The Amazing Shrinking Box

Just when I think we finally have climbed out of the hole, we seem to be falling right back in.  Clearly we are heading for more turmoil and uncertainty.

With Washington dysfunctional, lenders are getting more and more conservative and that does not bode well for the commercial real estate industry as whole.  I don't think we will see a normal market until after the 2012 elections.  There will be too much posturing by all concerned to get anything done that will give the economy stable growth.  Stable growth translates to confidence and confidence opens the lending spigot.

What is so strange about this round of problems is that lenders are continuing to call us looking for business. The  conduits are now back to sitting on the sideline, but other lenders still need to put earning assets on the books.  The problem is, however, that the box of what is an acceptable asset continues to shrink.  As the box gets smaller and smaller, even normal deals get kicked to the curb.

This shrinking box is not just limited to institutional lenders.  We also see a much more conservative posture from our private lenders  The private guys are becoming much more conservative on proceeds.  Private lenders have not dropped rates to attract deals, so they continue to hunt for the institutional kick outs and the deals that are safe but not of institutional quality.

So how do lenders differentiate themselves to be able to get that elusive perfect asset?  The answer is (cue the trumpets please), pricing! Rates are plummeting to levels that are substantially below any that I have seen during my 25 years in this business.  Lenders are simply dropping rates to attract the business.  At one point several weeks ago, a major west coast lender dropped three year multi-family pricing into the high 3's! ( of course that didn't last long as the lender was so overwhelmed with business, it raised rates to stem the tide.) Nevertheless, we continue to get updated rate sheets from our investors that show lower and lower rates.

But sometimes even offering low rates does not guarantee that a lender will get the deals.  I have a friend that is the Chief Lending Officer for a SE based community bank. He called me several weeks ago to lament the difficulty he is having in putting quality earning assets on the books.  The competition is so fierce in his market for good borrowers, that he lost a 75% LTV loan on an office building leased to a local law firm after quoting a ten year deal at, get this, 3.95%.  A bigger bank went 80% at 3.75%.  (While that rate sounds crazy, keep in mind that we have a ten year treasury hovering around 2% so the spread is not bad and they got the law firm deposits and banking business.)

So, what kinds of deals are qualifying for these incredible rates from the banks?  It is the usual stuff;  lower LTV's, perfect credit, substantial borrower liquidity.  Banks have moved into the mentality that has long governed lending by the life insurance companies; win deals on rates and hold the line on strict underwriting.

On the other side of the coin, the much trumpeted return of the conduits has fizzled.  Investors simply didn't buy that commercial conduit lending 2.0 would be much safer than the way deals were done in the past.  With so much uncertainty in the market,  pools went to market and failed or got pulled.  While some conduits will lend, it has to be the perfect deal at wide pricing.  Most conduits have moved to the sideline as they wait for stability to return to the market.

And so, as we enter the final turn for 2011, I have to say that I am not optimistic.  While I am hopeful that lenders will stay in the market, unless they ease up on the underwriting criteria, we will still see a credit crunch and the CRE business will not move to a normal market.

Shades of 1998 – CMBS Hits a Giant Bump in the Road

I remember it like yesterday. It was early summer, 1998. I was having a staff luncheon meeting at Junior's deli in west Los Angeles.  Clay Wright, our loan rep from First Union Capital Markets, was there to discuss his programs.  I had ordered a Rubin sandwich. (Those were the days when I could eat a sandwich like that without having hearburn for six weeks.)

We were really rocking with First Union during that summer.  I had about six deals in application totaling about 110 million or so with them alone.  This conduit business was the financing solution for every borrower and every deal.

Right in the middle of lunch, Clay steps out of our meeting to take a call on this thing called a Blackberry.  He comes back looking ashen faced.  I immediately thought someone had died.  I got it wrong.  The conduit market had died.

The Russian ruble has collapsed sending shock waves through the markets.  There were no buyers for CMBS paper.  All my deals were on death's door step.  I couldn't finish my sandwich.  There were going to be grim conversations with my clients.

