Meridian Capital Group announced today that its Institutional Investment Sales Group, led by Helen Hwang, has advised Arnold Simon of 12 Broadway Realty LLC in the sale of 60 East 12th Street to a partnership between Slate Property Group and Alcion Ventures for $107.5 million. The buyers financed their acquisition with a loan from Heitman, which was arranged by a Meridian team led by Rael Gervis.

Completed in the 1960s, 60 East 12th Street contains 133 residential units and 5,100 square feet of ground-level retail space, all of which is serviced by an attached parking garage. Located at the southeast corner of Broadway and East 12th Street, the 13-story, trophy-quality multifamily property is located in one of the most desirable neighborhoods in the city. The property’s unique location, nestled between Union Square and Greenwich Village, offers an unmatched living experience as a result of countless lifestyle amenities in the nearby area and convenient access to points throughout New York City.

A Meridian team of Helen Hwang, Karen Wiedenmann, Brian Szczapa, Ernie Nichols, and Nicholas Dailey represented the seller in the off-market transaction.

“Union Square is such a desirable location that it is extremely rare to buy a property of this size and potential,” said Helen Hwang, senior executive managing director and head of meridian’s Institutional Investment Sales Team.

Helen Hwang, senior executive managing director of Meridian’s Institutional Investment Sales group, can be reached at (212) 468-5930 or hhwang@meridiancapital.com.

Churchill Real Estate has scored $40 million in financing for its acquisition of 809 Madison Avenue, a mixed-use property that comprises 32 apartments and 2,700 square feet of retail space, Commercial Observer has learned. 

Keysite Capital Partners provided the five-year loan along with a $5 million earn-out facility, sources said. The debt features a fixed rate and full-term, interest-only payments. 

Meridian Capital Group’s Ronnie Levine and Thomas Wayda arranged the financing. Meridian officials declined to comment on the lender’s identity. 

“It was a pleasure working with the Churchill team on this financing,” Levine said in prepared remarks. “We were able to secure a fixed-rate balance sheet loan that enables them to execute their business plan and maximize the value of the asset.” 

The 11-story, 38,000-square-foot asset is located within walking distance to Central Park, The Metropolitan Museum of Art and the Guggenheim Museum. 

The Real Deal reported in June that Churchill was in contract to buy 809 Madison Ave from the Parkoff Organization for $55 million and seeking $40 million in financing for the acquisition. Churchill was simultaneously nearing a $16 million deal for 57 Jay Street in Dumbo, Brooklyn, as TRD reported.

Officials at Churchill and Keysite did not immediately return requests for comment.

Meridian Capital Group announced today that its Institutional Investment Sales Group, led by Helen Hwang, has advised Rose Associates, Inc., on the sale of 189-199 Madison Avenue to HUBB NYC Properties LLC. 189-199 Madison Avenue is a 17,800-square-foot retail condo which spans nearly the entire blockfront on Madison Avenue between East 34th and 35th Streets. The retail condo is 100 percent leased to a diverse roster of neighborhood-oriented retailers and is directly across the street from the proposed Museum of Pop Culture. 

Situated at the base of the Goodhue House, an attractive prewar Art Deco building, the retail condo includes 11,300 square feet on grade and 6,500 square feet below grade. Tenants at the retail condo have an average tenure of over 18 years, and include FedEx Kinko’s, Eden Wok, On Stage of New York, and Michel Cluizel Chocolat. The retail condo is proximate to New York City landmarks, including the Empire State Building and Macy’s Herald Square, and is poised for future rent growth as a result of notable new residential and commercial construction in the area. Since 2010, over 8,300 apartments and hotels have been constructed within a half-mile radius of the property and another 1,900 units and hotel rooms in the pipeline.

A Meridian team of Helen Hwang, Karen Wiedenmann, Brian Szczapa, Abie Kassin, Yasmin Kheradpey, and Ernie Nichols represented the seller in the transaction.

“189-199 Madison Avenue is a great retail investment that checks all of the boxes,” said Helen Hwang, head of Meridian’s Institutional Investment Sales Team. “It’s a well-diversified, multi-tenanted retail condo with nearly 150 feet of frontage along Madison Avenue, no use restrictions, and rents with runway for growth.”

Helen Hwang, senior executive managing director of Meridian’s Institutional Investment Sales group, can be reached at (212) 468-5930 or at hhwang@meridiancapital.com.

Putting together financing for CRE projects, especially in low-income areas, can be a test of ingenuity and determination. The passage of the Tax Cut and Jobs Act in December 2017 gave CRE owners and developers a promising new financing source to add to their options: the opportunity zone tax incentive program.

As the results from the Meridian Capital Group Commercial Real Estate Survey demonstrate, they are eager to try it out. Eleven percent of respondents say that they have used opportunity zone tax incentives as part of their financing stack during the last two years.

Enthusiasm is even greater going forward. Forty-three percent said they would consider using opportunity zone tax credits during the next two years. In fact, there is more interest in this program than any other form of alternative financing, including affordable housing tax incentives, foreign mezzanine financing and EB-5 financing.

Zeroing Out Capital Gains

Passed in December 2017 as part of the Tax Cut and Jobs Act, the opportunity zone tax incentive program creates incentives for investors to channel capital gains into qualified opportunity funds, which then invest in government-designated, low-income qualified opportunity zones. HUD estimates that opportunity zones could spur as much as $100 billion a year in investments. Overall, more than 8,700 communities in all 50 States, Washington D.C., and five U.S. Territories have been designated as opportunity zones.

The opportunity zone program allows individuals and businesses to liquidate a wide variety of appreciated capital assets and to reinvest all or a portion of the gain into qualified opportunity funds within 180 days of triggering the gain. This investment will allow for deferring capital gains tax during the investment period as well as excluding some of the deferred gain depending on how long the investment is held.

