4.13.18: How Interest-Only Can Solve DSCR Constraints on a CMBS Loan

Cap rates for income-producing properties have fallen to 5% or below in many primary markets, including New York, Los Angeles and San Francisco. As a result, borrowers seeking 75% Loan-to-Value (LTV) loans are finding that loan proceeds are constrained below 75% because the property cash flow does not meet the minimum debt-service coverage ratio (DCSR) of 1.25x when applied to the full 75% loan amount. Therefore, borrowers are forced to invest more equity than desired for a purchase or receive less cash-out proceeds from a refinance.

Fortunately, a solution exists when a CMBS conduit loan is the source of financing. CMBS conduit loans allow for interest-only (IO) payment periods before the loan begins to amortize. Typically, IO periods are 36 months (3 years) or 60 months (5 years). After the IO period ends, the loan payments begin to amortize on a 30-year repayment schedule. The good news is that the interest-only payments will be used to calculate DSCR, enabling the borrower to reach full 75% loan proceeds with cap rates as low as 75%.

Give it a try yourself: Take a hypothetical property in a primary market with $100,000 of net cash flow and assume you want to buy the property at a 5% cap rate, or $2 million. At a 5% interest rate and a $1.5-million loan, interest-only debt service is $75,000 a year and DSCR is 1.33x ($100,000/$75,000). If the loan was structured to amortize on a 30-year schedule, debt service would be $96,000 per year and DSCR would be roughly 1.05x, which is well below the 1.25x standard. Therefore, the loan proceeds would have to be reduced to a level that supports a 1.25x DSCR, which is roughly at a 65% LTV. So you can see how a CMBS conduit loan with an IO feature can solve the problem!

To obtain competitive proposals for your next CMBS conduit loan requiring an IO solution, contact Mike Sneden at msneden@valuexpress.com or Dennis Suh at dsuh@valuexpress.com.

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4.11.18: A Quick Test to Determine Hotel Eligibility for a CMBS Conduit Loan

Often a borrower wants a quick answer on whether a hotel is eligible for a CMBS conduit loan without providing much information. A way to make a quick assessment is to look at TripAdvisor reviews. But before that, the first step in making an assessment is to “google” the address and look at the photos presented to determine if the hotel is an interior corridor property. CMBS conduit loans are generally available for interior corridor hotels. Typically, the only exception to this rule is if the property is located on the beach. Next, compare the franchise brand with the list provided here. All categories except Economy are eligible for a CMBS conduit loan. Once you have passed these two tests, it’s time to determine what condition the hotel is in and how well it is run.

How can that be done without seeing the hotel and interviewing management? The solution is TripAdvisor. Owners have a love/hate relationship with property review sites (mostly hate) because, as one owner said, “Anyone can post anything with no repercussions for misleading information.” Nevertheless, the CMBS conduit industry has developed a rule of thumb for well-run hotels in good condition using TripAdvisor reviews.

Type the name of the hotel in the “google” search bar followed by “TripAdvisor” and you will find a TripAdvisor link for the hotel. Click on it and then scroll down to the “Overview” section listing the percentage of reviews that are “Excellent,” Very Good,” “Average,” “Poor” or Terrible.”

If “Excellent” and Very Good” ratings combined (add the two percentages together) exceed 50% you have a hotel that is likely well run and in good shape, and it likely would be fine for a CMBS conduit loan. If the combination exceeds 75%, you are probably looking at one of the top hotels in the market that would be very easy to get approved for a CMBS conduit loan.

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4.7.18: Washington Prime Group and Namdar Realty Look to Save Bon-Ton from Liquidation

U.S. mall owners Washington Prime Group and Namdar Realty Group will bid together to save department store chain Bon-Ton from liquidation, according to court documents filed Monday.

It was reported that the two landlords would attempt to acquire the embattled retailer out of bankruptcy. Bon-Ton, which operates other mall-based chains including Carson’s, Younkers and Herberger’s, is a tenant of Washington Prime’s and Namdar’s properties. Bon-Ton operated roughly 250 stores when it filed for Chapter 11 bankruptcy protection in February. It had already started liquidating some of its assets — planning to close about 40 stores under various banners across the United States at the time.

In securing funding to make the deal work, it’s been reported that Washington Prime and Namdar will use their properties to raise debt to finance the acquisition. The court documents said the mall owners would acquire “substantially all of” Bon-Ton’s assets. Columbus, Ohio-based Washington Prime is a spinoff from Simon and owns interests in a little more than 100 properties today. Namdar, based in Great Neck, New York, also has about 100 properties, including medical and office buildings.

This wouldn’t be the first time two mall owners joined forces to save a struggling retailer in a bid to keep stores from going vacant, especially when a key tenant is involved. Simon and GGP, for example, bid roughly $240 million in 2016 to save teen apparel retailer Aeropostale from liquidating. The deal helped keep hundreds of stores open.


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ValueXpress Arranges $7,250,000 CMBS Conduit Loan for the Refinance of an 88-Room Quality Suites Located in Atlanta, GA

ValueXpress has arranged a $7.25-million CMBS conduit loan for the refinance of a three-story Quality Suites hotel constructed in 1990 and renovated in 2015-2017. The hotel is located in the Buckhead Village section of Atlanta, Georgia.

