, drug stores, fitness centers (limited) Locations Nationwide Rates from 9%- 2-3 point in-1- out Term 2 to 3 years initial term with extension options Amortization Typically interest only Recourse Yes  but flexible Pre-Payment Penalty 1% - open in years 5 and 10 Notes This is a great program for the borrower who has a value added transaction. Debt coverage can be less than 1/1 at the inception of the loan.  The exit strategy is critical. This is a perfect program for the borrower anticipating a HUD execution for permanent financing. Hospitality Program Investment Amt. $5,000,000 to $25,000,000 Structure The property is sold to the investor and the seller leases it back for a period from 2-5 years.  The seller guarantees the revenue for two years.  The seller gets a repurchase option Flag Type Courtyard, Hampton, Embassy, Holiday Inn, Garden, Inn, etc. Locations Nationwide - major markets. Underwriting The property is sold on an adjusted 10 cap using revenue numbers from 2008. This will likely result in generating proceeds over 20% higher than financing alternatives that are currently available. Term From 2-5 years Revenue Sharing After the base return to the investor, net revenues are shared.  The repurchase option price is pre-negotiated based on an IRR to the investor. Recourse The seller provides a two year guarantee of revenue. Qualification Experienced operators only with financial strength to support the two year guarantee. Notes This program can provide up to 20% more proceeds than alternative financing options.  This is the perfect program for an owner/operator that is able to acquire REO or a discounted note purchase. In our next newsletter we will discuss two other innovative bridge programs.  In the meantime, if you have a loan request that needs bridge financing, give us a call. Joe Forman 000000 Joe Forman Chief Executive Officer 818.865.4104 jforman@bondstreetcc.com CA Dept. of Real Estate Broker # 00703915

Killing the CRE Recovery from the Banks

The following comment was made by the Comptroller of the Treasury. If his thoughts are put into action, it will drive even more capital out of the market.

Dugan Argues for New CRE Limits

Acknowledging that regulatory guidance to limit banks' concentration in commercial real estate has failed, Comptroller of the Currency John Dugan says that tougher standards are needed. In a speech Friday, Dugan called on regulators take up the issue and suggested weighing several options: strict concentration caps, increased capital requirements, minimum underwriting standards, restrictions on banks that rely too heavily on wholesale funding to finance such loans, or a combination of these.

Single Tenant Loan Programs

OPTIONS FOR SINGLE TENANT DEALS

In a normal market, single tenant deals transactions are not the favored asset type for many lenders.  While some life insurance lenders, banks and credit companies have provided this type of debt, the capital markets have always been shy about lending in this arena unless there is a long term credit tenant in place.

Ironically, even though we are just starting to climb out of the bottom of the lending market, we have more options in single tenant transactions including owner users than we do conventional multi-tenant commercial deals.  The following is a partial list of programs that we currently have available for single tenant and owner-user transactions:

Bank vs. Bank

I recently spoke to a friend of mine who had taken a senior position at a bank after seeing his mortgage brokerage business go down the drain.  He has been put into the work out group at his new bank.

This bank  (a modest size community bank) is not in financial difficulty....yet!  They have a sizeable commercial real estate portfolio which for the most part, they can manage both for the benefit of the bank and the customer.  They take the view ( heaven forbid )  that they can protect the bank without taking off the head of the customer.

Where this bank has a problem is in the deals in which they purchased a participation but the lead lender is taken over by the Feds.  When this happens, those loans are sold to a new bank or investor.  Once this happens, all bets are off.  The concept of working something out with the borrower is no longer the priority.  The new owner of the paper is a shark in a pool full of fish.  The faster they can eat, the more they can eat, and the fatter they become.

Beware Deal Sightings!

Lets Make A Deal: the real estate game show is back on the air!

The Deal Game has resurfaced after being all but dead for the last year.  It may be on a no name cable channel at 3:00 in the morning but at least there is a sighting.

I,  your fearless prognosticator, am here to tell you that the transaction market has bottomed out and the trend line is pointing up.!  Yes, I said things are looking UP!!  Now, after you pick yourself off of the floor read on to see if I am smoking the fun stuff or if perhaps there really is a light at the end of the proverbial tunnel! Also, in this issue, lets shake the Money Tree!  Are there any leaves on there?   Prognostications to follow!

On the Subject of Fraud

Once More on the Subject of Fraud

I recounted in my last newsletter how some moron was forging LOI’s in our name and signing up deals that he had no hope of funding. Three other lenders told me that they had experienced the same thing. Perhaps its only anecdotal, but it seems that the incidence of fraud and deceit in commercial lending is more prevalent than at any time in the 25 years that I have been in this game.

I was recently interviewed by a respected real estate journal about this subject. (Why they want me to opine on anything is a real mystery.) The reporter asked me whether I thought there was increase in the incidents of fraud these days. This is an interesting question. Of course my response was incoherent since the ability to think on my feet vanished years ago. However, I do tackle this subject in my commentary below.

But here is the real kicker, as I was writing this article, another case of fraud emerged. Read on for further details.