According to the IRS, If the qualified opportunity fund investment is held for longer than five years, there is a 10 percent exclusion of the deferred gain. If held for more than seven years, the 10 percent becomes 15 percent. If the investor holds the investment in the opportunity fund for at least 10 years, the investor is eligible for an increase in basis of the qualified opportunity fund investment equal to its fair market value on the date that the investment is sold or exchanged.

The Program Gains Focus

The opportunity zone tax incentives have spurred the creation of scores of funds and hundreds of articles in the press. Bloomberg noted that a database that specifically tracks these funds—OpportunityDB—reported that 88 funds have raised a total of $26.4 billion as of April.

This number should increase, thanks to new proposed guidelines published by the Treasury later in that month. A number of clarifications are of interest to CRE investors. The new regulations clarify that once a fund receives money, it will have six months to buy qualifying assets, which can include land and vacant buildings. The new rules also make it easier for investors to set up funds that hold more than a single asset. Real estate investors will also be allowed to lease and refinance their properties.

“We are trying to be as user-friendly as we can within the context of the law,” Treasury Secretary Steven Mnuchin said at the White House event highlighting the latest updates.

The Meridian Capital Group Commercial Real Estate Survey was conducted online between November 13, 2018 and December 6, 2019 by Signet Research, an independent research company, and is based on the response of 1,849 industry professionals.

Over the last year, banks narrowed their spreads for most commercial real estate sectors, according to the April 2019 Federal Reserve Board quarterly survey of senior loan officers. They also increased the maximum size of loans and increased the length of interest-only payment periods. The senior loan officers cited more aggressive competition from other banks and nonbank lenders as an important reason for easing.

This modest easing of standards is one reason that so many owners chose to refinance in 2018, a development that is amply documented in the Meridian Capital Group Commercial Real Estate Survey. Almost 60 percent of the industry professionals responding to the survey reported that their firm had opted to refinance at least one property in 2018 rather than sell.

Balance sheet lenders confirmed this finding. They reported substantial increases in refinancing activity. Over the past two years, the majority have seen their refinancing activity increase. Slightly less than 60 percent said that refinancing accounted for between 25 and 49 percent of their lending activity over the past two years—and 21 percent said that between 50 and 75 percent of their lending was due to refinancing.

The Conditions Favor Refinancing

Looking forward, both investors and banks expect refinancing to continue at the current level. Most investors expect to refinance less than 25 percent of their assets in 2019, but a significant group, 22 percent, is considering refinancing between 25 and 49 percent of their portfolio. Over 60 percent of balance sheet lenders responding to the survey expected refinancing to remain about the same.

Interest rates will also influence refinancing decision this year. In early March, the Federal Reserve cancelled plans to raise benchmark interest rates in 2019, precipitating a drop in the 10-year Treasury in April and May to between 2.2 and 2.6 percent. This is a significant decrease from its highs of around 3.2 percent in October and November 2018 and served as a reminder to investors to lock in low rates while there still was an opportunity to do so, especially in cases when they held adjustable rate loans. Although economic tensions can influence rates, 57 percent of owners say that they are unwilling to take on floating-rate debt in the current environment.

In other words, all the conditions are in place—a modest easing of lending standards and historically low interest rates—to confirm the trend expressed by borrowers and lenders alike in the Meridian Capital Group survey that refinancing will remain strong for the near future.

The Meridian Capital Group Commercial Real Estate Survey was conducted online between November 13, 2018 and December 6, 2019 by Signet Research, an independent research company, and is based on the response of 1,849 industry professionals.

Eliot Spitzer‘s Spitzer Enterprises has scored a $386 million refinance for 420 Kent Avenue—its luxury waterfront multifamily development in Williamsburg, Brooklyn, Commercial Observer has learned.

KKR Real Estate Finance Trust (KREF) provided the loan, sources said. Officials at KKR declined to comment. 

Meridian Capital Group is said to have negotiated the refinance, having also arranged $330 million in construction financing from Starwood Property Trust in 2016. Officials at the brokerage did not return a request for comment.

Designed by Eran Chen’s ODA New York, the massive South Williamsburg rental complex sits on a 2.8-acre waterfront site between South 8th and South 9th Streets.

The 1.5-million-square-foot property comprises three luxury glass towers housing 857 residences, many of which have private outdoor spaces. The towers comprise mostly studios and one-bedrooms that aim to cater to a “younger demographic with a little more hair than me,” Spitzer told CO in a February 2018 interview.

“The potential of living right on the East River and the openness of the views that you get are insane,” Chen told CO in a November 2017 interview.

The development’s unique boxy design means that 80 percent of the apartments are corner units with three-sided sweeping views across the East River.

“We asked ourselves, ‘Can we create a tower where every apartment is a corner unit?’ ” Chen said. “The answer was yes.”

The sprawling development features 20,000 square feet of restaurant and retail space, 25,000 square feet of indoor amenities and 80,000 square feet of outdoor space—including a 400-foot landscaped riverside esplanade. Those amenities include rooftop pools, a piano room, a fitness center, a spa, a library and a landscaped roof garden.

In June 2018, an affordable housing lottery was launched for the northernmost tower at 420 Kent, and a second lottery for an additional 121 affordable units was launched in March 2019, as reported by 6sqft.

Representatives for Spitzer Enterprises declined to comment.  

The Ardor School for Passion-Based Learning has leased 20,000 square feet for a new private school at a former Catholic convent in Greenpoint, Commercial Observer has learned.

Ardor will occupy half of a three-story former Catholic school building at 29 Nassau Avenue, between North 15th and Dobbin Streets, according to information from Meridian Capital Group. The independent day school inked a 35-year sublease for the Nassau Avenue side of the building, which is across the street from McCarren Park and Automotive High School. The private school is subleasing from the Argento family, which operates Broadway Stages in northern Greenpoint and has a long-term lease on the property owned by the Slovak Roman Catholic Church of the Holy Family. The building is a brick, Romanesque Revival structure with elaborately carved religious sculpture above the front door and separate side entrances marked “Boys,” “Girls” and “Convent.”