As it turned out, we saved about half the deals and CMBS slowly rebounded until once again it was hit in 2001 and of course the disaster of 2008.

Morgan Stanley recently went to market with large newly originated CMBS pool.  They expected the triple "A" tranche to price at 1.10 over swaps.  Then, unexpectedly, the markets went into a tail spin and the triple "A"s went out at 1.50.  This reportedly cost Morgan over $40,000,000.

What caused the backup on the spreads?  Apparently a combination of factors converged at once.  The government liquidating residential paper from the Lehman bankruptcy, jitters over Greece, and the large amount of CMBS paper coming to market in the next few months.  Too much paper, too few buyers.

How does this impact borrowers.?  For guys with deals in progress, the "repricing" provision may kick in.  This is a provision in CMBS applications which allows the lender to widen the spread right up until the day of closing if the markets have experienced a major negative event.  What happened last week is certainly a major negative event and you can bet that deals that were priced tight are being repriced.  Otherwise, the lender will lose money.
You can also bet that pricing on conduit deals will now widen substantially.  Since conduit lenders do not, today, have an effective way to hedge spreads, they will widen pricing to mitigate risk.

A conduit loan may still be the best solution for given deal.  Borrowers need to understand, however, that signing up for a conduit loan is a bit like buying an option on stock.  Between the time you sign up and close, market conditions may change.  You run the risk that your deal can be repriced if the markets have a major negative event.

Now there are ways to mitigate your risk when doing a conduit loan. We have originated over a billion dollars of conduit loans since 1997.  We know how to manage the loan process to get you the best possible execution of a conduit loan.

My philosophy on this is very simple. Pursue all options and choose the best solution for the long term.  Yes, a conduit loan may get repriced but, that may be less risky than sending the loan to a bank and having a loan committee member turn it down at the last second for no good reason or choosing a shorter term option and facing the consequences of a higher interest rate environment in the future.

The Worst Client Ever!!!!

The following a true story about a client that I really worked hard for that ultimately behaved in a way that frankly shocked me.   When you are in this business for over twenty five years, you would think that you can easily pick the winners and stay away from the losers.  Well, on this one I got it completely wrong.  And so,  I wrote this article to have some fun with a very disappointing experience.  I hope you enjoy it.

The WORST CLIENT EVER; a sad but true story.

I wake up each morning under the delusion that I am not the dullest tool in the shed.  As smarts go, I am somewhere between my dog Jezebel who knows 25 commands (but only follows them when she is in the mood) and your average California state assembly representative.  (Yes, these are the same folks that think its OK to permanently operate a state at a 25 billion dollar deficit.)

Now, when it comes to experience, that is where I really have it.  Yes, 25 years of stupid decision making gives me a leg up on the competition. So, what is the most important decision I have to make in my job?  Its which deals to work on and whether or not to work for a new client that I do not know.   You see, my most precious asset is my time and I simply can't afford to waste it on bad actors.

So you would think, with my vast experience and my sterling intellect, that I would be able to easily pick the winners and stay away from those horses that don't finish the race, or worse yet, dump me for another mortgage jockey at the far turn.  Nope, not me.  I am a sucker for a the down-trodden borrower who needs help.  Dumb, dumb, dumb.

Our story begins on a cold blustery November day here in Los Angeles.  With the temperature at a numbing 68 degrees, I received a call from a fellow named Glen (Actually his identity has been change because I get a severe case of constipation when I hear his real name.  Sorry to all the Glens out there  for associating your name in this story.)

Glen owns an office property that needs financing.  His bank is under a "cease and desist" from the government and is offering him a discount from $12,500,000 to $10,000,000.  This is a tremendous opportunity for him to save his investors from a substantial loss. Can I help him?

Boy can I help him!  I bring to the table a fantastic lender who is willing to provide Glen with a "non-recourse" loan over 90% of the purchase price at par.  Further, my lender will help him secure the deal with the bank by agreeing to finance the property or even buy the note.

