Real Estate Finance 301 October 26, 2011 Tim Wright, Senior Managing Director
Dec 23, 2014
Real Estate Finance 301October 26, 2011
Tim Wright,Senior Managing Director
Page 2HFF, L.P.
Source: HFF
Life Companies• 50% to 70% LTV (more going to 75% for multi-housing and higher quality deals)• Life Companies do have plenty of money beyond 10 year terms up to 30 years.• Interest rate floors have been instituted by most firms and are typically 4.00 to 4.50%. There
are some that will break 4.00% and stated floors for low leverage and shorter terms (7 yrs or less) and spreads are 200-250 bp with floors (3.50% to 4.00%).
• 25 to 30 Yr. Amort. (low leverage loans – some will quote full term I/O)• DSCR – 1.25x to 1.35x • Must increase allocation for next year and hit target for 2011
CMBS Aggregators• Up to 75% - May go higher as the focus is really on debt yields of <9% to 10% plus they now
can offer mezz to get them up to 85% LTV. • Up to 10 Years (5 to 10 years are typical - some are now offering 7 yrs but at higher spreads) • 30 Yr. Amort. (will offer 1 to 5 yrs. of interest only with LTVs of 65% or lower to win business)• CMBS spreads are 325-350 bp with all-in rates between 5.5% (best deals) - 6.0% – Pricing on 5
and 7 year deals is higher but still results in the same rate range.• DSCR – 1.25x to 1.35x
Debt Market Snapshot – Fall 2011
Page 3HFF, L.P.
Mortgage REITs and Debt Funds• 75% to 80%• Up to 10 Years• 30 Year Amort (will consider some 1 to 3 years of I/O)• Pricing 6.0% to 10% - want fees of 50 bps to 1% up-front as well as exit fees of 50 bps to 1%• DSCR – 1.00x to 1.25x• Good news money or structure
Commercial Banks – Bridge Lenders• 60% to 75% non-recourse in the 4% to 5% floating/fixed for 2 to 5 years for either stabilized
and/or transitional assets• Low Libor floaters popular with institutional buyers 50-60% LTV
Agencies• 70% to 80% LTV (lower LTVs & high quality assets with strong sponsors will break rates
below)• Requires 1.25x-1.30x DSCR (1.30x required for cash out)• Cheapest fixed rate spreads are Freddie CME execution• Freddie portfolio execution is roughly 50 bps higher than CME 4.25 vs 4.75%• Fannie roughly 15 bps higher than Freddie CME• Both compete well with each other buy losing some market share on high quality assets
Source: HFF
Debt Market Snapshot – Fall 2011
Page 4HFF, L.P.
Project: Circa 37 Apartments
Tactics:• Maximize cheaper first lien dollars, while still leaving enough mezz to be interesting to
mezz lender• Demonstrate a sensitized exit scenario showing the mezz could be readily taken out with a
permanent loan.
Issues:• Negotiating intercreditor such reporting and control could be done efficiently• Ability to exit out of Mezz early as possible while offering investor a reasonable multiple.
Current Trends:• More non-recourse debt available at higher leverage today, but still debt yield driven• Mezz money has come down in pricing • Structure becoming more common again in this cycle so pre-negotiated intercreditor
agreements are becoming easier to find.
Description: 306 Unit Class A Multi-Family San Diego
Total Budget: $72MM - $235,000 per unit Assignment: Arrange maximum leverage non-recourse
construction financing
Challenges: Limited number of banks offering non- recourse and those that were lower leveraged
Solution: Engineer a construction facility with a mezzanine piece to get to 80% LTV
Page 5HFF, L.P.
Project: Sheraton LAX
Tactics:• Demonstrate a very low exposure per key to Lender.• Touring the asset was a must because quality of the asset relative to peer group was readily
apparent.• Review of historical numbers reflected hotels performance is strong market and budgeted numbers
were inside of peak.• Articulate clear business strategy to modify demand mix to push rate (less crew, new corporate
contracts) to fall in line with the peer group.
Issues:• EBITA reflected operations at very high occupancy (90% plus)- lenders wanted to underwrite 80% or
less- exacerbating the sizing issue.• Airport sub-market perceived as limited with respect to rate growth.