The school is part of a four-building convent complex between Nassau, Dobbin and North 15th Streets; the Roman Catholic San Damiano Mission occupies the rest of the site. (The mission is run by the Franciscan friars, who are trying to bring younger people back to the cash-strapped Catholic church, The New York Times reported in 2016.) Asking rent for the entire, 40,000-square-foot school was $750,000 a year, according to Meridian. The transaction was structured as a triple-net lease—Ardor will pay taxes, insurance and utilities on its space.

Ardor is building out its space, which will serve kids from preschool through eighth grade, and plans to open in the fall.

Meridian retail brokers James Famularo and Eliot Goldschmidt represented Ardor in the transaction, and Modern Spaces’ Evan Daniel handled the transaction for the Argento family.

The property “offered a tremendous opportunity for Ardor” because of “the dense population of school-aged children” in the neighborhood, Goldschmidt said in a statement.  

“Schools are just in tremendous demand,” Daniel told CO. “We’re doing a number of spaces in western Queens and Brooklyn with schools. It’s a recession-proof tenant. And as more and more neighborhoods become gentrified, the need for school spaces has become problematic. Everyone wants restaurants and bars, but everyone needs schools.”

Running on Empty: Slower Job Growth May Spell Trouble for CRE

What goes up must come down, and after a sustained economic recovery from the depths of the 2008-2009 credit default swap crisis and recession that is now more than 10 years out, the question is when and what sectors will suffer when the inevitable downturn comes, as pondered by experts at Commercial Observer’s Spring Financing CRE Forum in Los Angeles last week.

Darrell Wheeler, head of strategy at CCRE, opened CO’s forum by providing an overview of the current landscape, examining the amount of construction and how much has been delivered within different property types.

While he said office development has been active in the last five or six years, most developers in the sector anticipated a recession that occurred from 2016 on and, as such, lenders have only been lending when they have tenants.

Multifamily, which he said has been built to the largest level “we’ve ever seen,” and that hasn’t been much of a problem in the United States because population growth—which he said always grows by 1 percent since the 1940s—has made up the difference.

“If we had to highlight an area that might be a problem, this is the one that’s probably O.K. It’s seen the vacancy rate come down by 2 percent from 8 to 6 [percent] nationally,” he said.

The industrial sector is, unsurprisingly, expected to be in “pretty good shape to start any sort of recession.” Demand for the product was brought home by the Blackstone Group’s record-breaking $18.7 billion purchase of 179 million square feet of U.S. warehouse space from Singapore-based GLP last week.

In terms of rent growth in the hotel and multifamily rental market, Wheeler said it was closely tied to employment growth, which is slowing and may be further hindered if there is a crackdown in immigration.

“The big challenge is you’ve got to have this employment growth continue, and if you start and look at the non-farm payroll every month, it’s hard to add 200,000 jobs every month. When your unemployment rate starts to get below 5 percent, you start to run out of people to employ,” he said, predicting a potential 12 to 24 months of economic growth before a potential slowdown.

His prognosis was seconded by the UCLA Anderson Forecast, which was issued the following day. Economists, drilling down into both national and state-level indicators, such as the most recent GDP data, bond market data and slowing job growth, did not see a rosy future.

Citing a record-level of Californians employed (18.7 million) and low unemployment rate in the state, Jerry Nickelsburg, director of the UCLA Anderson Forecast, wrote that the state “is, quite simply, running out of people to be employed.” He anticipates hiring to slow from its current 1.4 percent rate to 0.8 percent in 2020 and a measly 0.6 percent by 2021.

Considering such factors, the report increased the possibilities of a recession from near zero to 15 percent for the next year ad to between 24 to 83 percent for 2021.—A.S.

Bridge Lenders on the State of the Market

The commercial real estate collateralized loan obligation market is a much-buzzed-about topic, and with good reason. Issuance soared to $14.3 billion in 2018 from $7.7 billion in 2017, which is bound to grab any market observer’s attention. And while its velocity decreased slightly at the beginning of 2019, total volume is expected to remain pretty flat by year end, topping out around $15 billion.

Bridge lending experts at CO’s forum weighed in on what’s driving the market and also—in a time of fierce competition—how CLO issuers are differentiating themselves from the herd.

But first, some history.

It’s hard to have a panel conversation about CLOs without first quelling any fears that they aren’t direct descendants of that dreaded three-letter acronym heavily associated with the global financial crisis: CDO. Simply put, collateralized debt obligations were an arbitrage tool, panelists said, while CLOs are a financing tool.

“ ‘CDO’ was a very generalized term. It spanned a lot of things, and so it was tough to figure out exactly what you owned,” Nik Chillar, head of banking at Crescit Capital, said. As such, three little letters added to the moniker of today’s instruments to help differentiate them from days gone by: “CRE” shows they include commercial real estate loans only and “CLO” emphasizes these are loans, not securities.

Then there’s the retention of 20 to 25 percent of the risk and today’s extensive underwriting of the issuer—critical, seeing as most CRE CLOs are managed pools, the reinvestment period relies on the strength of the issuer to create a good replacement loan for the CLO’s investors.

The criteria for today’s CRE CLO collateral also remains pretty tight, panelists agreed, with both rating agencies and investors putting a very firm box around what can be contributed.

Now that’s cleared up, how are bridge lenders keeping their competitive edge in what moderator Steven Powel, CEO of industry advisory firm Situs, says feels like a “beauty contest to earn business?”

After all, even the industry’s behemoths are feeling the heat of more players in the space.

“It’s a challenge to differentiate yourself,” Jimmy Yung, a managing director at Blackstone, said. “We try to be fast and efficient, and scale is where we have a competitive advantage.” Its breadth of capital allows the platform to play up and down the capital stack, Yung noted. Although Blackstone didn’t issue a CLO in 2018, it issued the biggest one of 2017—BXMT 2017-FL1.