Armed with the backing of my lender, Glen takes the Term Sheet to the bank and begins the process of finalizing the price.  Many conference calls later, we finally are told that a deal has been reached.  The Term Sheet is signed, my Fee Agreement is signed and we wait the wire for the deposit.

Suddenly Glen is AWOL -  He doesn't return phone calls or respond to emails.  Radio Silence!!!

My lender has spent a lot of time on this and now gets very ANGRY!!!  He sends a DO NOT CONTACT US letter to Glen killing the deal.  That gets an immediate response.  Glen calls me in tears.  (Yes, it sounded like he was crying but I suspect he had employed a local actor to simulate his tearful response) He has had family problems, he has been out of the country, blah, blah, blah!  And...... by the way..... the bank has foreclosed!

OK, now at this point, I should have said "see you later alligator" but nooooooooo.  I actually listened to Glen as he goes on to tell me that this was a "friendly foreclosure" and that the bank has given him a contract to purchase the property at...$10,000,000.  Ok, so maybe that is possible but why, why, why the radio silence?  No good answer to that question.  But Glen's crying and begging gets to me and I decide to soldier on.

So, back to my lender I go.  I didn't actually need a phone to hear him scream at me.  "Are you kidding.  Glen is a bad, bad guy.  No way!!!"

Damn, all that work down the drain.  So, to paraphrase a famous poem, "once again, once again, into the breach I go; I start hunting for new money." But now I have a really big problem.  Only private bridge lenders will consider financing a foreclosed property. So hat and story in hand, I go to my bridge guys.

No one is that excited. I get quotes but proceeds are substantially less and the points and rate are much higher.  I tell Glen the bad news.  He takes it stoically.  (Maybe he ran out of money to pay the actor. ) Glen's "radio silence" has probably cost him a half a million bucks.  Worse, he doesn't have two million to put into the deal.

So, hat in hand, I go back to my original lender and plead my case for Glen.   Now, the point man for me with this lender is a very smart young guy without an ounce of arrogance in him.  Clearly he takes pity on me because I am almost old  enough to be his grandfather. (I am sure he is thinking that I must be suffering from early on-set dementia to still be working with this guy.)  So, he makes it very clear to me that he will reconsider the deal because we are friends but he is doing so with a great deal of skepticism. He smells a rat.

So once again my lender  issues a Term Sheet.  Once again Glen signs it.  Once again Glen signs my Fee Agreement.  This all takes place on a Friday.  The only thing left to do is wire the money on the following Monday.  I am feeling great as  Nancy and I  head off toward a long awaited cruise to the Baltic.  (Yes, I know, a typical old folks vacation. The only good news is that only half of the passengers on the ship were dragging oxygen behind them.  Pushing them out of the way to get to the food was easy.)

Now it's Tuesday morning and we are cruising through the Kiel canal in Germany.  I check my email.  No info from Glen regarding the wire. So, I send an email requesting info.  He replies, indicating that the wire had been sent.  Everything is GREAT!  Now, back to the buffet line.

Here I am, cruising in bliss, thinking that I had this deal in the bag.  Only....... three days later I get copied on an email from the Lender to Glen; the lender can't find the wire.  Now my pea size brain starts to sizzle.  WHERE IS THE WIRE ????

I call Glen from the ship ( at $42.00 a minute.) I get his voice mail.  I send emails . No response.  Can it be?  Did he do it to me again? I drink a lot.

Of course you know what happened.  There never was a wire.

And, ....even more crazy, Glen has NEVER RESPONDED TO A PHONE CALL OR REPLIED TO AN EMAIL since telling my lender to look for the wire.  Is he dead?  Is he in jail? Had he been kidnapped? Unfortunately, probably not.  Nope - he is just a plain vanilla sociopath.

There is an old saying  "Burn me once, your fault.  Burn me twice, my fault."  Well this is a big fat MY FAULT and trust me when I say that I am really, really burning.