Quality Suites Buckhead

Quality Suites – Buckhead Village

Amenities include a meeting room, exercise room, complimentary breakfast, high-speed internet access, a business center, hot and cold breakfast and an outdoor swimming pool. All rooms feature kitchens with refrigerators and microwaves, free WiFi, free wired Internet and flat-screen TVs with digital channels. Living rooms, coffee makers, and free local calls are among the other amenities available to guests.

The property is located at Pharr Road, adjacent to Frankie Allen Park, in Buckhead Village. The property is proximate to Underground Atlanta, Philips Arena, Emory University, Georgia World Congress Center, Georgia Institute of Technology, Atlanta Civic Center, Buckhead Crossing, Emory University Hospital and the Georgia Dome.

“The transaction was challenging in that the loan amount provided for a substantial return of equity to the sponsor. Normally, return of equity is not an issue in CMBS conduit loans; however, the loan amount in this case exceeded the cost basis for the property,” noted Michael D. Sneden, Executive Vice President at ValueXpress. “We were able to mitigate the concern based on the high level of property performance and outstanding location.”

In addition, the property is exterior corridor. “Exterior corridor hotels are not desired in CMBS conduit loans, but we were able to mitigate this concern as well,” commented Jim Brett, head of underwriting at ValueXpress.

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3.30.18: AAHOA Trade Show in National Harbor, MD a Huge Success

On March 28-29, 2018, ValueXpress exhibited at the annual Asian American Hotel Owners (AAHOA) Trade Show held in National Harbor, Maryland. The trade show was attended by more than 5,000 Asian American hoteliers ready to lock in long-term, fixed-rate hotel loans before interest rates head further upward.

Mike, Dennis and Jay of ValueXpress

(L to R) Mike, Dennis and Jay at the ValueXpress Booth at the 2018 Asian American Hotel Owners Trade Show.

“We had a significant amount of inquiries from clients looking to complete cash-out refinancing of their hotel properties,” commented Jay Bhakta, Senior Loan Originator at ValueXpress. “Many owners were looking to use the cash-out proceeds to complete Property Improvement Plans (PIPs) required to renew franchises. For example, some noted that it could easily cost $1 million to complete the new ‘Formula Blue’ PIP required by IHG for the renewal of Holiday Inn Express franchises. CMBS conduit loans with their unrestricted cash-out provisions are ideally suited for hotel properties requiring expensive PIPs so owners do not have to pay out of pocket for the PIPs.”

“In addition, we had requests for portfolio loans in which the owner gets one loan secured by a portfolio of properties, consolidating a variety of local lenders into one loan, converting recourse loans into non-recourse and obtaining cash-out proceeds for additional investments,” noted Michael D. Sneden, Executive Vice President at ValueXpress.

“In one case, the owner wished to build a new Hampton Inn property, but his local community bank wanted cash equity of 35%, or nearly $3 million, invested in the $8-million project. The owner had only $2 million cash on hand, so we are going to provide a $1-million cash-out on a Holiday Inn Express owned by the sponsor,” noted Bhakta.

To obtain competitive proposals for your next CMBS conduit loan, contact Mike Sneden at msneden@valuexpress.com, Dennis Suh at dsuh@valuexpress.com, or Jay Bhakta jbhakta@valuexpress.com.

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3.28.18: Trepp: CMBS Delinquency Rate Rises Modestly for First Time Since June

The Trepp CMBS delinquency rate rose modestly in March. This is the first time the rate has ticked up since June 2017. The delinquency rate for U.S. commercial real estate loans in CMBS is now 4.55%, up 4 basis points (bp) from the February level, which was the lowest reading since September 2016. One year ago, the overall 30-day delinquency rate was 5.37%. The delinquency rate had been declining consistently for more than a year as loans issued in 2006 and 2007 reached their maturity dates and were eventually resolved after the dreaded “wall of maturities” passed, and delinquency levels receded.

Delinquency reached a multi-year low of 4.15% in February 2016. The all-time high was 10.34% in July 2012.

In the beginning of summer 2017, Trepp noted that further rate declines were possible in the following months as the wall of maturities passed. Delinquencies have now fallen in each of the last six months, and further reductions could occur for 2018, despite the 4 bp blip in March.

Delinquency by Property Type, March 2018

Sector March
BP Change
Industrial 5.31% 5.54% -23
Lodging 3.35% 3.23% +12
Multifamily 2.39% 2.40% -1
Office 5.80% 5.46% +34
Retail 5.99% 6.16% -17

Source: Trepp

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3.20.18: Rents for Apartment in NYC Poised to Decline

Beleaguered renters in New York City may begin to see some relief to rising rents as the year progresses. Market analysts are watching rents plateau and developers increasing incentives to lure tenants into all the new properties that are completed and now leasing.

Market participants are reporting that landlords have had to offer more to attract tenants, including paying brokers’ fees on their behalf or waiving a month or two of rent. However, evidence indicates that concessions are not achieving the result of steady rentals and that rental rates will begin to fall.

“In many parts of the city rents will fall,” said Grant Long senior economist at the real estate listing site StreetEasy. “There’s a lot of new rental housing, and landlords are having to compete against each other and offer concessions, and inevitably cut the headline rents that they offer to folks. … And after a long period of increases that lasted over seven years, people are largely at the limit of what they’re willing to pay.”

But Jonathan Miller, president of the Miller Samuel appraisal firm, noted most of the new developments skew higher end, which means the benefits of increased competition are not as likely to trickle down to less-expensive units. “With a growing population and job growth, there’s much more price pressure on the lower half of the market,” Miller said.

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