CREFW-Summer2015

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CRE Finance World Summer 2015
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Clay Sublett. I see it generally as an opportunity. However, the
opportunities won’t come without significant expenditures of time
and energy as sponsors attempt to refinance loans with significant
issues. Many of those deals are highly leveraged and oftentimes in
tertiary markets. Some will be recapitalized, others will be acquired,
and some may have a component of debt forgiveness. For many
lenders the risk is that significant energy is spent on something
that may never come to fruition.
Larry Brown. The opportunity is that lenders can be more selective
as to what they lend on as maturity volume increases. This is an
improvement from the ‘there aren’t enough loans out there, and I’ve
got to do something aggressive to put some numbers up.’ The risk,
however, is that with so many lenders right now, is there a lender
for any and every loan? You sure hope not. The hope is that there’s
discipline in the market and that not all loans are going to make it.
A lot of the ‘good stuff’ has already been refinanced. It’s possible
the tail end of this wall may not be the prettiest.
Spencer Kagan. I would agree with that. I think a lot of people are
looking at this three-year window, but the reality is that some of
those loans, especially when you start getting in 2017, may need
to be extended. To date, that’s worked for a lot of loans — servicers
extended the loan out and it eventually got paid off. To the positive,
a lot of dollars have been raised to recap transactions that need
gap financing because the senior might be too high leverage for
today’s standard. Overall, I see the wall as more of an opportunity
than a risk, just be mindful of the fact that some loans are more
than likely to get extended out.
Lisa Pendergast. Is there a risk in extending these loans? No
one who would argue back in 2009, 2010, 2011 and 2012 that
loan extensions represented the best course of action in many
cases. During that period, the markets recovered nicely as
benchmark rates and cap rates declined and commercial real
estate became a real focus for value-minded investors. Going
forward, there’s less likelihood of substantial continued value
improvement, with an increase in cap rates likely to offset the
anticipated uptick in topline growth. It seems to me that there
is more risk in extension today than there was three or four
years ago.
Spencer Kagan. Certainly there’s a portion of the loans that should
take losses, but we still think that we’re in an economic environment
in which there is opportunity for substantial increases in top-line
growth. So give some of these properties more time to improve
their financial performance and they could build their way into
senior loans that make sense. At a minimum, extensions may bring
these loans back into a situation where there could be a recap with
gap financing that’s so common.
Brian Furlong. So who benefits from kicking the can down the
road? I think that that’s a very pertinent question. I was walking
through Stuy Town this weekend and they’ve done beautiful things
with it. I was thinking to myself what a food fight it would be if they
put it on the market today in this environment. But, somewhere the
cash register rings and the decision is made to kick that can down
the road. When the wall of maturities hits, who’s going to benefit
from kicking the can down the road and who will suffer?
Clay Sublett. You have someone still controlling the asset that
realizes they’re not going to get any money out and so they
have essentially given up hope. Extending it just runs the risk
of deterioration in your income trade.
How Concerned Should We Be About Refinance Risk on
Today’s Loans?
Lisa Pendergast. The lack of amortization in today’s deals and
the very real likelihood that mortgage rates are higher ten years
from now than they are today raise concerns about refinance
risk in CMBS 2.0/3.0 loans. What are your thoughts as lenders?
How do you protect?
Larry Brown. I echo your concern. I think investors should be very
wary of full-term IO and I believe significant focus should be placed
on LTV and LTC at maturity. In CMBS 1.0, the market drank itself
into believing that values would bail these loans out. And some
even point to the 2005 through 2007 vintages and suggest that
they actually did. But that happened only because interest rates
got so low just in time for this refinance wave. I would tell you that
there is every reason to be concerned about refinance risk 10
years from now based on where rates are and the amount of IO
getting done. I think that those lenders doing full-term IO at high
going-in LTVs should be penalized when it comes time to selling
those loans via the capital markets.
Stephanie Petosa. Given the uncertainty related to the direction
of interest rates and the general concern regarding the impact
of a macro event, do all of you perform refinance tests on newly
originated loans?
Larry Brown. Absolutely.
A Lender Roundtable: Real Talk from Real Lenders on Today’s Competitive Commercial and Multifamily Lending Environments
“I subscribe to the theory that the larger deals have the
better sponsors. BUT, to be very candid, these types of
loans are usually shopped to every lender on the Street,
so we often put these loan packages in the shredder,
because the “winner” has actually “lost” in terms of
what he has to stoop to from a credit standpoint to win
that deal .” Larry Brown