| There has been a lot of concern about the financial | | | | and bad economic times. |
| markets and where this economy is heading. | | | | Lender loan spreads are always a hot topic of |
| Financial and commercial real estate cycles always | | | | discussion in the real estate financial world. Loan |
| repeat themselves. The tricky part is that no one | | | | spreads will eventually correct themselves, as they |
| knows when. Trying to time the markets is a | | | | are starting to come off the spike from the |
| combination of a little bit of skill and a lot of luck. Real | | | | beginning of 2008. The shut down or decline of |
| estate borrowers that bear in mind the fundamentals | | | | business in the commercial mortgage-backed security |
| of underwriting when lenders have less stringent | | | | (CMBS) market has given banks the ability to |
| criteria will also prevail in tougher credit markets as | | | | generate more business and compete with the |
| we are experiencing today. | | | | permanent markets. Pricing spreads on loans that |
| There are a couple of key criteria to follow when | | | | used to be 100-150 basis points over the 10-yr |
| underwriting commercial real estate property and | | | | treasury are now priced with less concern of a |
| securing debt in any market. One of the first criteria | | | | spread but rather with "floor" rates implemented. |
| is the Debt Service Coverage Ratio (DSCR). Providing | | | | These floor rates are ranging between 5.75%-7.00%. |
| a coverage of 1.25-1.30x or better typically will put a | | | | Banks are more frequently competing with the |
| borrower in a comfortable cash flow position and in | | | | permanent market by offering customers a swap |
| return give a level of comfort to the lender. A | | | | product. The swap is a fixed rate product typically |
| second key component to any underwriting and | | | | priced off the LIBOR rate. This allows the bank to fix |
| especially critical in today's market is the Loan to | | | | the rate for the borrower and depending on where |
| Value or LTV of a particular project or portfolio of | | | | LIBOR rates go in the fixed rate period will determine |
| properties. In good times, this percentage can be | | | | whether or not it will cost to break the swap prior to |
| driven upwards towards 90-95% and in some cases | | | | maturity or if the bank will cut a check to the |
| 100%+. Today the permanent lending market is | | | | borrower. If the swap goes to term then the loan is |
| underwriting at a 60-65% LTV where banks today | | | | just paid in full at par. |
| are typically in the 70-75% range. The difference | | | | There are several other strategies and concepts that |
| between the permanent and bank debt loan to | | | | could be discussed in addition to the few mentioned |
| values are non-recourse vs. recourse debt. The lower | | | | above. The bottom line is keeping the basic |
| loan to value and strict DSCR requirements creates a | | | | fundamentals of underwriting all forms of commercial |
| borrowing environment where cash investors and | | | | real estate in mind when evaluating a transaction. Be |
| equity partners will hold a competitive advantage with | | | | patient and this economic market will certainly prove |
| current market opportunities. Keeping these two | | | | to be profitable in years to come through future |
| analysis criteria in mind when underwriting a potential | | | | economic cycles. |
| deal will always create a successful project in good | | | | |