SEPTEMBER 2018 INCOME PROPERTY FINANCE UPDATE

SEPTEMBER 2018 INCOME PROPERTY FINANCE UPDATE

The news from the ANNUAL COMMERCIAL REAL ESTATE CONVENTION in Las Vegas was  positive as our life companies, CMBS, Agency, Bridge and Mezz lenders all continue to increase their lending targets and are looking for us to bring them more loans as long as the economy does not falter. Consumer confidence registered an all-time high this week,  we appear to have new trade deals with Mexico and South Korea and  additional trade deals looking encouraging.  However, caution was expressed with Trump's tariffs particularly on the Chinese imports and the November elections. In addition, the US housing market appears to be weakening (a leading indicator), manufacturing activity in major regions of the world are showing signs of peaking, and US inflation rates are increasing rapidly, fueled by rapidly rising labor costs, shipping costs and the price of raw materials, all of which will be passed on to consumers. Inflation is approaching levels that have historically lead to higher interest rates and sharp declines in stocks. Add to those concerns, how very far all agree we are into this recovery with the potential for a downturn and lenders are all underwriting more conservatively, in particular construction lenders.    The 10-year Treasury rate moved up 58 basis points since the first of the year to 3.08% and the 10-year Swap up to 3.13%. Prime moved up from 4.25% to 5.00% since the first of the year and the FED just raised the Fed Funds Rate again so Prime will increase to 5.25% this afternoon, and the FED sounds poised for two more possible increases with inflation now exceeding their 2% target.   This is worth repeating in case you missed it as President Trump did sign  the  “Economic Growth Regulatory Relief and Consumer Protection Act”, aka “the Reform Bill” on May 24th. The intent of this legislation was to clarify specific provisions pertaining to HVCRE regulations, as defined by Basel III and the FDIC.  Again the most salient changes are: 1.   Developers can, once again, receive credit for the appraised value of contributed land versus the actual purchase price.   2.   This new legislation removes restrictions on distributing excess capital above the requisite minimum. Now, only the 15% minimum required capital need remain in the project.   3.   If the cash flow generated by the real property is sufficient to support the debt service and expenses of the real property, in accordance with the bank’s applicable loan underwriting criteria for permanent financings, then the loan is no longer required to be classified as HVCRE.  Under the old rules, the standing loan would be classified HVCRE until the property is refinanced and the current loan is retired or converted to a permanent status.  With regard to construction loans, once substantial completion has occurred and the property’s cash flow is sufficient to cover debt and expenses, then the financing institution has the option of reclassifying the obligation as non-HVCRE. 4.   In conclusion, there are no hard and fast rules, and, as always, lending institutions have their own criteria and policies. The recent legislative changes provide additional latitude for increased discretion on the part of lenders.     Industrial financing continues to be the favorite of our life companies with full leverage spreads  in the 130-150 spread range. In addition to 10-year fixed rate financing, we are seeing several of our life companies offering terms from as short as 3 years all the way to 30 years fully amortizing. With the yield curve extremely flat the difference in rate between 7 and 10 year fixed rates vs. a 15 or 20 year fixed rate is not much if you are interested in a fully amortizing loan. Rates are slightly higher for office, retail, medical office and self-storage. Retail:    Big Box space continues to be difficult due to the difficulty re-leasing these spaces as the retail industry closes and downsizes their retail stores to showrooms while shipping inventory direct to customers from big industrial logistics distribution facilities. Thus the preferred treatment of industrial property financing.    Unanchored and Strip Retail - We continue to have life company sources for unanchored and strip retail. Multifamily financing also continues to be a favorite and our life companies have been coming up with some amazing pricing. We have actually seen spreads inside of 100 basis points over the 10-year Treasury on large lower leverage loans. The Agencies (Fannie and Freddie) can get up to 80% LTV are pricing full leverage at 1.25 DCR. Pricing is in the range of 139-209 over the 10-year Treasury on a PAR basis. The advantage of course with Fannie and Freddie is that they allow for multiple future loan increases at their then first TD rates. Affordable (Low Income) Multifamily projects are priced as much as 40 basis points inside of your typical Fannie and Freddie programs. Agency Bridge Loans are available from $2 million unstabalized at a 1.0 DCR for 2-3 years up to 90% of current value and 80% of stabilized for 1 point in and 1 out (waived if you take their perm) at L+400. Hospitality Permanent Financing - 1) Our life companies are underwriting to 12% debt yield with rates in the low to mid 200's over the 10-year Treasury for the right properties and borrowers.  