Current Trends:• Bank lenders still looking for 11 to 12% debt yields on trailing 12 and properties with consistent
history.• Transitional properties remain difficult to finance at low life or bank rates (province of the debt
funds)- 4% vs. 7% plus• CMBS not competitive with life co’s or banks but provide reasonable fixed rate alternative again.
Description: 802 Key Full Service Hotel
Financing: $47.5MM
Assignment: Refinance existing loan with flexible, low coupon, interest only debt
Challenges: • Hotel recovering from downturn and T-12
underwriting did not support requested financing.• Hotel running at very high occupancy but needed to
push rate.Solution: • Given tangible improvement in operating results, lender was able to provide aggressive initial
funding loan and offer a compelling earn out that could be realized in as little as 6 months. Major bank financed at low spread over LIBOR for two years with two, one year extensions.
ULI Fall Meeting 2011Real Estate Finance 301
October 26, 2011
Gary GowdyManaging Director, UBS Global Asset Management, Real Estate
7
Gross assets – USD 16.1 billion
Overview of UBS Global Real Estate funds in the US
Assets by geographic region(USD in millions)
Assets by property type(USD in millions)
$567 4%
$1,380 10%
$838 6%
$2,694 18%
$4,147 28%
$5,025 34% Apartments
Office
Retail
Hotel
Industrial
FarmlandWest
4,98735%
South2,44717%
Midwest1, 47411%
East5,17737%
8
· San Diego, Class A townhome apartments
· TPI construction/permanent loan
· $40 million investment (90% LTV, $290 thousand per unit)
Participating mortgage structure
6.0%Interest
50% of remaining cash flow
8.0% IRR hurdleplus 50%of appreciation
=++ Total return
to TPI
Illustrative example
San Diego, CaliforniaFirst mortgage with sharing in cash flow and appreciation
9
Chicago Industrial
10
Meridian at Eisenhower StationAlexandria, Virginia
11
Hilton Carlsbad Oceanfront Resort & SpaCarlsbad, CA
12
Wythe ConfectioneryBrooklyn, New York
13
2011 ULI Fall Meeting
Douglas D. O’Donnell Los Angeles, CA
October 25-28th, 2011
Talking Points
14
1. Speculative
2. Value Added
3. Build To Suits
4. CORE
Equity & Debt For Industrial Projects
Speculative Projects
15
(Intentionally Blank)
Value Added Buildings
16
• 60% LTV
• 2 Year Term
• Tough Underwriting
• Recourse (LIBOR + 300)
• Non Recourse (6-8%)
• Buildings Bought Below
Replacement
• Pension Funds, REIT’s,
Advisors, Private Money
• +/- 20% Levered IRR’s
• 10% Co-Investment
EquityDebt
Build To Suits
17
• 70% LTC
• 2 Year Term
• LIBOR + 275 BPS (2.99%)
• Recourse
• Major Banks
• Strong Tenant Required
Debt
• Pension Funds, REIT’s,
Advisors, Private Money
• +/- 15% Levered IRR’s
Equity
CORE Assets
18
• 65% LTV
• Short & Long Term
Available
• 4.5-5% 10 Year Fixed
• Non-Recourse
• Life Insurance Companies,
Banks & CMBS
• Pension Funds, REIT’s,
Advisors, Private Money
• +/- 15% Levered IRR’s
EquityDebt
Real Estate Finance 301
Ken Kahan, Principal
California Landmark
Fall 2011
Fall 2005
For Sale
1817 Prosser
1303 Wellesley
Rent vs Buy FHA 30 Yr Fix 30 Yr Fix 7/1 arm
Princ. & Interest Princ. & Interest Interest Only
Rate 4.125% 4.375% 3.875%
Points 0.000 0.000 0.000
Down Payment % 3.50% 20.00% 20.00%
Sales Price $ 500,000 $ 500,000 $ 500,000
Down Payment $ 17,500 $ 100,000 $ 100,000
Loan Amount $ 482,500 $ 400,000 $ 400,000
Base Loan + MIP $ 487,325
Monthly Payment Information
Principal and/or Interest $ 2,362 $ 1,997 $ 1,292
Property Taxes $ 521 $ 521 $ 521
Mortgage Insurance Premium $ 467 $ - $ -
