1 Navigating Today's Lending Market Tom Detienne David Woida Investors Community Bank NorthMarq Capital 860 N. Rapids Road 325 N. Corporate Drive, # 180.

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Navigating Today's Lending Market

Tom Detienne David WoidaInvestors Community Bank NorthMarq Capital860 N. Rapids Road 325 N. Corporate Drive, # 180Manitowoc, WI Brookfield, WI (920) 686-5626 (262) [email protected] [email protected]

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Agenda

Industry Summary Recent CMBS Market Slowdown Where are Rates? Underwriting Changes Examples Q & A

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Industry Summary• Expanded options for CRE finance

– Conventional Banks / Portfolio Lenders– Conduit Lenders (CMBS)– Insurance Companies– GSE’s (Fannie Mae and Freddie Mac)– Private Money Lenders– Mezzanine– Credit Tenant Lease (CTL)– Equity

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Key Differences Between Lenders

Banks – Portfolio Lender, flexible terms, good $’s, shorter terms, typically recourse

Conduits – Securitized Lender, little flexibility, aggressive terms

GSE’s (Freddie & Fannie) – Could be either portfolio or securitized, flexible terms, attractive rates

Life Companies – Portfolio Lender, very flexible, conservative terms

Private Money – Portfolio Lender, flexible and attractive terms, very selective on deals

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Holders of Commercial and Multifamily Mortgage Loans

Record Levels of Just Over $3.0 Trillion of CRE Debt Outstanding in 2007!

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CMBS Spreads

• 1998 – Russian Bond Crisis CMBS spreads jump from 150 to 300 basis points• Current Spreads - widened to all-time highs

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What’s Going On in the CMBS Market?

• Loss of Investor Confidence - Results in billions of dollars in Commercial Mortgages being held on books waiting for Investors

• Risk Adjustment – Increased spreads of over 100 basis points – 200-250 bps over 10-year Treasury– 130-180 bps over 10-year Swap Spread– Current Market Rate Re-established at 6.35%-6.85% (Fixed 10-year Loans)

• Borrower Impact – Underwriting Standards have tightened – Debt Cover Ratios remain at benchmark 1.20 – Interest-Only periods reduced or eliminated– Ultimate impact = lower loan proceeds in today’s market

• Competition - CMBS spread increases have made Portfolio Lenders (Life Companies, Fannie Mae & Freddie Mac) more competitive

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Federal Reserve

Not a Bailout: The Fed is in a position to defend a cut in the fed funds rate based on weak economic data as opposed to lowering the federal funds to address the liquidity and credit problems

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Yield CurveConstant Maturity Yield Curve

3.70

3.90

4.10

4.30

4.50

4.70

4.90

5.10

5.30

1 Year 2 Year 3 Year 5 Year 7 Year 10 Year 20 Year 30 Year

Maturity

Per

cen

t

9/18/2006 8/17/2007 7/18/2007 9/10/2007

Source: Federal Reserve

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How Did We Get Into This Mess?

A Combination of factors…

1. The Fixed Income Market has driven a majority of the spread widening

2. Unlike in the past, the CMBS Market itself has contributed to the recent risk adjustment

Fixed Income Drivers CMBS Drivers

• Sub-Prime Meltdown• Volatility in the Corporate Bond Market• Lack of Liquidity

• Deterioration in Loan Underwriting• Huge Issuance Calendar in Volatile Market• Lack of Liquidity

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Corporate Bond Spreads

Commercial Real Estate Impact: Life Companies primarily set interest rates

based on corporate bond yields, therefore mortgage spreads for this sector have

seen increases in the range of 30-60 basis points

Source: Federal Reserve

Moody's Corporate BondsSpread over 10-year Treasury

-

50

100

150

200

250

300

350

400

450

Jul-

01

No

v-01

Mar

-02

Jul-

02

No

v-02

Mar

-03

Jul-

03

No

v-03

Mar

-04

Jul-

04

No

v-04

Mar

-05

Jul-

05

No

v-05

Mar

-06

Jul-

06

No

v-06

Mar

-07

Jul-

07

Basis Points

Aaa

Baa

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CMBS Outlook

Improved Long-Term Outlook

• Commercial Real Estate Fundamentals Remain Solid

– Rental growth still being seen in many markets

– Higher cost of building helps to moderate supply

– Job growth remains stable

– Companies strong balance sheets

• CMBS Community Responded Proactively to the Situation

– Significantly more conservative loan underwriting

– Result is lower supply in the fourth quarter

Current Spreads offer tremendous value – increasing future demand for Commercial Mortgage Backed Securities

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Capitalization Rates

Cap Rates

Apt

Industrial

Office

Retail

Mtg rate*

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

1 2 3 4 1 2 3 4 1 2 3 4 1 2

2004 2005 2006 2007

* 7 to 10-yr fixed rate conduit loans for properties 5 mil+

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Where are Spreads Today

Property Type2006

Spread (1) CMBS GSE Life Bank (2)

Anchored Retail 100 200 N/A 160 200-300

Un-Anchored Retail 135 235 N/A 170 200-300

Multi-Tenant Office 118 220 N/A 165 200-300

Medical Office 120 220 N/A 175 200-300

Multi-Tenant Bulk Warehouse

100 200 N/A 165 200-300

Single Tenant Bulk Warehouse (non credit)

125 225 N/A 180 200-300

Multi-Family (Class A) 105 200 140-150 150-160 200-300

1. September 20062. Indexed to LIBOR Swaps vs. Treasuries

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How Does All This Affect Underwriting

• Cash flow (Debt Service Coverage)• Leverage (Loan-to-value)• Interest only periods• Reserves / Escrows• Costs of issuance• Personal guarantees• Prepayment penalties • Assumptions

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EXAMPLES / Q&A

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Sources

• MBA Website

• Federal Reserve

• Real Capital Analytics

• REIS