Annaly Capital Management’s David Sotolov joked he’d also tout Annaly’s big balance sheet as the feather in his cap, but peacocking was tough “sitting next to Jimmy.” Still, $100 billion of assets under management ain’t too shabby.

Annaly issued an $857.3 million managed CRE CLO earlier this year (NYL 2019-FL2, through subsidiary Annaly Credit Opportunities Management).

Thorofare Capital has just started tapping the CLO market, using the vehicle as “one tool in our toolbox,” said Brendan Miller, the lender’s chief investment officer.

The bridge lender has built out its platform with the intention of having access to as many levels of the capital stack as possible, Miller said. This includes a move from being a “heavy lift” transitional lender to forming a strategic partnership with DoubleLine Capital in 2015 to do more core-plus lending and up its loan size. The lender focuses on value-add and transitional multifamily, industrial, office, self-storage, student housing, retail, health care and hospitality assets throughout the United States.

“We’ve put together all parts of the capital stack, so we can take borrowers from point A to point B,” Miller said.

Balance sheet lender Crescit operates in the fixed- and floating-rate lending space and also “dabbles in construction as well.” The $10 million to $45 million lending space is its sweet spot and—bonus—there’s a little less competition there.

In times of increased competition, loan pricing can seduce even the savviest of borrowers. Resist the siren song, said the panelists.

Miller said he’s seen borrowers who selected a lender based on attractive pricing subsequently return to them, “usually because that lender didn’t have asset management capabilities or because their loan was contributed to an unmanaged pool,” he said.

Indeed, the potential risk in the unstable nature of heavy-lift, transitional loans means that asset management capabilities are key, and business plans don’t always (or rarely) go exactly as planned. Blackstone has in-house asset management to service what Yung called its “borrower relationship-driven business.”

Thorofare, too, continues to staff up on the asset management side, Miller said, as well as building lasting relationships with its borrowers. New York-based Annaly, on the other hand, is expanding into other markets to be “closer to borrowers in those markets,” Sotolov said.

When Powel asked which industry weaknesses are being witnessed by the panelists, retail still dominated the conversation.

“There’s a real lack of liquidity in the market,” Sotolov said. “Retail owners may not want to sell [their properties] but if they’re trying to refinance the capital markets aren’t that kind, to say the least.”—C.C.

Lenders Talk Foreign Debt and Equity Flows

Despite ongoing trade disputes between the U.S. and some of its largest trade partners, as well as a pullback in Chinese involvement, major foreign investment in the commercial real estate sector hasn’t slowed, panelists said.

Experts on a panel moderated by Loryn Dunn Arkow, a partner at Stroock & Stroock & Lavan, discussed prominent players and what markets, property types and financing were drawing the most suitors.

When polled about whether foreign investment in the U.S. real estate sector would increase, decrease, or stay the same over the next six to nine months, the forecast ranged from “relatively stable” to an expected increase. (The panelists are far from the only ones saying this; according to Real Capital Analytics, cross-border acquisitions of U.S. commercial real estate surged to $94.9 billion last year, increasing 73 percent over the $55.3 billion reported in 2017 and nearly matching the $100 billion recorded in 2015, as reported in National Real Estate Investor.)

“As long as foreign banks keep their rates low and the U.S. isn’t so low, we should see increased capital flow,” Greg Murphy, managing director and head of real estate and hospitality, Americas at Natixis, said.

Paul Vanderslice, CEO of CCRE, concurred, saying foreign investment would increase for several reasons.

“One, foreigners diversify their asset base. Two, given that the dollar is so strong, a lot of their own currencies are actually eroding in value, which is what is bringing more dollars in over here,” he said. “Also, I think relative to other places you could go, I think Europe is weaker with Brexit, which is driving more investment over here.”

Despite the assumption that China was the biggest investor in U.S. real estate, Vanderslice said our neighbors up north are the true OGs. Citing data from Real Capital Analytics, Vanderslice said that in 2018 Canada invested around $19.6 billion compared to China—which was only $5.8 billion.

In Los Angeles, Singapore has become a major player in the L.A. market, which Vanderslice said is “just on fire.” Interest is particularly strong for industrial in Gateway markets like El Segundo, which is in the South Bay of L.A. county.

Despite entreaties and interest rates that are flat, Japan is a nation that is largely sitting out investing in commercial real estate, which Vanderslice said was a byproduct of getting burned in the past.

“They were big, say, from 2002 to 2006, and then certainly when the CMBS market hit the skids in 2008, 2009, prices were 65, 70 cents on the dollar and there were no bids even at that level, so they had a really bad experience,” he said. Japan is one of the biggest players in the CLO sector—accounting for around 40 percent of the market—Vanderslice said, but in terms of the CMBS market, they continue to sit it out.

But Murphy said that the Japanese are investing in other asset classes in the U.S., namely in aviation, energy and renewables and while it remains rare to see them in real estate, he said there has been “a little toe-dipping that’s happening.”

Gateway markets in general continue to be preferred by foreign investors though each country and type of lenders have their own predilections.

“The German banks tend to go toward gateway markets, oddly penalizing San Francisco and Boston in their models,” Murphy said.

Corey Hall, a senior vice president at Brookfield Asset Management, said with so much debt compression he has been seeing a growing diversification into other markets and asset types as foreign investors are chasing yield in order to find deals that make sense.

“Seattle, Portland, Oakland, those are markets where some will play, and some won’t play, and I think you’re seeing less efficiencies in those markets because not everybody is there, but it’s not like a decade ago where it’s like New York, San Francisco or Chicago and that’s it,” Hall said. “I think you’re definitely seeing more people having more experience in the U.S. locales and markets. You’re definitely seeing new markets open up.”

