TODAY’S FINANCING MARKET IS A RETURN TO
THE DAYS BEFORE 10-YEAR INTEREST-ONLY
PERIODS, HIGH LEVERAGE AND NO RECOURSE
BECAME THE NORM
By Michelle Napoli
Steelhead Capital vice president A. Sean Aguilar was
expecting to close at the end of June on the refinancing of a single-tenant property, a deal he began
working on about eight months earlier. With its 10-year
financing on a Pier 1 Imports Inc. store in Barboursville, WV
coming due, his client got an early start on the process, something Aguilar advises for anyone who needs financing in
today’s market. The tenancy proved a challenge, since the
retailer has had sales performance issues of late. However,
the real estate, located on an outparcel of a regional shopping
mall, was good.
After speaking with 50 different lenders, only three would
write a term sheet on the deal, San Francisco-based Aguilar
reports. Ultimately, a regional bank agreed to provide an
approximately $1.1-million, five-year loan, which matches
the five years remaining on the property’s flat 15-year lease
with below-market rents. The debt carries recourse, has a
fixed-interest rate of 7.25% and leverage of about 60%. The
client is happy with the outcome, but “it was tough getting
this done,” Aguilar says. “The environment has totally
changed.”
In many ways, the transaction Aguilar describes illustrates
the new debt financing landscape for single-tenant, net-leased
properties: there are fewer competing lenders and they are
more conservative in their underwriting; local and regional
banks are increasingly seen as the go-to source of mortgage
dollars, particularly for deals with lesser credit and in secondary or tertiary markets; full or partial recourse is back on
the table; leverage is lower; and loan terms do not exceed the
length of the lease. On the whole, it’s back to basics.
“There’s still a home for every loan out there, you’ve just
got to find the right one,” says David Akeman, director of
capital markets at Tulsa, OK-based Stan Johnson Co.
“Borrowers need to be more realistic with their expectations,
and that typically means putting more money down. It has
gone from a borrower’s to a lender’s market.”
When it comes to capital sources, clearly conduits are, for
all intents and purposes, out of the market, creating a void in
debt financing for all commercial properties, including single-tenant assets. There was less than $10 billion of CMBS
issuance during the first half of 2008, and much of that
involved loans that originated in 2007, notes W. Kyle Gore,
managing director of the real estate finance-net lease group of
RBS Greenwich Capital in Timonium, MD. Compare that to
