Real Estate Forum - October 2009

hit the market as 10-year interest-only loans come up for refinancing. Net-lease deals account for a fair share of those loans, especially in the 2005 to 2006 period, notes Net Lease Capital Advisors’ MacDonald. “It really comes out badly if you have IO on a flat lease,” he says.

CGA Capital’s Gore is keeping an eye on the same thing, noting that cash-flowing properties with solid tenants are likely to be impacted simply because the borrower has a “humongous” balloon that they can’t refinance with only, say, 12 years left on a lease.

But that’s still a number of years away. In the meantime, some net lease players say they are seeing what might be described as a few glimmers of hope. While smaller deals that are not credit-based are more likely to continue having a hard time landing financing, bigger and better deals are finding ways to get the necessary debt capital, says MacDonald.

Orchard, too, says he see some positives—not necessarily more capital in the system, but signs that lenders are becoming more willing to dole out debt. Recent pricing stability is making it easier for lenders to make decisions, and at the end of the day banks need to make money, particularly as they look for profit opportunities to counter their losses, he notes.

The swing in cost due to recent spread compression is indicative of life companies’ desire to lend, and that’s also a positive sign, Orchard relates. Ultimately, “it’s very deal specific.” Though it is tough to obtain debt and equity, “the capital markets are definitely improving.”

On the other hand, DuGan says his list of lenders actively making loans has become slightly shorter as this year has progressed. “We haven’t seen an influx of new lenders,” he says. “What would

Net leases are cash flow
generators. Now, more
than ever, no lender wants to
hear a story that isn’t based on
existing cash flow.”

GORDON DUGAN

W.P. Carey & Co.

make me optimistic is if we were adding to that list.”

DuGan and others believe that at some point—and it’s hard to say when—there may be new sources of capital. Perhaps it will be the result of TALF, or the new mortgage REITs that have been raising considerable amounts in the public equities market, or other sources. And since life companies can’t fill the whole gap, MacDonald states, “At some point there is going to be a way of rekindling CMBS, and TALF may be the beginning of that.”

“I wouldn’t be surprised if the void gets filled by some combination of those,” concludes DuGan. “The optimistic side of me would say the void left by the securitization market will be filled. I don’t know how, or when, or whether it will be completely filled, but there will be money available for finance on reasonable terms.” ◆

Contributing editor Michelle Napoli is editor of TIC Monthly, a publication of ALM’s Real Estate Media Group. For more information, go to www. REMnewsletters.com

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