Vanderslice noted that Austin, Texas, has become a major market for foreign investors as the definition of gateway markets expand. In terms of product types, he said multifamily and industrial have been attracting foreign capital, with office and hospitality holding less appeal.

“Multifamily investment by foreigners has gotten big, [accounting for] 30 percent over the last couple of years, definitely industrial,” he said. “From what we’ve seen, multifamily have been bid up by foreign bids and industrial and even though some people have stretched the definition of industrial to include cold storage.”—A.S.

The Ins and Outs of Construction Debt

“The road to success is always under construction,” Lily Tomlin once quipped. And the trio of development experts that were quizzed by Ballard Spahr’s Siobhan O’Donnell have seen quite a few bricks in their time.

The lively panel included some gentle—but seemingly necessary—cautioning.

“Every time the market gets peaky it seems that every borrower is a great borrower and every deal is a great deal,” Chris Allman, a managing director at CIM Group, said, adding that developers should choose their construction lender very carefully. But, “a lot of borrowers aren’t doing that.” And he should know, being both a lender and a borrower (CIM borrows between $5 billion and $7 billion per year).

Casey Klein, a principal of Crescent Heights, is an active borrower who’s busy closing significant debt deals—recent refinances include $734 million in CMBS financing for two of its luxury residential properties in L.A. and San Francisco, namely Ten Thousand and NEMA San Francisco—but said that when it comes to picking a construction lender, the post-close relationship is actually key.

Jeff Fastov, senior managing director at Square Mile Capital Management, concurred, saying that it’s all about “life after you close, and doing the admin stuff as early as possible.” Echoing sentiments from earlier in the conference, Fastov warned against being lured by attractive pricing offered by inexperienced lenders.

“It’s in the nooks and crannies—if a deal isn’t put together well, all the basis points in the world won’t make up for a lender who can’t keep up with the [draw down] schedule,” he said.

Indeed, these tricks ain’t for kids, and borrowers should be wary of those who aren’t necessarily fully versed in the nuances of the complex world construction, Allman said.

“Be careful what you wish for. There are a lot of lenders doing these deals who don’t understand how construction works,” he said. “And when things go wrong and they’re faced with the proposition of assuming that project, they freak out.”

Strengthening its foothold in the debt space, CIM only lends where it builds, Allman said, which gives it a major leg-up in the understanding of those markets. Additionally, having CIM in the capital stack often sweetens the deal for potential borrowers, he said (and Klein agreed).

As for those lenders dabbling in value-add deals that include quasi-construction? Once again, proceed with caution, borrowers.

“Those deals can be even more difficult than ground-up construction,” Allman said, using the example of an 80-year-old building that needs significant rehab as something that needs expert attention.

It’s not just the lenders who are under scrutiny. When asked what makes a good borrower, the panelists also had plenty of boxes to check.

“They should have a strong balance sheet and reputation, a good track record and haven’t given any assets back,” Allman opined. Construction lending is also a relationship business and so Fastov asks himself, “can we add value to their business, and can we do 10 more deals with them?”

But, there is no doubt that “it’s a great time to be a borrower,” Klein said, adding that even when doing big, heavy-lift loans, capital continues to flow to top-tier sponsors with well-located assets.

Indeed, well-located properties decrease leasing risk, which is a key consideration in development lending. Or, more simply put, “We like it when a building fills quickly,” Fastov said.

But, it also comes down to supply and demand. And one interesting market from a case-study perspective is San Francisco.

“The demand there is of the chart, but because of that values are pushed way above trend,” Fastov said.

When the conversation swung around to co-living and co-working properties, panelists agreed that the property use reflects a broader theme: increased importance being placed on a sense of community at properties.

“Mixed-use is a great blend for us,” Fastov said. As an example, Square Mile provided a $30 million preferred equity investment for the construction of Property Markets Group’s X Miami Project—a 462-unit rental tower in Downtown Miami that includes co-working space and The Guild hotel.

As a final word, if things do start to go sideways, speak up, panelists advised the audience. “It’s got to be an immediate conversation [with your lender],” Allman said. Fastov concurred, saying that this sometimes-difficult chat has to come early so there can be a rebalancing.

“Be forthright, and provide real-time info,” Klein said. “In particular, what are you doing to rectify your situation?”—C.C.

In the Tranches: Credit Standards, New Entrants and Opportunities

What does the next year hold for commercial real estate lending? Experts from major institutions taking part in CO’s panel were divided.

When asked by moderator Bill Fishel, a senior managing director and L.A. office co-head at HFF, about changes in credit standards from the same time last year, several said they were holding strong.

“To the credit of those lenders, the underwriting standards have varied greatly from the last cycle, 2005, 2006, 2007, when everything became more elastic,” Seth Grossman, a senior managing director at Meridian Capital Group, said.

“This time around, you’re not seeing a ton of that. You’re still seeing strict underwriting in the fixed-rate business.”

However, where there is some slippage, he said, was through the entry of new smaller sized players in the space where underwriting is being pushed.

Charlie Rose, a managing director at Invesco Real Estate, said he has seen refinancings being done on appraised values.

“Deals are getting done at 70 to 75 percent loan-to-value, but the valuation is inflated so it’s actually 80 percent. Those real LTVs are a concerning trend,” Rose said. “We’ve also seen a movement toward more [covenant]-light type deals, so longer untested terms, and just lighter cash management.”

Alan Flatt, a managing director at Wells Fargo Bank, said instead of what they did in cycles past, his organization and banks in general are staying lower risk and providing their A-notes or warehouse lines to other firms, which has become a big part of his organization’s strategy. By doing so in today’s current lower leverage environment, he said, “that risk is bifurcated, which is probably healthier for everyone.”

“What we’ve done with other cycles, where we did go off the leverage curve, it ended badly for us, so no thanks,” he said.

Another change from past markets, that has “amazed” Flatt is how the current cycle continues to evolve in what he classified as “mini” or “counter” cycles where investors are jumping into perceived higher-risk sectors, like retail.

