when Mulligan and his colleagues sensed a
thaw in the financing community. By June,
they had partnered with Washington,
DC-based equity provider Federal Capital
Partners. By the end of September, the
pair were finally able to snag some construction financing.
Wells Fargo and US Bank provided $52
million in debt toward the $70-million project, while FCP and Matan kicked in $17.5
million in equity. Mulligan declined to discuss further specifics of the structure, other
than to note the debt is a floating-rate deal
based on a spread over 30-day Libor.
For its part, the government is investing
$130 million in the project, mainly toward
the specialized lab equipment, high-tech
building systems and necessary build-out.
This investment will further enhance the
value of the building, Mulligan says. “HVAC
systems required for biolabs, for example,
are of higher quality and they travel with the
building, regardless of the tenant.”
But is the project a foreshadowing of
more deals to come? Mulligan doesn’t go
that far, but he does believe it never would
have gotten accomplished before this
spring.
David Webb, a managing director in
Cassidy & Pinkard Colliers’ structured
finance group who also worked on the
Matan Cos. project, shares that sentiment.
“Compared to a year ago,” he says, “there
has been a clear improvement in certain
areas of the capital markets and in terms of
appetite for risk.”
For various reasons, lenders such as Wells
Fargo, have new pots of money to be allocated to real estate. “Lenders across the
board—debt, equity and mezz—are now
willing to go into development deals if they
are leased,” Webb notes. “We are going to
see a fair amount of construction starts next
year as a result.”
Wells Fargo SVP Joe Carter is circumspect
about what the Matan Cos. deal says for the
bank: “It was a great opportunity with strong
sponsors. We are open for business and continue to provide financing, be it construction loans, standing loans and the like.”
Life insurance companies, too, have
popped back on the scene in the past 45 to
60 days, says John Pelusi, executive managing member in Cassidy & Pinkard Colliers’
Pittsburg office. “At beginning of the year,
life companies were lending at the 50% to
60% LTV range; they had floors at 7% to
8% and would underwrite cash flows based
on the market they were in—that is, using
local market vacancies and rental rates.
“Now, instead of a 7% to 8% floor, they
are telling us they will do 6.5% to 7.5% and,
for really good deals, as low as 5.5%. Their
lending parameters have also moved up to
65% LTV.” Some life companies are even
more aggressive than that, Pelusi adds. “I
would say that 15% to 20% of life companies
are telling us they will go as far as 75%.”
William Hughes, SVP and managing
director of Marcus & Millichap Capital
Corp. in Irvine, CA recently completed a
deal with a lender who had been noticeably
absent, at least from Hughes’ radar, for the
past year and a half. The Midwest-based client came to Marcus & Millichap with the
refinance transaction—a five-year, $20-mil-
lion recourse loan with a 65% LTV on multiple retail assets—thinking there was nothing to be had in the market. “We approached
one of our banks that we hadn’t talked to in
more than a year and found out otherwise,”
Hughes says. ◆
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It might have been unusual to see a mezz holder bringing a property to market a few years ago, but not anymore, Seifer says. “Given the dramatic decline in values, mezz lenders are the ones who have the only economic stake in the property.”
More Losses Coming for Banks, but Not Life Companies: At the
beginning of October, the Wall Street Journal leaked a Federal
Reserve Bank internal study that US banks have not experienced
the worst of their exposure to underwater real estate. According
to the report, whose findings the Fed did not dispute when they
were made public other than to note it was not part of their official strategy, banks that loaded up on commercial real estate are
grossly under-reserved, at approximately 38 cents for every $1 in
bad loans. Potential—or better yet, likely—scenarios include more
bank failures, more distressed assets on the market and even less
capital available for lending.
On the other hand, life insurance companies are also heavily exposed to these loans. These entities, though, are better prepared to
ride out the defaults. A separate report by FBR Capital Markets finds
that while commercial real estate remains an enormous challenge
for life companies, “our view is that most life insurers are adequately
capitalized to absorb these losses as they are realized.”
FBR also takes note of these companies’ resumed interest in
commercial real estate, particularly CMBS debt. Principal Life Insurance, for instance, is seeing returns close to 3.5% to 5% on high-rated corporate debt and agency RMBS investments, relative to 6%
to 7.5% on new CRE mortgages and 9% to 11% for CMBS, according
to the report.
Policy Support: Despite its scattershot initial approach, federal government has been supportive of the industry since the beginning of
the crisis. One recent development from the IRS, for instance, allows
CMBS borrowers to begin negotiating with servicers before the loan
goes into default. The biggest news, though, was the long-awaited
launch of the Treasury Department’s Public Private Investment Program. By mid-October, $12.27 billion was raised by five—BlackRock,
Wellington Management Co., AllianceBernstein LP, Invesco Ltc. and
TCW Group—of the nine asset managers selected for the program.
The next step will be to entice holders of these assets to sell, and at
prices palatable to the government. Yet this is not a sure thing by any
stretch, since PPIP was not designed to enrich the holders of these
assets or, for that matter, the investors. If the program does not succeed as expected, it will surely pressure the government to curtail
other rescue measures.
