Mortgage Banking

Making sense of commercial real estate finance.

Archive for November, 2007

The Pancakes of a Purchase (aka the Capital Stack)

Posted by Jordan Crouch on November 30, 2007

To buy a commercial property you have to have deep pockets. For those coming up a little short (myself included) you have several options. You can either get a partner to put up some of the money, get a loan to cover what you’re lacking or get a combination of the two. The combination of equity and loan(s) in a deal is called the Capital Stack. Whenever I hear this term, I always think of pancakes. It might be because I’m a visual person or maybe it’s because I just really like breakfast. Regardless of the reason, I’m going to use the image of a stack of pancakes to help explain this concept. For this example, we’ll assume we’re trying to use as much “other peoples” money as we can.

Imagine a stack of ten pancakes on a plate. The entire stack represents the purchase price of a property, therefore each pancake will represent 10% of the price. The first seven or so pancakes (70% of the purchase price) represent a permanent loan. This is the long term loan from a bank, conduit, or life company and will have the lowest interest rate out of the stack. The next half to one full pancake (usually around 5% – 10% of the purchase price) is the mezzanine (or second) loan. Usually from a different lender this loan comes on top of the permanent loan and is usually for five or less years (but can match the length of the perm loan) and has a higher interest rate than a perm loan. The next pancake (from 5 to 15% of the purchase price) is the joint venture partner. This type of “pancake” will charge a higher interest than a perm or mezzanine loan, becomes part of the ownership entity and is concerned with having an exit from the investment (typically in five to ten years). The last pancake is the equity the buyer brings to the table. See below for a visual representation of the Capital Stack.


Not every deal will utilize the entire capital stack. Most don’t. But it is important to know the option is there. Ask an experienced mortgage banker what would work in your particular situation.


Posted in Finance 101 | Tagged: | 5 Comments »

Does Building Green Pay Off?

Posted by Jordan Crouch on November 27, 2007

Yes it does! According to an article by a university professor and two higher ups at CoStar, the online property database. The article has several good points (which I’ve summarized below), but what I found most fascinating is the following table.


Highlights of the article:

  • The green movement is led by tenants, investors (e.g. CALPERS) and some cities.
  • Costs for going green range from a low two percent to more than seven percent of total cost.
  • The typical green building is a Class A Office building with 353,000 SF, 15 floors, built in 1985, multi-tenanted and 91.7% leased.
  • Barriers to going green stem from a lack of planning and education.

It’s only a matter of time before lenders (and everyone else) acknowledges going green as a significant cost saver, a productivity enhancer as well as the right thing to do.

Posted in Green | Tagged: | 4 Comments »

And we’re back!

Posted by Jordan Crouch on November 26, 2007

Even with the Thanksgiving Holiday last week, there is a lot happening in the market. Here’s a recap of a few headlines.

  • Retail sales for Black Friday and Saturday were 7.2% higher than last year. The rest of the year might not be too bad.
  • HSBC, Europe’s largest bank, is bailing out two of its troubled funds, which invested in mortgage backed securities.
  • Citigroup is planning major layoffs after taking a $15 Billion write off. No Christmas for those employees. L
  • Spreads continue to widen but with the ten year treasury at a two year low, interest rates for commercial loans are still in the 6 percent range.

And finally, here is an interesting article about a hedge fund that made a 1000% return this year betting on the sub-prime market tanking. The interesting part is that the fund’s manager, Andrew Lahde, is now betting against the CMBS market. hmm….

Posted in Capital Markets | Leave a Comment »


Posted by Jordan Crouch on November 21, 2007

Thanks to everyone that reads this blog, gave me input in its design and encouraged me. Have a wonderful Thanksgiving holiday! I will be out for the rest of the week.

Posted in Random | Leave a Comment »

The Fate of the Rest of the Year…

Posted by Jordan Crouch on November 20, 2007

…will be determined on Friday (and next Monday). This coming Friday is known as Black Friday because of the deep discounts retailers give to entice shoppers into the stores. The following Monday has become known as Cyber Monday as people shop online at work. If shoppers don’t spend as much as anticipated, it will show the economy is not as strong as some people believe it is. If both Friday and Monday show poor sales, the rest of the year will be dismal. If the sales are outstanding, expect the market to reflect that as well.

Posted in Capital Markets | Leave a Comment »