“I’ve seen some really good retail opportunities lately. We’ve seen some good hotel opportunities lately which is late cycle. We’re making a bridge loan to a fund that has limited service hotels and the fund has three to five years left on the fund life and we went in and provided a loan there,” he said. “There are still good opportunities in the market and it’s been interesting…You can say it’s late in the cycle or there’s a trade war, but still, individually, there are opportunities.”—A.S.

What does the next year hold for commercial real estate lending? Experts from major institutions taking part in the opening panel of Commercial Observer’s Inaugural Spring Financing Commercial Real Estate Forum were a bit divided on the state of the market.

Commercial real estate lenders discussed market opportunities and potential challenges—namely newer, less established players entering the market— earlier this week.

When asked by moderator Bill Fishel, a senior managing director and L.A. office co-head at HFF, about changes in credit standards from the same time last year, several said they were holding strong.

“To the credit of those lenders, the underwriting standards have varied greatly from the last cycle, 2005, 2006, 2007,” Seth Grossman, a senior managing director at Meridian Capital Group, said.

“This time around, you’re not seeing a ton of that. You’re still seeing strict underwriting in the fixed-rate business.”

However, where there is some slippage, he said, was through the entry of new smaller sized players in the space where underwriting is being pushed.

Charlie Rose, a managing director at Invesco Real Estate, said he has seen refinancings being done on appraised values.  

“Deals are getting done at 70 to 75 percent loan-to-value, but the valuation is inflated so it’s actually 80 percent. Those real LTVs are a concerning trend,” Rose said. “We’ve also seen a movement toward more [covenant]-light type deals, so longer untested terms, and just lighter cash management.”

Alan Flatt, a managing director at Wells Fargo Bank, said instead of what they did in cycles past, his organization and banks in general are staying lower risk and providing their A-notes or warehouse lines to other firms, which has become a big part of his organization’s strategy. By doing so in today’s current lower leverage environment, he said, “that risk is bifurcated, which is probably healthier for everyone.”

“What we’ve done with other cycles, where we did go off the leverage curve, it ended badly for us, so no thanks,” he said.

Another change from past markets, that has “amazed” Flatt is how the current cycle continues to evolve in what he classified as “mini” or “counter” cycles where investors are jumping into perceived higher-risk sectors, like retail.

“I’ve seen some really good retail opportunities lately. We’ve seen some good hotel opportunities lately which is late cycle. We’re making a bridge loan to a fund that has limited service hotels and the fund has three to five years left on the fund life and we went in and provided a loan there,” he said. “There are still good opportunities in the market and it’s been interesting…You can say it’s late in the cycle or there’s a trade war, but still, individually, there are opportunities.”

Decron Properties has nabbed $365 million in financing for a portfolio of seven multifamily properties in California, Commercial Observer has learned. 

Wells Fargo provided the 10-year, fixed-rate, interest-only Freddie Mac financings in a deal negotiated by Meridian Capital Group’s Seth Grossman, Jackie Tran and Sarah Kuebler.

“We have had the pleasure of working with the Decron team for nearly 15 years, assisting with their capital advisory needs,” Grossman said in prepared remarks. “Without fail, every transaction we bring to market on their behalf receives unbelievable lender interest. Capital providers think outside the box to differentiate themselves and win the business.” 

The properties comprise a total of 1,596 units and are all located in California. Cypress Creek and Creekside Glen are in Walnut Creek; Los Robles and Marlowe in Thousand Oaks; Villas at Woodranch and Overlook at Woodranch in Simi Valley; and The Reserve at Carlsbad is in Carlsbad. 

The assets were acquired between 2015 and 2017 and L.A.-based Decron Properties subsequently began extensive renovation programs at each of them. Property amenity packages include sports courts, fitness centers, clubhouses and pools and spas. 

“Decron had the foresight to take this portfolio to market for financing at the start of 2019, while fixed rate spreads were extremely tight and treasury rates had just begun falling. While the portfolio required many months of seasoning to achieve the desired proceeds, both agency lenders and life insurance companies competed to tailor long-term forward rate locks that allowed proceed upsizing prior to closing based on achieving predetermined debt coverage thresholds,” Grossman said. “Ultimately, between a combination of a 60-day index lock followed by a 119-day early rate lock, Meridian was able to secure six months of locked rate that allowed proceeds to increase significantly from start to close as Decron executed their business plan and net operating income continued to increase.”

Decron acquires, develops and manages multifamily apartment buildings, shopping centers, marinas and office properties throughout Los Angeles and its surrounding area. Its current portfolio includes 8,250 multifamily units, and 1.5 million square feet of commercial office and retail in 55 communities.

Officials at Wells Fargo and Decron Properties were not immediately available for comment.

J.P. Morgan Chase has provided the Belvedere Corporation with $72.5 million in commercial mortgage-backed securities debt to refinance its 561-key Hilton Cincinnati Netherland Plaza hotel in Cincinnati, Ohio, Commercial Observer has learned. 

The five-year loan retires roughly $70 million in previous 12-month bridge financing provided by J.P. Morgan last fall, as CO previously reported. The bank declined to comment on the refinance or the loan’s eventual securitization.

Meridian Capital Group senior managing director Drew Anderman and senior vice president Joshua Berman arranged this new financing on behalf of the borrower out of the firm’s New York City headquarters; the pair also brokered the previous bridge financing that closed last year.

“This five-year loan allowed the borrower to finalize their ongoing property improvement plan and ideally position the hotel over the next five years,” Anderman said in prepared remarks. “With interest rates at historic lows, we were able to take out the existing bridge financing and lock-in a competitive loan that provides cash flow stability for the foreseeable future.”

The 31-story Hilton Cincinnati Netherland Plaza — at 35 West Fifth Street in Downtown Cincinnati — is a luxury hotel that was designated as a National Historic Landmark in 1985; it was added as a charter member of Historic Hotels of America in 1989. The hotel is one section of a massive three-part mixed-use development called Carew Tower in the city’s Central Business District. 

