Mortgage Banking

Making sense of commercial real estate finance.

Archive for October, 2007

If you build it, they will come (and spend $275M on conferences)

Posted by Jordan Crouch on October 31, 2007

From an article at MultiHousingNews earlier this month, the Sheraton hotel in downtown Seattle finished their remodel, adding an additional 420 rooms in a new tower. With a total of 1,258 hotel rooms and 75,000 sf of conference space, the hotel is a force to be reckoned with. It also helps that the hotel is across the street from the WA State Convention Center, the largest conference facility in Seattle.

The Seattle Sheraton, which is owned by the Starwood Hotels and Resorts, spent $175M on the remodel and have already booked $275M in convention business. Someone who recently stayed there told me it costs more stay in the new tower, but that the remodel was well done. I have walked through the lobby and even attended a few meetings in the rehabbed banquet facility and it is top notch. overall, I’m just happy the construction is done since my office window faces the hotel.

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Posted in Seattle Real Estate | Tagged: , , , , | Leave a Comment »

The Four Food Groups

Posted by Jordan Crouch on October 30, 2007

There are four main types of commercial real estate, often called the Four Food Groups. These are Office, Industrial, Retail, and Multifamily. In this article, we’ll look at examples of each type as well as touch on other types of commercial real estate.

Office – Office properties can range from the skyscraper downtown to the small two story suburban office building near my house to everything in between. There are many subcategories of office properties including medical, single/multi tenant, owner-user, telecommunications, credit (usually single tenant that’s stock is traded; ie Microsoft, Boeing, Starbucks), and even office condominiums. Office properties are usually found in central business districts (CBD), business parks, and near lots of housing.

Industrial – Industrial properties are what you would expect. One story concrete/cinder block buildings with minimal office build-out, tall ceilings, large bay doors and few amenities. As with office, there are many different types of industrial buildings including cold storage, warehouse, manufacturing, single/multi-tenant, owner-occupied, flex (usually consisting of a larger portion of the building being office), and distribution. These properties are usually away from the CBD and neighborhoods; near wide streets for the semi-trucks to maneuver and with close access to ports, railroads, and major freeways.

Retail – Retail properties can range from a big box store (Wal-Mart, Costco, Best Buy) to a small restaurant, bank branch or 7-11 type mini-mart. Also included in the retail category are shopping malls, grocery stores, and strip retail. Typically any business that sells directly to its customers can be considered retail. With such a broad definition and so many diverse types, retail can be found almost anywhere.

Multifamily – Also called apartments, this category of commercial real estate is probably the most familiar to everyone because at one time or another everyone will live in an apartment building. Like the other Food Groups, this one comes in different shapes and sizes. There are garden style (multiple 2-3 story buildings spread out around a central clubhouse, usually in suburban areas), mid/high rise (mid rise are 3 to 5 stories, high rise are 6+ stories, both are found in densely populated areas), affordable (a government agency reimburses a portion of the rent), student (usually on or near a college campus), and military (exclusively or semi-exclusively used by a branch of the military, usually near a base).

Other Types – Besides the four food groups, there are many other types of commercial real estate. These include hotels, self storage, senior housing, marinas, hospitals, mobile home parks, and mixed use. Mixed Use combines two different property types in one property. The most ubiquitous are multifamily buildings with retail/office on the first floor but there are other successful combinations as well.

As always, if you disagree or have a question, please leave a comment.

Posted in Finance 101 | Tagged: , , , , , | 9 Comments »

Conduits Aren’t Dead

Posted by Jordan Crouch on October 26, 2007

The Dirt Attorney confirmed this for me yesterday. Macquarie bank has poached several higher-ups from LaSalle Bank’s conduit division in order to form its own. Nate Stearns will be the executive director. Even though Macquarie is Australia’s largest bank, the new conduit will be located in Chicago (home to LaSalle). This is a sign that the CMBS market is far from being down and out.

Update: (12/9) The conduits are dead again. They are not quoting deals. Or when they are quoting a deal, the quote is ridiculously high.  The certainty of execution with a conduit is practically zero, making any quote you do get worthless until the day the loan closes.

Posted in Capital Markets, Finance 101 | Tagged: , , | 3 Comments »

Teaching a 6 year old about CMBS loans

Posted by Jordan Crouch on October 25, 2007

I don’t know why anyone would want to teach a six- year old about commercial mortgage backed securities (CMBS), but this is how I would do it. This is INCREDIBLY simplified. For this example, our six year old will be named Lucy.

