ValueXpress Obtains $6.65-Million CMBS Conduit Loan for a Single-Tenant Industrial Flex Building

ValueXpress obtained a $6,650,000 first-mortgage CMBS conduit loan that was utilized to refinance an 82,280-square-foot single-tenant, industrial flex building located in St. Louis, Missouri. The building is 100% occupied and leased to Nooter Construction Company. The transaction refinanced a maturing CMBS conduit loan.

Single Tenant Injudstrial Flex Building St Louis MO

The Sponsor approached ValueXpress seeking a solution to the difficult challenge of refinancing a single-tenant asset with only five years remaining on its lease. “The Sponsor had contemplated entering into negotiation with their tenant to extend the lease early at a reduced rent,” commented Dennis Suh, Senior Vice President at ValueXpress. “However, having successfully refinanced other single-tenant assets with similar hurdles I advised against it, ultimately providing a refinance proposal that did not require a lease extension.”

“We have had excellent success working with Sponsors to refinance single-tenant asset deals with lease terms that expire early in the loan term,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “The effort requires substantial diligence on how “mission critical” the location is to the tenant and providing a compelling case to the chief credit officer that the tenant will not move at lease expiration.”

“This is the second high-quality industrial asset that I have closed in recent months,” commented Suh. “In each case I was able to confirm that the tenant was credit-worthy despite a lack of corporate financial statements and that the location was critical to business operations.”

The loan transaction was structured as a 10-year term based on a 25-year amortization schedule. Loan-to-value was 65% and the property provides 1.70x net cash flow DSCR on actual income and expenses.

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7.21.17: “Loan Sizing” Accurately Determines Loan Amounts for CMBS Conduit Loans …

We are in the business of providing loan quotes for CMBS conduit loans. To do this requires loan sizing. Here’s the detailed method we use:

CMBS conduit loans are based on the amount of property cash flow. To determine the maximum loan amount that can be offered to a borrower, CMBS loan underwriters perform cash flow analysis on the property. This is often referred to as “loan sizing.”

ValueXpress has sophisticated loan sizing models for each asset type that can be financed in CMBS (multifamily, commercial, hospitality and self-storage) in which market capitalization rates, minimum debt-service coverage and maximum loan-to-values (LTV) for each asset type are built into our models. The models also have CMBS industry-standard vacancy factors, management fees and replacement reserves built in.

“The results produced by our loan sizing models are very accurate and highly reliable in determining the maximum loan amount that can be offered to a borrower,” commented Michael D. Sneden, Executive Vice President at ValueXpress.

“But loan sizing takes a lot of time,” notes Jim Brett, head of underwriting at ValueXpress. “For a commercial property, I have to input the property rent roll including all the lease terms. Plus I need to input the most recent 12 months’ income and expenses for the property and the prior 3 years as well. This can take two to three hours.”

Borrowers sometime won’t wait or cannot readily provide all the data to perform detailed loan sizing. Plus, we don’t want to spend the time sizing deals that will not reach the requested loan amount, so we use the “debt yield” method as an alternative to give a borrower quick CMBS loan terms.

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7.18.17: … While Using Debt Yield Allows for a Quick Size of a CMBS Conduit Loan

When time does not permit for a detailed loan sizing analysis, a reasonably accurate shortcut method can roughly determine the maximum CMBS conduit loan amount that can be offered to a borrower. The method utilizes a metric called “debt yield,” which is defined as the property net cash flow for the most recent 12 months (including vacancy, management fees and replacement reserves) divided by the proposed loan amount, expressed as a percentage.

For example, if a borrower on a retail center says his most recent net cash flow after expenses is $1 million including a management fee and replacement reserve and the loan request is $10 million, then the debt yield is 10% ($1,000,000 divided by $10,000,000). The result can be compared with the minimum debt yield required for each asset type. If the calculated debt yield exceeds the minimum debt yield, preliminarily, the loan amount is acceptable.

The following are the minimum debt yields for each eligible asset type financed in CMBS:



Asset Type


Debt Yield

Multifamily/Manufactured Housing 8.5%  
Retail 8.5%  
Office 8.5%  
Industrial 8.5%  
Self-storage 9.0%  
Hotel 12.0%  

More important, the debt yield formula can be reworked to indicate the loan amount. Suppose the same borrower in the example above said, “I have net cash flow after expenses of $1 million including a management fee and replacement reserve. How much can you lend me?” The calculation using debt yield would look like this: $1,000,000 (net cash flow) divided by 8.5% (the minimum debt yield for retail properties) equals $11,750,000 (rounded). So the borrower can be offered $11,750,000, which would meet minimum debt-service coverage and maximum loan-to-value requirements.

I often get a skeptical look from folks who are unsure of the accuracy of the debt yield method: What about market cap rates, debt-service coverage, appraised value and other metrics? How can all of these be incorporated into one metric? Well, it simply works.



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7.12.17: Document All Tank Removals Please

We recently had to work through an environmental issue on a transaction because of shoddy work by a firm that completed the prior Phase I Environmental Site Assessment (ESA) and lack of documentation on the removal of an underground storage tank that occurred prior to 1992.

