Mortgage Banking

Making sense of commercial real estate finance.

Archive for May, 2008

Buying the Empire…

Posted by Jordan Crouch on May 21, 2008

…State Building. I recently finished reading Empire: A Tale of Obsession, Betrayal, and the Battle for an American Icon about the Empire State Building and its many transfers of ownerships. It’s a fascinating read about one of the most well known buildings in the world. At one point the ground is owned by one entity, the building is owned by a second entity and master leased to a third entity. How that ownership structure transpired and what each entity did to try to get the other “parts” of the property is what makes this a great story.

Thanks to Dirt Attorney for mentioning the book on his blog a few weeks ago.


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Costs Going Up

Posted by Jordan Crouch on May 20, 2008

I don’t have any hard data to back it up, but according the Square Feet blog, construction costs are on the rise. It makes sense. A weak dollar means buying supplies overseas costs more (ie steel) and high oil prices means shipping those supplies is also costly.

What the post didn’t mention is that debt is also costing more than it did a year ago. As rates go higher, the debt service coverage is constraining the loan amount. In other words, as the total cost of construction goes up, the loan size isn’t able to rise with it, therefore the builder has to use more money out of his pocket. This situation makes it more difficult for new construction to make financial sense. If I have time I’ll crunch some numbers for an example.

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Oil hits $127

Posted by Jordan Crouch on May 19, 2008

  • ECONOMIC NEWS: Recession predictions are tapering as some reports show signs of life in the economy; oil continues to set records highs (now at $127); Microsoft is still making noise about a Yahoo deal; GE is selling off appliance division; global food prices continue to rise; watch for the jobless claims report coming out this week.

  • LENDING MARKET: Lenders that were out of the market a month ago are now tentatively back lending again. There is not one lender out there that is lending on all types of real estate with the best terms. There are several competitive lenders lending on a particular sector of commercial real estate. Spreads are staying in the 250-300 range for most life insurance companies. Rates are moving because of the rising yield on the ten year Treasury bill (up 50 basis points in the last two months).

  • FINANCE TERM OF THE WEEK: Material Adverse Change (MAC Clause) A clause that gives the lender the right to terminate or renegotiate the loan prior to closing, if there is a major change in the market that will hurt the lender. Examples are the recent sub-prime meltdown, the 1998 Russian Ruble Crisis, or the 9/11 terrorist attack.

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5 Ways to Decide Which Loan?

Posted by Jordan Crouch on May 6, 2008

Every loan is a little different from the next. Here are five things to consider when evaluating your options.

  1. What are your plans for the property? This is the number one thing I try to determine when I meet with clients. Do they want to pull some equity out, hold the property long term, or flip it in a few years? Each of these scenarios will require a different loan structure, term, prepayment, etc.
  2. How much cash flow do you want? Your cash flow will be determined by the loan amount, amortization and the interest rate as well as any reserves that are collected.
  3. Will the loan have recourse? Recourse means that the lender has the ability to take anything of yours, in addition to the building, to repay the loan in full. Non-Recourse means the lender can only take back the building if you default on the loan. There are consequences with both recourse and non-recourse loans.
  4. What type of lender do you want? There are many types of lenders. Click here to read a discussion on the various types.
  5. Does the lender require reserves? Some lenders require you to keep a tenant improvement, leasing commission, tax or insurance payments in a reserve account held by the lender. This can be funded when the loan closes or payments can be made along with the regular loan payment. Other lenders require some or no reserves.

This isn’t an exhaustive list, but is a good way to get started when comparing different loans.

Posted in Finance 101, Lenders, Uncategorized | 4 Comments »

Rate News

Posted by Jordan Crouch on May 5, 2008

  • ECONOMIC NEWS: Microsoft called off negotiations with Yahoo, leaving the market to end on a low note today. As expected, the Federal Reserve lowered the Fed rate to 2% last week. As concerns grow over inflation, most experts anticipate the Fed to not make another rate cut. Inflation is most easily seen in the price of oil which is now $120 a barrel.
  • LENDING MARKET: The 10 Year T-Bill yield remains above the 3.80% range, which is 40 basis points higher than one month ago. Spreads have lowered slightly but overall rates are still in the 6.25% to 6.75%. Lenders’ appetites remain the same: quality assets with low leverage and little lease-up risk. The biggest problem lately is that debt service coverage is constraining loan dollars.
  • FINANCE TERM OF THE WEEK: Yield Maintenance –A prepayment penalty that requires a borrower to pay a lump sum equal to the present value of the outstanding interest payments of a loan. Each lender calculates this differently; it be anywhere from 0 to 10% of the loan amount.

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