The Hilton Cincinnati features 41,000 square feet of event space, two restaurants and a bar. It has the Orchids at Palm Court, which is Ohio’s only AAA Five Diamond restaurant, The Grille at Palm Court and The Bar at Palm Court. 

Carew Tower, overall, was built in 1930, becoming the city’s largest skyscraper. It includes three components: the hotel, a 49-story, 400,000-square-foot office building and “the arcade,” which features 110,000 square feet of retail space, according to Cincinnati Business Courier. 

The new CMBS loan, as well as the previous bridge financing that’s being taken out, went toward the hotel, alone. 

Known for its French Art Deco design, the landmark hotel opened in 1931, a year after the tower’s construction, and its design has served as inspiration for the Empire State Building. The hotel also plays host to the popular Hall of Mirrors, a ballroom that was modeled after the Palace of Versailles located outside of Paris. Many popular political figures and celebrities visited the hotel throughout the 20th century, including Winston Churchill, Eleanor Roosevelt and Elvis Presley. 

Early last year, Belvedere — purchased by its current CEO Greg Power in the fall 2014, with its most significant holding being Carew Tower — finished planned renovations to the hotel’s common areas, and by August 2018, the hotel had moved to invest over $2 million to revamp and upgrade its rooms, according to an Aug. 2018 report by the Business Courier. 

“Placing the mortgage on the hotel is a significant step towards making certain that the hotel is carrying its own weight and in fact is doing so at this time,” Power told the Business Courier in an email statement in August 2018, following the firm securing the previous bridge debt. “We are now turning our attention to further strengthening the other two lines of business.”

According to the Business Courier’s 2018 report, Power has added a roster of fresh retail tenants to the Carew Tower development, including Paragon Salon, a diner and eatery called Frisch’s, a Stafford Jewelers, a Kidd Coffee Co. and a Hellman’s Clothiers.

Northlink Capital has nabbed $72 million in construction debt for 510 Driggs Avenue, a condominium and retail property in Williamsburg, Brooklyn, Commercial Observer can first report. 

Bank Leumi provided the financing in a transaction negotiated by Meridian Capital Group’s Morris Betesh, Justin Boruchov and Alex Bailkin. 

When completed, the six-story, 122,000-square-foot building will house 44 residential units and include 30,000 square feet of commercial space as well as 111 parking spaces. The development is set to feature 175 feet of frontage along Driggs Avenue. 

“Working with Bank Leumi and Northlink was a pleasure,” Betesh said in prepared remarks. “We’re excited to have been a part of this project and the continued development in Williamsburg. 510 Driggs is one of the last prime development sites in Williamsburg and we’re certain it’s going to be another great success.” 

A Wonder Foods warehouse previously sat at the address before its demolition in 2006. Brooklyn developer Alliance Private Capital Group acquired the development site in 2014, before selling to Northlink— the development affiliate of Hampshire Properties—in August 2017. Northlink filed plans for the new structure at 510 Driggs Avenue in May 2018. 

Bank Leumi also provided construction debt for another Williamsburg residential project last year. Slate Property Group landed a $36M financing from the lender for its apartment project at 222 Johnson Avenue. 

Officials at Bank Leumi and Northlink weren’t immediately reachable for comment.

The MIPIM Proptech conference descended upon New York City this week, with the two-day event in Chelsea — organized by MIPIM and MetaProp NYC — featuring a startup competition, a large number of international attendees and panels on topics ranging from cybersecurity to artificial intelligence’s future in the industry. (Commercial Observer, it should be noted, was a media sponsor.)

Here’s a couple of main takeaways from the event, its fourth edition, which counted more than 1,000 attendees per day with about one-third made up of foreign delegates. 

Pay Attention to Your Company’s Security

As more proptech companies help building systems get onto the cloud and allow brokerages to offer remote working options, experts said many firms have yet to fully pay attention to the threats of hacking.

Min Kyrianni, the head of cybersecurity for building engineering firm Jaros, Baum & Bolles, warned that it’s not because there’s no danger out there, but simply because the real estate industry has yet to experience a headline-grabbing security breach. 

“Systems have not been hacked yet,” Kyrianni said. “Stuff hasn’t happened yet, so we need to be proactive.”

Kyrianni said part of the issue is there’s a lack of education about the security threats companies face. Another is that smaller companies simply don’t have the resources to address every single security issue, said Sandy Jacolow, the chief information officer for Meridian Capital Group.

“I wouldn’t even begin to imagine how some of the small companies deal with that, because they’re just as prone, they’re just as much of a target and they don’t have the staff resource,” he said.

Keep an Eye on AI

Experts said that companies focusing on artificial intelligence will be the next wave of the proptech industry.

Jake Fingert, the general partner of venture capital firm Camber Creek, said in recent months the firm’s fund has mainly targeted startups with data or AI components because they have the highest potential to shake up the market. 

“AI is both increasing efficiencies — because you’re able to work people through your funnel more efficiently — and having real-time responses and real-time booking,” Fingert told Commercial Observer. “We think it’s going to have a tremendous impact.”

Specifically, Fingert experts AI to have the biggest impacts on the workflow for building owners and brokers as well as the construction industry.

“Machine learning, real-time revenue optimization are some areas where we’re seeing some interesting morsels starting to grow,” he said.

But one of the biggest considerations for investors like Fingert is if the real estate industry as a whole will see these new products as must-haves.

“Solutions that sound great on paper but when you go and talk to who the customers would be those folks say, ‘That’s interesting, but it’s more a nice to have than a need to have’ that’s not the type of products [we invest in],” he said. “We invest in things that are really core.”

RXR Realty Adding More Amenities to its Portfolio

During a fireside chat, RXR Realty’s chairman and CEO Scott Rechler said that his company has been setting aside a larger chunk of his portfolio to amenity and hospitality options, with 75 Rockefeller Plaza serving as a testing ground.

