Wall St. bankers: new kids on the block in '94

Real Estate Weekly, May 18, 1994 by Robert P. Corso

The activity in real estate for the balance of 1994 and beyond should be brisk, as investors look at properties with significant upside potential. This active pace will be driven and maintained by the availability of both debt and equity capital.

Today's financial markets are being propelled by sophisticated computer programs and the explosion of information technology, which allows investors access to worldwide capital markets as well as instantaneous opportunities for their funding needs. This has changed the traditional banking industrY as we have known it for the past 25 years.

Previously, owners looked to banks, thrift institutions, pension funds and insurance companies for their financing. Now in 1994, investment bankers and Wall Street are providing the funds to re-finance current loans and acquisitions through the securitization process, whereby traditional loans are converted into more liquid and marketable securities. This changes the higher risk and diminishing returns of traditional lending to one of lower risk and higher return.

One of the problems with this form of financing was the securities were usually in pools of at least $100 million and up, which left the owner of one or two properties with nowhere to go. Now a different form of securitization has come along to address this situation, known as the Real Estate Mortgage Investment Conduits (REMICs). When the target dollar amount is reached, the portfolio is then securitized under a single placement. This allows for the financing of small properties, from $1 million to $5 million.

The present volume of loans being securitized is very strong and it is reported there is a 6 month backlog at the agencies rating these securities. The Commercial Mortgage Backed Securities (CMBS) is without a doubt the fastest growing, most promising sector of the real estate financing market. It is anticipated that as much as 40 Percent of multi-family and 10 percent of non-residential mortgage loans will be securitized by the end of the decade.

For fixed income investors, it presents a growing opportunity to place capital at higher yields than can he gotten on other similar types of investments with an opportunity for diversification.

Properties Bankable in 1994: $1 Million to $50 Million Range

* Properties occupied by credit tenants rated BBB or higher with triple net, long-term leases.

* Underlying co-ops with good sell-out and positive cash-flow.

* Multi-family properties: All types in good locations.

* Retail: Anchored by food/drug outlets, 100,000 to 500,000 square feet.

* Industrial: In established parks with some office space.

* Hotels: Class A affiliated with successful franchises and good balance sheets.

* Office/Loft with good occupancy rate and upside potential.

* User properties with owners of companies with excellent financial track records.

For owners and developers of financially sound, quality real estate, there will be ample funds readily available throughout 1994 from traditional lenders as well as Wall Street.

As always, if the numbers fly, so will the funds.

These conduits are formed with a sponsor funding the mortgage loan on a loan by loan basis according to predetermined underwriting guidelines involving similar type properties.