First, let’s go to the grocery store. Have Lucy grab a basket. We’re headed for the produce section. Let’s grab a banana, an apple, an orange, and a tomato and put each in the basket. Good job Lucy! Quickly pay for the items and head home.

Now the fun begins. As the adult (young kids shouldn’t handle knifes), I’ll cut each of the items into halves. While I’m doing this, Lucy calls her two best friends (Anna and Bill) and has them come over to the house. She reminds them to bring their piggy banks.

While we wait for Anna and Bill to show up, we place one half of each of the fruit in a bag. We mark a big “A” on it. We put the rest of the fruit in another bag and label it “B”. About this time, Anna and Bill arrive. Lucy gives Bag A to Anna. In exchange Anna gives Lucy 200 pennies. Now Anna has a half of the banana, the apple, the orange, and the tomato and Lucy has $2. Next Lucy gives Bag B to Bill and gets 200 pennies in return. Everyone is happy and Lucy’s friends go home.

Lucy is out of fruit but now has $4. She takes $1 and puts it in her piggy bank and gives the other $3 to me. We hop in the car and head to the grocery store to buy some more fruit. And that is how to teach a 6 year old about CMBS loans!

Here’s the translation:

“Lucy” is not a six-year old but actually a conduit lender. There are thousands of “Lucys” in the world (Artesia, BofA, Goldman Sachs, PNC to name a few). Each of the “fruit” represents a loan the conduit lender makes. After the lender has made enough loans, it bundles the loans together (i.e. puts them in the basket). Once the loans are bundled, the lender slices the bundle into several tranches (for our story putting the halved fruit in Bag A and Bag B).

Next the lender will go to the market (call her two best friends) and sell the tranches (in this case for $2 each. In reality, each tranche will be priced differently.) Who buys the tranches? Pension funds, hedge funds, large banks, insurance companies, anyone who can write a very large check. After selling all of the tranches, the conduit lender will keep some of the profit ($1 in the piggy bank) and then go out and make more loans on other property (going back to the grocery store). The conduit lenders have perfected this cycle and repeat it several times year.

I said it was incredibly simplified. If you want a better explanation of what a CMBS is, check out here.

Posted in Capital Markets, Finance 101 | Tagged: , , , | 7 Comments »

Types of Commercial Real Estate Lenders

Posted by Jordan Crouch on October 23, 2007

There are many types of lenders for commercial real estate. I’ll cover the most popular ones.

  • Banks – These are the Citibank, Key Bank, and Bank of America’s of the world, but also includes local and regional banks. Banks specialize in construction and short term (less than 5 years) loans. Depending on the size of the bank, will determine the maximum loan size as well as how much exposure each bank will want to each borrower. Prepayment is the most flexible with banks.
  • Life Insurance Companies – Almost all insurance companies invest in real estate as a lender (John Hancock, Nationwide, Genworth, State Farm). Typically their loans are long term (10 years) and conservatively underwritten but the larger life companies can be more flexible with term. Prepayment is usually calculated by yield maintenance.
  • Conduits – Most Wall Street banks have a conduit arm (Goldman Sachs, Artesia, Deutsche Bank) . This type of lender is aggressive in terms of loan dollars and interest rate. The prepayment is usually defeasance. The term is almost always a 10 year term. The lenders are inflexible because all conduit loans are packaged together and sold as commercial mortgage backed securities (CMBS). Also called CMBS lenders.
  • REITs -Real Estate Investment Trusts can offer short term loans, mezzanine loans, construction loans and joint ventures. Typically REITs loan on bigger projects with large loan amounts to experienced borrowers.
  • Credit Union – In one word, flexible. Typically funkier deals that don’t fit in the conduit/life company box. Can be smaller sized deals.
  • Pension Funds – Similar to REITs, Pension Funds like the experienced borrower who needs a large loan or a joint venture partner.
  • Private/Hard Money Lenders – Quick moving lender that charges a higher interest for a shorter term, typically a 6 months to 3 years. They will lend any loan amount and on any property type. An expensive lender but often necessary for the quick turnaround.
  • Government Agencies – This includes Fannie Mae, Freddie Mac and HUD. Typically a Designated Underwriter Servicer will underwrite the loan and then sell it to an agency. Look for an article covering this topic soon. These lenders only loan on multi-family type properties.

Banks, life insurance companies and conduits are the top three most popular lenders currently. But each lender has a particular type of loan that it likes. So for each unique piece of real estate, there is a lender to put a loan on it.

If you have a question about something above, leave a comment and I’ll clarify.

Posted in Finance 101 | Tagged: , , , , , , , , , | 8 Comments »