4.27.18: CMBS Remains Best Solution for Retail Loans

Struggling retailers have lenders reassessing the risk of retail loans. Over the past two years, poor retail sales have resulted in a slew of store closures and bankruptcies. It seems that not a month goes by without more bad news, most recently the closing of the Bon-Ton department store chain, affecting approximately 200 stores, that was announced in mid-April.

While B-quality malls are very difficult to finance, the CMBS conduit loan market is still actively lending on all other retail assets, providing relatively high leverage loans up to 75% LTV on acquisitions and 70% on cash-out refinancing. CMBS is particularly aggressive on food- and drug-anchored shopping centers, as well as unanchored neighborhood shopping centers with service-oriented and restaurant tenants.

“We are actively quoting and closing retail loans right now as other lenders begin to back off on the asset class,” commented Michael Sneden, Executive Vice President at ValueXpress. “We just closed a $4.8-million loan on a service-oriented retail-office property in Parkland, Florida with a 10-year term/30-year amortization at 75% of purchase price and closing costs (click here for details), and we have three other similar transactions in the underwriting/closing process.

CMBS is able to close high-leverage loans on retail properties because underwriting is thoughtful when it comes to tenant risk. CMBS is able to structure for weaker tenants by providing for cash-flow sweeps in advance of tenant renewals or bankruptcies. This provides landlords with the capital to replace tenants or reposition properties, as needed, to better performing retailers.

To obtain competitive proposals for your next retail CMBS conduit loan, contact either Mike Sneden at msneden@valuexpress.com, Dennis Suh at dsuh@valuexpress.com or Gary Unkel at gunkel@valuexpress.com.

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4.24.18: Kroll to Track CMBS “Loans of Concern”

Kroll Bond Rating Agency (KBRA) has created a monthly index to track CMBS loans that it believes are at risk of default. The index tracks not only loans that are already delinquent or in default, but more important, loans that face a high risk of default in the future. These loans, known as “Kroll-Loans of Concern” or K-LOCs, were 7.90% of conduit loans issued since 2010, up from 7.49% a year ago.

The index is primarily forward looking. Only 0.75% of CMBS conduit loans are delinquent and 1.13% are in special servicing as of last month, according to Kroll. That means that KBRA’s research has identified many more loans that are at risk of default in the future.

According to Eric Thompson, Kroll’s CMBS chief, the index is “an informed, forward-looking barometer of credit that’s compiled from real analyses by people who dig into each and every deal.”

The index will be available free on Kroll’s website. The data will be published monthly beginning with January 2017 and on an annual basis retroactive to 2015. The index stood at 3.58% at yearend 2016 before surging amid a wave of distress in the retail sector. Over the past year, it fluctuated between 7.33% and 7.95%.

Kroll notes that the current index is in line with its expectations, but Kroll is keeping watch on retail loans and weakening lodging trends in certain markets. Kroll expects the index to rise modestly in coming months, along with actual delinquency, but does not expect a meaningful spike in either the K-LOC index or the delinquency rate in the near term.


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4.18.18: Westside Pavilion in Los Angeles to Be Repositioned

U.S. mall owner Macerich and office developer Hudson Pacific Properties are redeveloping the Westside Pavilion mall in Los Angeles into a campus featuring 500,000 square feet of office space, according to the firms.

Approximately 100,000 square feet of the 600,000-square-foot property will be retained for existing entertainment and retail space. The 12-screen Landmark Theatres complex will remain in the reconfigured mall, as will Westside Tavern restaurant, both of which have performed well and will expect to be complimentary amenities for tenants. The estimated total project costs are in the range of $425 million to $475 million. Hudson Pacific will hold 75% of the joint venture and will be the property’s day-to-day operator and Macerich, the current owner of the property, will own 25%.

Westside Pavilion opened in 1985 and has struggled since the $1-billion renovation of nearby Westfield Century City, which took Nordstrom and Macy’s from Westside Pavilion. The property is encumbered by a $155-million CMBS conduit loan that does not expire until October 2022. That loan will likely need to be modified or paid off to accommodate the redevelopment.

The redevelopment is targeted to the rising demand for creative office space for high-tech, media and start-up ventures on the west side of Los Angeles where Westside Pavilion is located. Demand for creative office space is strong, according to local office leasing brokers. Currently, more renovations and creative office conversions are in the pipeline than ground-up new office development, according to Michael Soto, research manager at real estate firm Transwestern. Of the 4.4 million square feet of office space on its way in Los Angeles, 2.6 million square feet is conversions, or 59%.

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ValueXpress Arranges $4,800,000 CMBS Conduit Loan for the Purchase of Parkland Town Center Located in Parkland, FL

ValueXpress has arranged a $4.8-million CMBS conduit loan for the purchase of a 34,930-square-foot office/retail center located in Parkland, Florida. The property was constructed in 2004 and is located 50 miles north of Miami and 15 miles west of Boca Raton in desirable Broward County.

Parkland Town Center, Parkland, FL

Parkland Town Center, Parkland, FL

The property is currently 96% occupied by 18 tenants. Many of the tenants are internet-resistant, service-oriented occupants as well as two restaurants. Significant leasing has occurred in the past two years as the market for local service tenants has increased dramatically. The property is located in proximity to residential demand generators, including several new 500-plus unit residential developments.

The purchaser was not a U.S. citizen, which limited financing options. However, non-U.S. citizens are active borrowers through CMBS, and this transaction was no exception. In addition, the purchaser owns many commercial properties in South America, but this was the first income-producing property purchase in the United States for this purchaser, which again was not an issue for a CMBS conduit loan.

“As this was the first CMBS transaction in the United States, we led the purchaser and his attorney step-by-step through the process,” commented Gary Unkel, Senior Loan Originator from ValueXpress who orchestrated the transaction. “Since we have provided CMBS conduit loans to over 100 “first timers,” we have developed a methodology to streamline the underwriting and legal process through education and instruction, which resulted in an on-time closing in accordance with the purchase contract.”

As a result, the purchaser was very pleased with the process and the CMBS conduit loan and is searching for additional properties to purchase and finance through ValueXpress. For your next retail transaction contact Gary at gunkel@valuexpress.com.

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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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