BofA and the uncertain future of AIG, WaMu and others will be
felt across the marketplace. It will likely result in even tighter credit
and higher borrowing costs. A forced sale of Lehman’s commercial real estate assets and residential mortgages will have a negative impact on the value of other firms’ holdings as well, and the
survivors will take steps to further reduce risk and preserve capital. The upshot? Increased
downward pressure on the
pricing of income-producing
assets as buyers insist on more
reward in the form of current
yield, in return for the increased equity requirement.
The beneficiaries of these
events will be investors in
strong cash positions, and
owners of stabilized cash-flowing assets without short-term need to
access the equity in their real estate.
How have underwriting criteria evolved in the current
credit landscape?
Martocci: The market has seen a general and significant pullback
from the very aggressive loan structures offered during 2006 and
much of 2007 by lenders that were securitizing or otherwise offload-ing debt. During the later part of the credit euphoria, we found our-
selves generally unable to compete with the loose structures, high
debt capitalization, generally poor underwriting standards and low
risk-adjusted returns that were endemic for the period. Today, a much
greater equity contribution is required with development or transition deals garnering 30% to 40% cash equity, and loan spreads more
appropriately compensate debt providers. Personal recourse, considered a quaint anachronism in 2006, is very much back in vogue.
Michael P. Higgins: Loan to
value has gone from 75% to
60% to 65% max. You want
debt service coverage of
125%. In all cases, we’re requiring recourse from solid
clients with high net worth
and liquidity on top of that.
Terms and covenants are
tougher. Over the last six to
nine months, lenders have taken into account with all new underwritings that values are down by 15% to 25%.
Rick Gallitto: Our criteria haven’t changed dramatically; however
the lack of liquidity, specifically senior debt, has altered the cost of
capitalizing transactions. The result is an increasing capitalization rate,
which has depressed valuations. More specifically, senior lenders that
are still active have reduced their advance rates to 50% to 60% or
maybe 65% on a high-quality asset. As a result, the mezzanine gap has
widened, increasing the total cost of leverage on new transactions.
“To me, normalization means
the return of the CMBS market.”
RICK GALLITTO
Thursday, September 25, at Japonais Chicago, 600
West Chicago Avenue at Larrabee, Chicago
FALL KICKOFF LOAN SYNDICATION PARTY — NYC
THIS IS A “LENDERS & EQUITY PROVIDERS ONLY”
EVENT – SPONSORSHIPS ARE AVAILABLE
Thursday, October 16, at Naples 45,
200 Park Avenue at East 45th Street, NYC
BREAKFAST MEETINGS — N YC
LENDERS AND EQUI TY PROVIDERS ONLY, PLEASE!
Tuesday, September 23, featuring Sean Hennessey,
CEO, Lodging Investment Advisors LLC
at Club 101 • 101 Park Avenue at 40th St. • NYC
SAVE THESE DATES!
BREAKFAST MEETINGS — N YC
October 14 • November 11 • December 11
For event details, please go to www.rela.org
or call 212-692-9379.
