Commercial Real Estate Financing

The natural Commercial Real Estate financing cycle has changed. The majority of acquisition loans are not converting to construction loans and pre-sale and pre-leasing requirements are not being met. Construction loans are not performing as planned and for-sale condo units are not closing – requiring longer saturation. Without access to take out financing and long term financing, developers are leaving the banks holding the bag. There are no capital markets to support long term debt. The CMBS market has disappeared. Additionally, a rising rate environment makes fixed-rate, long-term financing risky.

From a lenders perspective, this environment has increased regulatory demands for banks – both internally and externally from their boards and bank regulators. Banks are being forced to increase reserves, hire asset professionals, and legal counsel as more and more commercial loans non-perform. These factors all serve to reduce liquidity and shrink lender's access to capital. Furthermore, banks are not well suited to dispose of assets on a large scale, which will lead to further downward pressure on the price of commercial real estate assets.

From a developer's perspective, conventional commercial stabilization financing is gone. There still exists hedge fund and private money financing, however, the cost of such financing often destroys the economic viability of the project. Developer's have little choice but to sell the project at a discount, or return the project to the bank. Again, placing downward pressure on the price of commercial real estate assets.

Given this environment, how do lenders and developers survive? Banks must maintain liquidity and salvage their asset base. Developers need to get out of their projects and minimize their loss. Currently, there are still too many developers holding on too long, and the banks are ill equipped to liquidate their assets quickly. In this environment, reacting slowly means failure. Whether a lender or developer, bring your asset to market quickly, price your asset correctly and get what you can for it. The market has changed, banks and developers are price takers. Liquid buyers have much more control. Those that will survive and succeed are those that can quickly find a source, or sources, of liquid buyers for their commercial real estate assets.

For more information contact Chris at christofer.pacheco@gmail.com .

Selling Commercial Real Estate in a Declining Market

Too often I watch sellers follow the market all way down in a dropping market. Sellers get proud and often think they are still holding the winning lottery ticket. As in all business endeavors, sellers need to have sell strategy. Most sellers want to realize property appreciation, but may or may not need to cash out immediately.

In the current market, many sellers need to cash out. If that's the case listen to the market - expecting a 7 CAP in a 9 CAP market is unreasonable, even if you have the most credit worthy tenant in the world. While you bring your credit tenant property to market at a 7 CAP, your competition is bringing the same credit tenant property at a 9 CAP - the result, investors take the higher return and the you're still holding your property. At this point most sellers, drop their price to an 8 CAP while the market is moving to a 9.25 CAP - same result. The consequence? Those developers that sold have capital to move on to the next project. The developer that didn't sell is scrambling to find a refinance in a no-credit environment, and end up giving the property back to the bank.

The second scenario for sellers that want to lock in their appreciation and don't need immediate cash. This strategy usually works best on completed, leased-up developments that are generating a return, but can work on properties in all stages of development. Sellers, you can't get credit in this environment and most of your potential buyers can't either. Get creative, consider seller financing, lease with purchase options, mortgage wraps - cover your payments, take an income stream and agree to cash out when the credit market comes back.

It all boils down to strategy - determine your needs, why are you selling the property, and what conditions can you live with? Make no mistake this is tough market, but there is plenty of opportunity in this market - cash and creativity are king. If you have cash, you're fine. If you don't have the cash, get creative. Those that are realistic and creative will and thrive in this market.

For more information contact Chris at christofer.pacheco@gmail.com.