Changing capital market reveals few vehicles

Real Estate Weekly, Sept 22, 1993 by Therese Fitzgerald

"We really have a change in the dynamics of the real estate capital markets," Carl Kane, managing director, Kenneth Leventhal & Company, told a gathering of real estate professionals last week.

On the equity side, Kane told the members of the Young Men's/Women's Real Estate Association (YM/WREA), there are real estate investment trusts (REITs), with $3 billion of activity last year on a base of $12 billion.

As for debt financing and refinancing, a not-so-new vehicle is emerging as one of the few alternatives. "Commercial mortgage-backed securities," Kane said, have been around for a decade, but, during the 80's. there were so many other alternatives. Savings and loans, foreign banks, syndicators and life insurance companies threw "tons of money " at debt financing, Kane said.

Today, he said, mortgage-backed securities are the only device that is used with any frequency for income-producing investments.

In 1990, Kane said, commercial mortgage securities accounted for $1.5 billion in debt capital; $4.5 billion in 1991; and $16.7 billion in 1992. (Kenneth Leventhal has tracked this activity in a report available from its New York office.)

While much of this activity has been dominated by resolution trust corporation (RTC) deals - $13 billion of the $16.7 billion in 1992, Kane said, the financing tool is growing in acceptance.

"It's a business, a market that will continue to grow," he said.

And the ground today is fertile. First, he said, interest rates are currently low. Second, regulatory reform is causing insurance companies, great providers of debt financing in the last decade, to rethink their portfolios. Under regulations issued by the National Association of Insurance Companies, insurers will face penalties for the amount of risk-based capital they carry.

"You're going to see some real movement toward risk-based capital moves," he said. "They're going to force action. They are going to force disposition. "

Kane offered some recent examples where commercial mortgage securities played a role. An already debt-burdened New York City owner of 71 multi-family buildings needed financing for 20 of his properties. Via debt security, he was able to raise $144 million in new capital. The commercial security was then taken back by the bank as representation because the owner could not provide collateral.

In the recent purchase of 35 properties and mortgages Quantum Realty Fund, a fund created by George Soros and managed by Paul Reichman, the investors were given an advance of $353 million from Kidder Peabody in the form of a commercial mortgage security.

And the purchase of a package of hotel properties, he said, is being financed through commercial mortgage securities. In this case, the device is being used as a bridge to buy debt out of an existing institution.

For small borrowers, Kane said, mortgage conduits are being used. Loans are closed on a firm basis and they are later securitized.