Ho-6 Insurance $ 40 $ 40 $ 40
HOA Dues $ 325 $ 325 $ 325
Total Payment $ 3,715 $ 2,883 $ 2,178
Estimated Tax Savings (35% bracket) $ (769) $ (693) $ (634)
Amortization Savings $ (703) $ (539) $ -
Estimated Economic Cost $ 2,243 $ 1,651 $ 1,543
Rent Equivalent $ 3,200 $ 3,200 $ 3,200
Savings via Ownership $ 957 $ 1,549 $ 1,657
Jerry RappaportCHR Investors
Opportunistic Distressed Recapitalization
Property Description
Opportunity
• Market: 86% occupied• 30,000 SF tenant signed at closing
Highlights
• Developer imputed equity disappears• Developer funds 10% of new equity• JV receives 20% after 15%
Southpoint Executive CenterMaitland Green I & IIOrlando, FL
• Three suburban office buildings; 330,000 SF• 50% occupied• Purchase price $55 PSF• Capital reserve $40 PSF• 50% of replacement cost
Property Description
Property: 11-story Class A office asset built in 2010 totaling 281,623 SF Pricing: $27.5M ($98 PSF) – 30% of development costs $43M ($152 PSF) – Projected all-in cost - 50% of replacement cost
Opportunity
• Purchased $56 million loan for $27.5 million• Signed 100,000 SF lease at closing• Provided $7 million in transaction costs at closing
Highlights
• Developer/Property manager kept in place• No initial debt recapture to Developer• 20% after 15% preferred IRR to equity; 20% after unlevered 12%
Opportunistic Distressed RecapitalizationOne Park Square at
DoralDoral, FL
Value-Add AcquisitionGut Renovation of Failed
Condo
Property Description
Property:
Original Developer Basis
Acquisition Cost: $120,000,000Capital Improvements: 45,000,000 Total: $165,000,000
Project Capitalization
Alden Tower at Longwood TowersBrookline, MA
• Unit Count: 86 of 260 in three building complex• Size: 90,000 SF
CHR Purchase Price: $18,000,000 Debt $18 MM
Renovations: 12,000,000 Dev. Equity $ 6 MM
Total Cost: $30,000,000 Mezzanine $ 6 MM
$6.0 million mezzanine at 10% current pay Total $ 30 MM
(60-80% of capital stack)
Alden Tower Basis: $55 million
Value-Add AcquisitionInfill Development
Property Description
Property:
Project Costs
Acquisition: $52,400,000New Construction: 8,400,000Capital Improvement Reserve: 2,200,000 Total $63,000,000
Sources
Norwest WoodsNorwood, MA
• Original units: 322• Phase 1: 45 units• Infill Units: 54
Debt: $38,100,000
Construction Debt: 8,400,000
Investor Equity: 8,250,000
CHR Subordinated Equity: 8,250,000
Total $63,000,000
Equi
ty C
hara
cter
istic
s
20% after 12%
Evolved to 50% after 8%
20% after 10%
50% after 17%
JVTe
rms
Equity Terms: 2006 vs. 2012
2006 2012 Debt replaced equity Value determined price
Minimum leverage No value add debt Cost equals value
Equity chasing deals Equity doesn’t want JV headache
Significant predevelopment dollars available/at risk dollars shared
Risk averse—all risk must be wrung out of deal
Trees grow to the sky—don’t want to lose opportunity
Lack of trust in projections
Guarantees by equity source are not real equity—price to play the game/access deal
No equity guarantees available
0-5% co-invest 10-20% co-invest
Dis
creti
on/
Appr
oval
s 2006 2012 Sponsor had leverage
Joint approval
Buy/sells
Hope certificate to Sponsor
Equity controls decisions
Avoid legal complications
Co-In
vest
Opportunity funds and value-add funds
Lehman leverage/bifurcated tranches of conduit debt/equity
85-97% leverage
Non-recourse debt
Fund of Funds to local operators/funds
Investment advisors of HNW family offices
65-75% leverage
RECOURSE debtSour
ce o
f Eq
uity
/Cap
ital
Stac
ksEquity Terms: 2006 vs. 2012