The story starts with the fire department. Its records indicated up to four underground storage tanks (USTs) were installed on the subject property at the time of development in 1969. An ESA completed in 2000 stated that on the date of inspection by the ESA firm no USTs were identified on the property. This was inconsistent with the fire department data. Therefore, the ESA firm returned to the site with a metal detector to determine the potential locations of the tanks. No metal objects were found. The ESA firm noted that the building superintendent for the property indicated all of the tanks were removed prior to 1992. No documentation of these removals was located by the ESA firm during the course of the Phase I investigation.

You cannot close on a CMBS conduit loan that lacks proper documentation. It must be clear in the documentation that soil contamination did not occur. It seems clear USTs were installed and subsequently removed. The ESA firm should have flagged the lack of documentation as a “Recognized Environmental Concern” (REC) and required further investigation and testing.

Our borrower had two choices:

  1. Phase II Investigation: The use of ground penetrating radar would identify the general locations of the former tanks and confirm they were actually removed. Second, soil borings in the area(s) of the former tanks would be required, which would take approximately 20 days.
  2. Environmental Insurance: We reached out to the insurance consultant working on the transaction for a quote to insure over the risk.

In the end, we received a very competitive quote for environmental insurance and closed after binding coverage. The moral of the story is to always document any tank removal. Undocumented removals will always be flagged as a REC in CMBS and will have to be mitigated before the transaction can close.

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ValueXpress Arranges $2,400,000 CMBS Conduit Loan for the Purchase of a 68-Unit Multifamily Apartment Complex in Hartford, CT

ValueXpress has arranged a $2.4-million CMBS conduit loan for the purchase of a 68-unit apartment complex located in Hartford, Connecticut for $4.0 million. The purchase was part of an IRS Section 1031 tax exchange for the buyer. The property consists of five four-story brick buildings constructed in the 1960s. In 2000, the property was awarded $435,000 in tax credits under Section 42 of the IRS tax code. This was utilized to complete a substantial rehabilitation in exchange for the property providing units and rental rates to low- and moderate-income tenants for a period of 15 years. The compliance period ended in 2016 and the owner elected to sell the property since rental restrictions are no longer required at the property.

The transaction was challenging in that some oil tanks were removed from the property prior to 1992 without any documentation. As a result, the environmental firm called for a Phase II subsurface investigation, including a ground penetrating radar (GPR) survey of the property as well as subsurface sampling in areas where former tanks were suspected to have been present. The seller did not want the buyer to investigate the property, but he would not do the investigation himself. The issue was solved with environmental insurance.

The transaction was structured with a 10-year fixed-rate loan term that is payable based on a 30-year amortization schedule.

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7.7.17: Pace of CMBS Conduit Loan Originations on Par with a Year Earlier

CMBS conduit loan originations at midyear are on pace with a year earlier, as measured by CMBS securities issuance. CMBS conduit issuance as of June 30, 2017 totaled $38.8 billion compared with $30.7 billion a year earlier. After a slow start to 2017, volume picked up in the second quarter. CMBS conduit issuance of $15.2 billion in the first quarter of 2017 fell short of the $19.2 billion for the same period in 2016. But $23.5 billion of issuance in the second quarter of 2017 easily surpassed the $12.6 billion of issuance in the prior year. Industry professionals have predicted volume of $65-$70 billion for full-year 2017, which now appears to be easily achievable. Expectations now are that last year’s total volume of roughly $75 billion is within reach.

The strength in new CMBS originations stems from a variety of factors. CMBS issuers are now comfortable with risk-retention rules, having successfully sold CMBS using all three methods of risk retention — vertical, horizontal and L-shaped — without any method having much impact on bond prices. As a result, CMBS bond spreads have been stable, with senior AAA-rated CMBS market spreads holding steady below swaps plus 100 basis points (bp) for lower leverage deals and roughly swaps plus 100 bp for higher leverage deals.

Indications are that third-quarter issuance will be strong as well. According to Commercial Mortgage Alert, $25.9 billion in transactions have been identified in the pipeline for the third quarter.

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7.3.17: Gross Profit Margins Now Transparent for CMBS Issues

Risk-retention rules have made the accurate calculation of gross profit margins for CMBS issues possible. Although the results do not include transaction expenses, the gross profit indications are more accurate than previous methods to “reverse engineer” the pricing results of the public bonds and estimates for the pricing of the non-public bonds.

Risk-retention regulations require new disclosures that make the gross profit margin calculation relatively simple for deals that utilize two of the three options under risk-retention rules – the “horizontal strip” structure and the “L-shaped strip” structure. Under these two structures, the issuer must disclose the amount of bonds retained, and this allows for the calculation of the gross profit margin. For example, if an issuer sells $1 billion of CMBS for $40 million more than the $1-billion face amount, the gross profit margin would be 4% ($40 million divided by $1 billion).

The determination of net profit margin is trickier. Deal expenses need to be subtracted from the gross profit margin. These expenses include fees paid to service providers, including legal fees and fees paid to rating agencies. Some loan contributors are required to pay fees to have bonds distributed to investors. In general, it is estimated that these fees will total roughly 0.5% of the deal amount. In addition, it is even harder to determine the cost of any hedging efforts.

Excluding any hedging impact and assuming transaction costs of 0.5%, estimated net profit margin for deals that utilized the “horizontal strip” structure and the “L-shaped strip” structure ranged from 2.04% to 6.10% for the first half of 2017, well in excess of the target margin of 2.0% expected by issuers.

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