ANDREW LITTLE TIMES-DISPATCH COLUMNIST
Published: October 12, 2009
Bob Seger in “Against the Wind” and, more recently, Toby Keith sang “I wish I didn’t know now what I didn’t know then,” expressing a desire to erase cumbersome knowledge and move on.
Many lenders are now stuck with that feeling as they want to originate new loans, but knowledge of the past 12 months just won’t let them.
Flow of Funds data recently released by the Federal Reserve support what most borrowers are experiencing.
Total outstanding debt on commercial and multifamily real estate in the U.S. as of June 30 was down by $9.8 billion from the prior quarter to $3.5 trillion.
Multifamily debt actually grew by $6.4 billion during that period, which means that debt on commercial properties shrunk by $16.2 billion.
Because the commercial real estate business lives and dies on debt, the predictable result is that many borrowers are starving for cash.
What’s emerged is a two-tiered lending system in which a property of high quality with a low loan-to-value ratio can get financed at a more aggressive interest rate than last month or even last year.
Rates for five-and 10-year mortgages are in the 5.75 percent to 7 percent range for these top-tier assets, according to the John B. Levy & Co.’s national mortgage survey.
Those properties that are not the best location or don’t have quality sponsors and tenants are shut out of the debt markets.
Quality of sponsorship, tenancy and location is important to the lender, but leverage is more valuable to the borrower’s heart. Regardless of quality, many properties are over-leveraged.
So what are lenders doing to address the issue?
Many are pretending that the property has not lost value and are simply extending loans. The idea is that if you delay the time when the loan gets sold or refinanced through another lender, there is a prayer that no loss will have to be recognized — which explains the phrases “delay and pray” and “a rolling loan gathers no loss.”
An over-leveraged building in the Richmond area will likely experience the strategy soon. The FBI office building at 1970 E. Parham Road in Henrico County is encumbered by a $17 million loan that matures in November, according to data from Trepp LLC, the New York-based provider of commercial mortgage information.
The loan, part of a securitization, has been on the servicer’s watch list since last month because of the impending maturity.
The 96,607-square-foot building was developed and financed by an affiliate of Penrose Corp. based in La Jolla, Calif. At $176 per square foot, the loan balance on the building is daunting given the underlying lease terms.
Since the structure is a single-tenant building, the sole source of the building’s success or failure at this loan level is vested in the tenant and its lease. The lease is to the U.S. government, but the lease matures in January 2011.
Until the FBI decides what it is going to do with the renewal, the building and the current cash flow are under the lender’s control.
If the tenant leaves, the value of the building is far less than $100 per square foot, according to market sources, but as long as the tenant is there, the lender won’t let it go for anything less than the current loan balance.
Thus, it becomes a likely candidate for extending the maturity and pretending the value and loan are still viable.
The story of Communities at Southwood, a 1,286-unit apartment complex off Hull Street in South Richmond, has finally turned positive — at least for the new buyers and hopefully for the tenants.
The project was over-leveraged in August 2005 with a $50 million loan from Capmark, which was securitized and sold off as a commercial mortgage-backed security.
The property recently sold to a local buyer for $24 million, closing a few weeks ago using money from Fannie Mae, said Wink Ewing, a senior associate at CB Richard Ellis, a commercial real estate firm in Richmond.
The Southwood transaction is a good sign for the area’s apartment market. Although the price translates to a $26 million loss for the lender, the asset can best be described as “fair” in quality.
Earlier in the year, the transaction probably could not have closed at this price.
“There is a lot of activity on the market,” Ewing said.