What happened?  I don't know for sure.  If I really wanted to give him the benefit of the doubt, I would assume his investors bailed out on him.  Had he called me and discussed it, I might have been able to fix it.  All I know is that I really went the extra mile for this guy and he dumped me like a bad blind date. Was I an idiot to have continued on with Glen after he burned me the first time?  Yes, but, as I said at the beginning, I really am not the sharpest tool in the shed..

I am sure you are now wondering what my young lending prodigy friend said to me.  Did he scream?  Did he hang up on me?  No, he merely chuckled and said "yea, I thought he was a bad guy."  And, on to the next deal we went.  Whew, at least he is still taking my calls.

Seriously, My real problem is that I am an optimist.  I generally like people and I stupidly believe people will treat me the way I treat them.  Unfortunately many folks don't function that way.  They don't care about how their conduct impacts others.  They are simply bad people.

So, here is how I reconcile my deep seated anger about this event.  I believe that in the end, when your time is up  our good and bad deeds are balanced in the ledger of life.  I think this guy will get his for treating people the way he does.  Now its time to focus on the good clients.

Wasn't that a touching ending to this story?  Its almost worthy of a Lifetime movie of the week!

I know that you have shed a tear for my failed deal, but please know that I will continue to soldier on in my never ending quest for truth, justice and financing - in the American way!

Finally, Optimism! or why it has taken me so long to write this!

a letter to my deal old uncle Charlie!

Hi Uncle Charlie,

I know your busy and have really important things on your mind, like how you are going to pay the mortgage or where will you find a tenant to fill your half empty building.  But,  I know that every now and then you wonder....  every now then it crosses your mind......, that momentous question,  why hasn't Joe posted a new blog?

Your probably thinking," whats up with Joe?  Doesn't he know that I look forward to his pithy insightful comments about the world of commercial real estate finance?  When, or when will the next edition arrive?"  Yes, I am sure that every so often, on your way to that mid night run to the bathroom this thought slaps across your consciousness and perhaps a tear appears on your cheek.  Oh, the waiting...... its just too much!

Yes, I know I am an ungrateful nephew and I do apologize.  I know I have let you down, but I have an excuse.  I have actually been really busy with deals.  Yes, I know that actually working is really no excuse, but frankly, I have been having too much fun in the land of real deals these last three months to put the time into writing my insightful, pithy blog. (Uh, ok, a little overstated but what the heck, if the Repubs and the Demos can lie to themselves on a regular basis, so can I!)

In January of this year I told the team that I expected a slow first half with business picking up significantly in the third and fourth quarter.  That has absolutely been the case.  We are very, very busy with deals.  So, what has changed?

Here is my top ten list of things to consider?

1. Wall Street is back (sort of).  There are conduits out there actually doing business with loan minimums down to $5,000,000 and get this - mezz loans have reappeared. This really increases financing options for quality commercial assets.
2. Life Companies are pricing loans very well and underwriting has eased.
3. Institutional Buyers are so active that cap rates are approaching 2007 levels on performing assets! (albeit on lower revenue numbers)
4. Alternative investments such as stocks or bonds have very low yields by comparison to solid commercial real estate deals.
5. Cautious Optimism is back!  Buyers are bored with sitting on the sidelines and have money burning a hole in their pocket.
6. The gap on asset valuation has disappeared.  Lenders, Buyers and Sellers are much closer on the perceived value of assets.
7. Bottom fishing buyers have finally figured out that the expected Tsunami of REO is really nothing more than a 6 foot wave and are settling for more realistic deals.
8. Lots and lots of structured finance lenders have re-entered the market even for asset classes like hospitality.
9. The amateurs are out of the business and the pros have room to work in the paint (that's a basketball reference folks.)
10. The SBA now has a much more viable program with larger loan amounts and expanded asset types including self storage facilities.

With all of this good news, I put away the golf clubs and have gone back to work.  I have to say that while doing deals is still frustrating, we are back in business! (heck, it only took two years!)