2) CMBS continues to be the source for maximum leverage underwriting to as low as 9% debt yield with spreads in the mid to high 200's over the Swap.  Several can add mezz to get down to an 8.5% using a combined 1.10 DCR. We have also seen spreads as low as 150 for lower leverage loans. Hospitality Construction Financing - Banks continue to be under pressure from the regulators to dial back commercial construction lending, particularly in the case with hospitality construction lending. That said, I just closed a $16,250,000 hospitality construction loan at 65% LTC for a select service hotel. Most banks are capping their hospitality construction loans at 55%-60% LTC, with several allowing construction mezz up to 75% LTC behind their senior loans. Self Storage is hot and one life companies, CMBS and banks are all want and are willing to go to 75% LTV, 8%-10% debt yields and DCRs in the 1.25 range to get them. Stable cash flow, in markets with high barriers to entry and markets that are not overbuilt will be key. Our life companies have been offering the best rates and, of course, rate lock at application.  Bridge Lenders - With pressure on the banks to be more conservative many have turned their focus to bridge lending in addition to our traditional bridge lenders and we are seeing several get more aggressive with less recourse and flexible prepayment provisions. On large transactions we are seeing pricing as low as LIBOR plus even sub-200, but again those are very large transactions. For deals under $25 million we are seeing pricing as low as L+350 for multifamily properties and goes up  from there. 12-month lock out with no make whole provision and full term I/O and typically 1 point in and 1 point or less out. With the CMBS sources they will usually waive the exit fee if you roll into their permanent program. Some of the CMBS have their own internal mezz which can get them up to 80% LTV. LIFE COMPANY RATES                                 5-Year               10-Year Multifamily *                                                    4.59%-5.29%    4.50-5.20% Office, Industrial, Shopping Center and Self-Storage                                                                            4.69%-5.39%   4.60%-5.30% *Our life companies are PAR to us, and we have been beating the agencies on interest rates. That situation will likely improve as the likelihood if the agencies are privatized under the new administration. *Amortizations run up to 30 years depending on the age and condition of the property. WHY WESTCAP? WESTCAP was founded in 1988 and serves as a correspondent to 15  life insurance companies for which we service over $2.0 billion. Most of these correspondent relationships date back over 25 years, including Sun Life of Canada for which we have been the exclusive correspondent in Southern California for almost 30 years. We also represent non-correspondent life companies, multifamily agency sources, banks, construction lenders, bridge, mezzanine and equity, in order to meet all of our client's financing needs. We handle assignments ranging from $1,000,000 to $400,000,000 nationwide, and represent all sizes of borrowers including some of the largest developers in Southern California.    WESTCAP is also a founding member of Q10 Capital, which is a network of 14 of the largest independent mortgage banking companies in the country with 22 offices throughout the United States, and a combined servicing portfolio in excess of $12 Billion. With a proprietary database sharing quotes, lender and equity intelligence we are constantly in a position to insure that we deliver the best sources at any given time for our clients.    Call for rates on all income property types including hospitality, multifamily, industrial, retail, office, self-storage, student and senior housing. We even have a couple of bank sources which offer no prepayment penalty and a few who offer non-recourse. With a few exceptions our permanent lending sources are PAR to us.

Steve Bridges
Executive Vice President
Q10|WESTCAP
9960 Irvine Center Drive
Irvine, CA 92618
Office: (949) 387-9061 Cell: (949) 235-1540
sbridges@Q10westcap.com 
https://www.linkedin.com/in/stevebridges2/ 
www.westcapcorp.Q10Capital.com
CA RE Broker: 00465840

SEPTEMBER 2018 INCOME PROPERTY FINANCING UPDATE