by Brandon Miller, Senior Director

As the CRE property and capital markets gradually move closer to the proverbial “light at the end of the tunnel”, our phones are ringing more frequently with inquiries on financing for acquisitions and refinances alike.  While distressed situations may still be the “deal de jour” with hungry investors looking to put equity out into the real estate market, there has been a slight shift back to more traditional mortgage banking assignments on behalf of owners/investors looking to acquire a new property or refinance an existing property.

The CMBS market revival is happening quicker than most anticipated.  Many local and regional banks have worked through their balance sheet issues and now are looking to originate new loans.  So with all this capital available in the marketplace why are we still moving closer to the light at the end of the tunnel rather than looking back at the tunnel in the rear-view mirror?  There are a multitude of factors but when it comes to debt financing, one word can capsulate the issue……..Appraisal.

It may sound simple but the appraised value of a property is absolutely critical to the financing process.  Any discussion with a Lender about a commercial real estate loan will include one or more of the following words – Value, Cap Rate, Market Info, Sales Comps and Rent Comps – all of which are essential to determining the appraised value of a property.  Why is value so important?  Every loan is subject to a maximum loan-to-value (“LTV”) requirement.  Underwriters used to think a conservative loan was any loan done at less than 80% LTV.  Today one is lucky to get 70% to 75% LTV.  But what is value today when so few properties have actually traded?  Deals can be made or lost depending on how they are valued with little room for error.  Confidence in the appraisal becomes absolutely critical to the decision-making of both the Borrower and Lender in transaction.  So what is the problem?

The old joke that the MAI designation carried by Appraisers stood for “Made As Instructed” is no longer funny.  Appraisers need supportable evidence backed by more supportable evidence to validate their work.  The problem over the last 2-3 years has been the inability to find that supportable evidence due to a lack of commercial real estate transactions during the recession.  Sales Comps need to be recent, of similar asset class and market-specific.  Using three-year old sales information for multifamily properties along the West Coast is hardly supportable data for a multifamily property in Dallas, TX.  The transactions that have occurred are typically of the distressed variety in which properties and/or notes are trading at significant discounts.  While this may represent a great opportunity for the investor, it provides little indication of real property values.

Fortunately in 2011, we are now starting to see more commercial real estate transactions.  We recently met with a national real estate appraisal group for a “State of the Union” update for the appraisal industry.  Across most asset classes (i.e. office, retail, industrial and multifamily), property sale transactions have increased significantly just in the last 3-6 months  This information helps establish property valuations that benefit not only Appraisers doing their job but also Lenders and Borrowers.  The trickledown effect will lead to an increased volume in commercial real estate transactions.  Armed with valuable market data, Borrowers and Lenders will have renewed confidence in getting debt transactions done whether it be for a new acquisition or a refinance of an existing property.

MCA can help you place your development or property acquisition finance requirements. To learn more, visit us on Facebook, Twitter on the web,

Want to learn more about this?  Feel free to contact Brandon Miller, Senior Director.