Category Archives: Commercial Real Estate

The Five Cs of Credit in the Apartment Building Mortgage Lending Business

The Five Cs of Credit in the Apartment Building Mortgage Lending Business

“Loan underwriters often refer to the five Cs of credit when evaluating and underwriting loan applications. What are the five Cs and how do they affect mortgage lending on apartment properties? The five Cs are: capacity, capital, character, collateral and conditions. We will attempt to explain each of these items and their effect on apartment lending credit decisions.”

Source: The Five Cs of Credit in the Apartment Building Mortgage Lending Business

National Real Estate Investor | Bridge, Mezzanine Lenders See Rising Tide of Deals

Beth Mattson-Teig

[JANUARY 15, 2014] Demand is up across the board as borrowers seek to buy debt back from special servicers; recapitalize properties; access capital for tenant improvements; or perhaps reestablish business plans for properties, notes Josh Zegen, managing member and co-founder of Madison Realty Capital in New York City. In addition, there is a healthy supply of “transitional” deals getting done for acquisition, rehab and new construction. Borrowers for those types of transactions often utilize bridge and mezzanine capital as a source of financing as they work to stabilize properties and improve NOI before going out and seeking permanent loans.

via Bridge, Mezzanine Lenders See Rising Tide of Deals | Bridge & Mezzanine Finance content from National Real Estate Investor.

RCA: Investment Sales Post 19% Y-O-Y gain – Daily News Article – GlobeSt.com

NEW YORK CITY-The phrase “a rising tide lifts all boats” applied generally to sales of significant commercial real estate in 2013, but it seems as though a variation on the old saw would be even more relevant. That is, a rising tide lifts the most rickety boats the highest, as Real Capital Analytics’ review of the year found there was an especially strong rebound for the property types and markets that had been the weakest in terms of recovery.

This rebound occurred amid a 19% year-over-year increase nationwide in commercial property sales worth $5 million or more. New York City-based RCA said the year’s tally reached $355.4 billion, while the Moody’s/RCA Commercial Property Price Indices were expected to post a 15% increase nationally Y-O-Y.

via RCA: Investment Sales Post 19% Y-O-Y gain – Daily News Article – GlobeSt.com.

JOBS Act – Excerpt from SEC Final Ruling for Capital Raising

JOBS Act

 

SECURITIES AND EXCHANGE COMMISSION

 

17 CFR Parts 230, 239 and 242

 

Release No. 33-9415; No. 34-69959; No. IA-3624; File No. S7-07-12

 

RIN 3235-AL34

 

Eliminating the Prohibition Against General Solicitation and General Advertising in

Rule 506 and Rule 144A Offerings

“We are adopting amendments to Rule 506 of Regulation D and Rule 144A under the Securities Act of 1933 to implement Section 201(a) of the Jumpstart Our Business Startups Act. The amendment to Rule 506 permits an issuer to engage in general solicitation or general advertising in offering and selling securities pursuant to Rule 506, provided that all purchasers of the securities are accredited investors and the issuer takes reasonable steps to verify that such purchasers are accredited investors”

More info via SEC, Final Ruling

 

Broad Group | High-Rise building built in a matter of days | KurzweilAI

Constructing a high-rise sustainable building in a matter of days is an amazing accomplishment. It seems that technology like this could change the face of commercial construction.

“Broad is one of the few Chinese manufacturing companies that has been widely recognized for its green policies and commitment to climate change. It has expanded its business in recent years to include other energy saving products and sustainable buildings, and achieved a feat of building a 15-story tall hotel in 6 days, which received 2 million views in the first 10 days on YouTube.”

httpv://youtu.be/Hdpf-MQM9vY

Some notable accomplishments noted about the building in this video:

  • 5X more earthquake resistant than conventional buildings
  • 5X more energy efficient
  • External solar shading
  • Internal window insulation
  • Heat recovery fresh air
  • 20 times purer air

Broad Group | Fifteen-story building built in 6 days | KurzweilAI.

