Capital markets a source for dept and equity

Real Estate Weekly, March 15, 2000

The following are excerpts from a recent presentation entitled "Shopping the Capital Markets: The Leading Sources of Debt and Equity for Investment, Development and Turnaround Deals". The panel discussion took place at the New Jersey Opportunities Conference.

The panel was moderated by Bruce Schonbraun, managing partner at Schonbraun Safris McCann Bekritsky & Co. Participants included Sanford S. Herrick, principal of SWH Funding Corp.; Jim Poole, president & CEO, Poole & Company; Jonathan Kohan, vice president of Bank of America Commercial Finance; Ed Brown, principal of Devon Realty Capital/Prudential Mortgage; and Chris Terlizzi, executive vice president of Summit Bank.

Setting the backdrop for a sound financing climate

From Bruce Schonbraun

With controlled new construction, the Jersey market remains strong. Private groups, opportunity funds and joint ventures are taking up the slack left by REITs. Capital is available, but a more cautious environment sets the backdrop for monitoring of risk and rewards. The capital markets have been volatile over the past 18 months. The big change involves the cost of capitalization to a greater extent than ever, due to macroeconomics rather than real estate. To evaluate risks and rewards, one needs to understand the financial vehicles and the volatility of the vehicles. For example, commercial mortgage backed securities (CMBS), offering fixed rate debt financing, will remain a source of debt; however, public markets are bringing volatility to this segment of the market.

Where is lending today and where is the environment headed?

From Jim Poole

The investment market is raising cap rates for real estate. Insurance companies are aggressively lending but CMBS' are softening. Commercial banks remain active but restrictive. Borrowers are looking for creative financing packages.

Is the environment more cautious in terms of underwriting?

From Chris Terlizzi

Borrowers know it is a borrower's market. Bankers view this with a healthy dose of respect - we don't know where the market is headed. But with faith in the tried and true fundamentals, we watch leverage and debt service coverage.

What is happening in the CMBS market?

From Jonathan Kohan

Volume was off industry wide 37 percent for the year and we continue to see maturation of the CMBS market. It's not a borrowers market any longer. Nationally, there are fissures, which are cause for concern. Not every loan is a CMBS loan structure. Issuers are being driven by big bond buyers who have more say on the collateral pool. The business continues to be consolidating.

What is happening to the opportunistic and hedge fund turnaround markets of the world?

From Sandy Herrick

We continue to address deals with problems, but we see the upside of them. In the last 16 months, we have seen less ability to create value and buy better as compared with 1991, when there were obvious opportunities. Today, finding properties and deals where we can create value with liquidity is much harder. Our firm completed $73 million in such activity in 1998, and since 1991 we've done 47 deals with about $165 million of opportunistic loans, helping clients to reposition themselves and/or their properties. It's not an abyss; however, our business has become more transactional. For entity level financing, we can find money on the street.

Additional key points:

At SWH, 75 percent of business has involved 95 percent or more of the acquisition cost, lending up to 130 percent of acquisition costs if potential to create value exists. SWH focuses on distance to liquidity, and on how long before the deal will be ready for conventional funding. The market is at the end of a long cycle and every opportunity must be looked at carefully. Some markets are soft - hospitality and assisted living with returns that are un-leveraged are egregious.