So, enough for now Uncle Charlie.  I have to go but I want to tell you two last tid bits- just finished reading Unbroken by Laura Hildebrand.  Absolutely fabulous book about tenacity, survival and redemption.  Its a wonderful read.  Also, shot a 77 last weekend at Sherwood.  That is eight strokes under my handicap.  No, I was not on drugs and I was not taking gimmees on 6 foot putts.  I can't explain it except to say I was in the zone! The only problem is when I revert back to my usual 90, I will be very frustrated.

Love,  I will write again soon.

Your nephew Joey

Gaming the System

Lots of us are angry, very angry.  Bailouts, handouts, everyone feeding at the trough except us.  Car companies, big banks, investment bankers, everyone got taken care of except me; or so it seems.

Drinking at the trough of the government is nothing new. It is the extent of the handouts in this go around that is shocking to behold. Its taking the meaning of the word “entitlement” to a whole new level.

Its very simple; when a selective segment of society gets preferential treatment, we feel like we should get it and we get mad if we don’t. The banks got bailed out and promptly stopped lending.  (Why lend when you can make a nice spread with no risk?)  What a great deal for them and a terrible deal for us.  So it raises the question.....where is my bailout?

The problem is that there is no sympathy from the public or the government for the folks in the commercial real estate business. As a group, we are on our own.  Not only are we not getting a handout, we are getting shoved down even further with government regulators restricting lending.  So, when you combine the vacancies, the liquidity squeeze and the “too bad, so sad” attitude towards our business, its easy to see why we are still in the doldrums.

But, the real consequence of the selective fixing of the economy is that it changes the way people view their obligations. Paying the credit card or the mortgage is for the other guy.

Compounding that with the anti-business attitude of the current administration and a whole lot of folks feel they are “entitled” to special treatment.  Screw the lender.  Cut my loan, cut my rate, cut my rent. This is the new age of entitlement and take advantage of the other guy.  The core principal of living up to your commitments goes right out the window. And when that happens, we are all in trouble.

So, it seems that we have a whole slew of borrowers in the commercial real estate space that have tried to game the system. They have looked at the pressure placed on lenders and assumed they could “leverage” their way to a reduced loan balance or reduced interest rate.  The problem is that many of these borrowers have properties that are not really under water. There is no lender incentive to take a hit for these folks.  But, so called “work-out” specialists or attorneys try strong arm tactics with lenders with disastrous results for the borrower.

So, we have spent a year listening to the stories of borrowers who have dug themselves into a hole they didn't need to be in because they tried to extort solutions to problems that were really not there. They were looking for their free drink at the trough - at the expense of the big, bad lender!  Here are a couple of examples:

• Borrower has a perfectly good loan on his home of seventeen years.  He decides to renovate the house.  When the roof is off and the house has been gutted, he stops making payments hoping that the lender will give him a short pay deal. After six months, he didn’t get his short pay, he got the short end of the stick.  The lender foreclosed.  Only after the borrower filed a law suit was he able to get his house back at a 100% pay off to the lender plus legal fees to the lender and his lawyer. Of course his credit was demolished so we had to do a hard money deal to get him a new loan.  On a loan of $1,450,000, the added cost to this borrower was......$330,000.  A total waste of money.

• Borrower has a very nice apartment building in Texas that has performed as expected for ten years.   Yes the market is softening a little but he is a good manager and maintains high occupancies.  His loan comes due in July of 2009.  On the advise of a short pay consultant, he tries to bully the lender into accepting a short pay by with holding payments and threatening bankruptcy. This was on the advise of an “expert” work out consultant.  The lender reacted with fear and trepidation.......not!  The lender started foreclosure proceedings, put in a receiver and promptly ruined the borrower’s credit.  The borrower lost the property.  There was simply no refinancing money available for this borrower when the take out lenders figured out who they were dealing with.

The real bottom line is that no one ever got hurt by maintaining their integrity and meeting their obligations.  I know that circumstances arise that force people into foreclosure or bankruptcy.  Those folks are not the target of this rant.  Rather, its the folks that can meet their obligations that try to take an unfair advantage of the system.  Those folks are figuring out, way too late, that they made a very big mistake.

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.