Emerging Trends Advice – “Back off the sub-6 cap rate deals”

apartments77

 

“Back off the sub-6 cap rate deals on existing properties, where you have much less room for error” should interest rates increase, and steer clear of garden apartments in suburban areas where new development can spring up easily and soften returns on older product. Some of these low-barrier-to entry places could suffer from oversupply by 2014 or 2015: ‘Multifamily is almost guaranteed to overdevelop,’ according to one interviewee. Particularly watch out in high-foreclosure markets where speculators will turn single-family homes into rentals and compete directly against apartment owners for tenants.”

http://www.pwc.com/en_US/us/asset-management/real-estate/assets/pwc-emerging-trends-in-real-estate-2013.pdf

Construction Could Approach 1999 Peak Levels by Year End | Multi-Housing News Online

Dallas—The multifamily sector will continue to be the darling of the commercial real estate industry throughout 2013 according to panelists on the “2013 Kick-Off Webinar for Apartment Development” hosted by Humphreys & Partners Architects. Although rental rate growth is slowing down, construction rates are on the rise and could approach peak levels of the past cycle by the end of 2013.

via Construction Could Approach 1999 Peak Levels by Year End | Multi-Housing News Online.

Raising the Bar in Real Estate

Business-Integrity

 

In a world without flaws, people are honorable in their business dealings, and life in general. There is a spirit of abundance, open communication, and collaboration towards a common goal. There is good will, and good faith. Honorable people deal with each other honorably by talking straight about all material issues; they deal equitably with each other by seeking first to understand before seeking understanding, and establishing clear expectations with mutually agreed rules of engagement to nurture mutual respect, consideration, efficient business dealings, and eventually, mutual trust.

Under-Handed Tactics Benefit Nothing and No One

When people use under-handed tactics to gain an advantage; when they add questionable items in their agreements and avoid addressing the concerns or questions; when they expect someone to produce results or work without any assurance of compensation, they are operating in ways that are less-than-honorable; it is the mark of a fearful and protective soul with bad intentions.

In an industry where people will no doubt run into each other again over the course of doing business, it is worth the time and effort it takes to communicate in a manner that does not diminish the value of the other person. It’s all about addressing the tough issues with the intention of maintaining and developing fruitful business relationships over time.

Aspiring Towards a New Norm

It is the quality of our relationships–whether business or personal–that makes life rewarding. Good relationships are worth the effort; the rewards are beyond measure and they are self-evident. It is about collaboration, and not competition; it is about aspiring to a spirit of abundance, and not adversarialism. We can raise the bar in our industry; we can change the landscape from cut-throat to cooperation, and we can all still thrive regardless of any differences we might have. We can do this!

IREM : Institute of Real Estate Management | ABOUT IREM |

 

Information for Property Owners and Investors Building Value Worldwide

“As a savvy real estate owner or investor, you value results; IREM-credentialed members deliver by: effectively operating properties—of any type—resulting in improved value adapting quickly to achieve your evolving goals anticipating and taking advantage of market conditions applying the body of knowledge, education and resources of their global professional organization to bring leading-edge solutions to your property a commitment to adhere to an enforced code of ethics which is an added value when trusting someone with your investments. Learn more about IREM and its members.The Institute of Real Estate Management IREM® is an international community of real estate managers across all property types dedicated to ethical business practices and maximizing the value of investment real estate. An affiliate of the National Association of Realtors®, IREM has been a trusted source for knowledge, advocacy and networking for the real estate management community for more than 77 years.”

via IREM : Institute of Real Estate Management | ABOUT IREM |.

Multifamily Properties – Why the Cap Rate is Insufficient for Determining Investment Value

 

In the multifamily market, the cap rate or “capitalization rate” plays a dominant role in determining the market price of a property. By definition, it is the calculation used to “determine the ability of the property to carry debt as well as for a measure of overall returns” (Miller & Geltner, 2005, p. 298). However, there are drawbacks that makes the cap rate insufficient for determining investment value. Firstly, the cap rate offers a limited perspective; it only looks at the first year forecast of cash flow; it does not take into consideration the impact of financing and taxes (CCIM Institute, 2005, p. 6.6).

