The CMBS credit market is vital for the commercial real estate industry, providing leverage on assets that typically banks or life companies will not finance. CMBS lenders offer very attractive debt in terms of a nonrecourse, high-leverage loan, but conversely, there is minimal flexibility once securitized. That being said, the market is ripe for borrowers to take advantage of this favorable leverage at extremely low interest rates.
Metropolitan Capital Advisors (“MCA”) has closed over $300mm of CMBS financing over the past thirty-six months and has been tracking loan terms, which have drastically changed since the CMBS market rebounded in 2010. Everything is getting more “borrower friendly.” Spreads have tightened, debt yields have decreased, required reserves have become more relaxed, and interest-only periods have lengthened.
In fact, we have a retail shopping center deal that I marketed last year to the CMBS market that was stalled due to an unforeseen co-tenancy issue. Eighteen months later, we are back in the CMBS market on the same deal and getting superior offers compared to previous efforts. Here is a brief chart to show how terms have shifted in favor of my client:
|Today (Aug 2014)||Last Year (April 2014)|
|Interest Rate Spread||S+195||S+245|
|Interest Only Period||2-years||None|
|Amortization||30-year amort||30-year amort|
|Max LTV||75% LTV||75% LTV|
|Cash Management||Springing Lockbox||Lockbox|
|Upfront Reserves||None||$200k TI/LC|
|On-Going Reserves||$0.75/sf for TI/LC/Capex||$1.20/sf for TI/LC/Capex|
|DSC Trigger Event||1.15x DSC||1.20x DSC|
Rest assured, my client was ecstatic when we told him how we improved virtually every aspect of the proposed financing on his deal. So, what does this tell us? Is the market back to the highs of pre-recession? Are lenders becoming reckless in their underwriting? At MCA, we don’t think so… not yet at least!
Pre-recession, some CMBS lenders were lending based on proforma rather than historical performance. Also, senior financing is currently capped at 75% LTV… whereas leverage was creeping up to 85% on the first mortgage in the previous CMBS cycle. With these disciplines in mind, we think lenders are still acting responsibly. But, the market is red hot right now, so lenders may start to push even harder to get deals into their securitizations.
With this being said, MCA is constantly in the credit markets monitoring conditions. Right now is the prime time to lock in permanent financing at low long-term rates with other favorable terms. Interest rates are bound to increase, and there are always bumps in the CMBS markets. If your deal needs new financing (either acquisition or recapitalization), consider taking advantage of the CMBS debt market while it’s chugging along!