These are important considerations in the overall determination of investment performance. Among investors, it is a “common misconception when using the term ‘cap rate’ that some investors assume the overall cap rate is equal to the return on their invested capital; this is rarely the case” (CCIM Institute, 2005, p. 6.6). Yet, investors continue acquiring properties at 4% – 5% cap rates. It is keeping the price of properties inflated in certain markets. An investor that buys an apartment building at a 7% cap rate could still find themselves earning very low returns–or losing value–if the property does not cash flow as anticipated. Therefore a cap rate is insufficient, because it does not include important considerations such as investor preference, capital investment, or material financial information that would impact how a property performs over the term of the anticipated holding period.

A true reflection of investment value also takes into account the total cost of the property, which includes capital investments, the cost of capital, and the impact of taxes. A cap rate does not accomplish this. It may offer a starting point as to understanding market sentiment; but in order to make an accurate determination of how much a dollar truly earns while it is invested requires that an investor focus on “IRR,” or internal rate of return, instead of focusing on the cap rate. An investor must examine the cash flows that a property produces; they should also determine the perceived risk factor of those cash flows, assign a required rate of return for the level of risk assumed, and then apply that required rate when examining the cost of acquiring, renovating, operating, and maintaining the property. Otherwise, an investor may find themselves realizing paltry returns, if any return on investment at all.

Two properties in the same market might have the same market value by cap rate, but if one property has a higher cost of operation or requires a significant investment of capital to make it rent-ready, it will increase uncertainty and, thus, increase the risk of the cash flows. This increased risk should also increase an investors’ required internal rate of return, which is “the percentage rate earned on each dollar invested for each period it is invested” (CCIM Institute, 2005, p. 6.10). In a low cap-rate environment, many sellers cling to cap rate driven trends and many of them remain firm on price regardless of circumstances surrounding the property. While this is certainly a sellers’ prerogative, a savvy apartment buyer will not let emotion drive the investment decision. Apartment buyers must know up-front how their money will perform and only choose to invest in apartment buildings that will provide attractive internal rates of return—which should be in the range of 15% – 20% for multifamily properties—give or take—depending on the level of risk perceived and assumed by the investor.

Owning and operating an apartment building carries more risk than parking money in a CD or savings account; because of this risk, it should earn a higher return on investment, “To compensate an investor for more or less risk relative to other investment opportunities requires a change in the required rate of return” (Miller & Geltner, 2005, p. 336). Assuming more risk should be a factor in investors’ perception of investment value and what they ultimately pay for the property. If not careful, apartment buyers that rationalize acquiring properties at low cap rates may find themselves earning returns comparable to “safer” investment vehicles such as CDs and savings account. Savvy apartment buyers know that when “determining investment value of a property, the investor decides what to pay to achieve given performance objectives,” (CCIM Institute, 2005, p. 6.2); the sellers’ desire for top dollar does not come into play. Basing investment decisions on a market cap rate alone is the equivalent of catering to sellers; it leaves apartment buyers at risk of finding each dollar invested underperforming—or losing value.  Apartment buyers must be sufficiently compensated for the level of risk they assume, or else money is better off invested in a “safer” vehicle—not real estate.

In order to obtain a perspective that would allow an investor to make an informed decision, an investor would need to look beyond the first year using historical operating data within the context of the intended holding period (typically 5 or 10 years). A cap rate cannot do this, so a cap rate should not be used as the basis of establishing investment value. Investment value is “the amount that an investor would pay for a specific property, given that investor’s investment objectives, including target yield and tax position” (CCIM Institute, 2005, p. 6.3). Please notice that this definition of investment value does not include the involvement of seller preferences.

 

References

CCIM Institute. (2005). CI101: Financial Analysis for Commercial Investment Real Estate. Chicago: CCIM Institute.

Miller, N. G., & Geltner, D. M. (2005). Real Estate Principles for the new Economy. Ohio: South-Western.