“You’re working on a prototype of its vertical use [with 75 Rockefeller Plaza],” Rechler said at the conference. “We’re going to replicate that in multiple locations.”

Earlier this year, the firm announced blockbuster partnerships with Airbnb and WeWork at 75 Rockefeller, with the 33-story tower also housing a Convene as well as RXR’s headquarters.   

The company has been investing heavily in the proptech space; its RXR Digital Lab combines a 23-person research team with a proptech investment arm that has funded companies like Convene, Latch, Lyric and VTS. The firm has also announced a major strategic partnership across the city with shared kitchen startup Kitchen United.  

Rechler said he sees potential for Airbnb to partner up with owners and expand across buildings in the city, with landlords taking over from tenants on some of the logistical headaches associated with short-term rentals. 

NYC Will Launch a Proptech Pilot Program for its Real Estate 

The Deputy Mayor of Housing and Development Vicki Been chastised the industry a bit during her keynote speech for not paying attention to all kinds of apartment buildings.

Been — who stressed that the city wants to support all proptech startups — said that too many investors and companies only target products that help luxury residential buildings and commercial properties, ignoring buildings with affordable apartments.

“The fact that there aren’t more startups playing in that space is somewhat surprising and disappointing,” Been said. “It seems like our proptech ecosystem is missing or ignoring an enormous market.”

To help change that, Been announced the city will launch a pilot program allowing proptech startups to test their products in the city’s 326.1 million square feet of owned or managed real estate, as CO reported. 

Be Wary of Who You’re Taking Money From

While some major real estate companies can be great to score as an investor, some experts warned proptech startups to be wary of firms with little experience in the tech world.

In a panel about venture capital funding in domestic and international markets, Zachary Aarons, the co-founder of MetaProp NYC, said firms like JLL have enough knowledge of the market, but others do not and might structure the deal in real estate terms.

“Don’t take money from tourists if you can avoid it,” Aarons said. “People think that tech is hot right now, it’s global, it’s fun. But that doesn’t mean you need to destroy a company because you feel some [fear of missing out] because your friend who runs another real estate company just did a deal.”

Vastgood Properties and RW Partners have closed on a $127 million acquisition of a portfolio of Giant Food Stores-anchored retail centers in Pennsylvania, Commercial Observer has learned. 

Citigroup and Wells Fargo jointly provided a $97 million CMBS loan in the trade, sources said. The 10-year loan has a rate of 3.87 percent and features five years of interest-only payments.

Meridian Capital Group’s Bryan Kallenberg and Meyer Ovadia negotiated the debt. 

The seven-property portfolio is located throughout mid-to-eastern Pennsylvania, totals 548,482 square feet and includes Aston Center in Aston, Penn.; AYR Town Center in McConnellsburg, Penn.; Creekside Marketplace in Hellertown, Penn.; and Parkway Plaza in Mechanicsburg, Penn. Washington, N.Y.-based Vastgood has managed the properties for seven years and will continue to do so post-acquisition.  

Giant Food Stores is a supermarket chain that operates stores in Pennsylvania, Maryland, Virginia and West Virginia. An affiliate of Ahold Delhaize — the fourth largest retail grocery company in the world — the tenant accounts for 75 percent of the portfolio’s total gross leasable area as well as 80 percent of its revenue. The portfolio is well positioned for success as it features long-term leases for the chain as well as renewal options for decades to come.

Vastgood also teamed up with Conshohocken, Penn.-based private equity firm RW Partners to acquire the 153,000-square-foot Dillsburg Shopping Center in Dillsburg, Penn., last October, as reported by Long Island Business News. The asset is also anchored by Giant and its acquisition was also funded by an $18 million CMBS, also loan secured by Kallenberg.

Officials at Wells declined to comment, as did a spokesman for Citi. Officials at RW Partners and Vastgood didn’t immediately return requests for comment. 

As the capital markets landscape continues to become increasingly intricate and sophisticated with every passing year, lenders and investors have likewise become more nimble and astute, showcasing a heightened sense of discipline when it comes to their respective tolerance for risk.

This has helped create a stable U.S. commercial real estate market that is as formidable as ever, and industry participants are relishing a dynamic playing field.

“All data shows [investments in] hard assets have increased significantly,” said Starwood Property Trust president Jeff DiModica. “Government bonds are close to zero globally, and high-yield bonds trade at 3 percent, so [those are] not very compelling … We try to look at what leverage point we want to be involved in, and we’ll pick a spot in the stack with moderate leverage. We run the lowest leverage of our peers and create an accretive return for our shareholders.”

DiModica spoke as part of the first panel at Commercial Observer’s fourth annual Fall Financing Commercial Real Estate Forum at the Metropolitan Club at 1 East 60th Street in Manhattan. DiModica was joined on the panel by J.P. Morgan Chase’s head of real estate banking Chad Tredway, TPG Real Estate Finance Trust CEO Greta Guggenheim, Trimont Real Estate Advisors CEO Brian Ward and Meridian Capital Group chairman and CEO Ralph Herzka. It was moderated by Kramer Levin Naftalis & Frankel partner and chair, Jay Neveloff.

Tredway said an abundance of liquidity coupled with low interest rates in the market “is driving a lot of the [positive] dynamics,” adding that “millennials want to rent more; they like the flexibility, so we feel very good about multifamily. And office is a big part of our portfolio, with investment-grade tenants.”

Guggenheim, whose platform focuses on large, institutional borrowers, said, “We focus on assets in some sort of transition, so the key for us is, what does the stabilized [net operating income] look like? We still love multifamily, and it will continue to be in high demand. We like dynamic markets, like New York, but it’s been complicated with things like rent control regulations. But we stick to major property types and we’re highly selective on hotel and retail.”

Herzka said that today’s market is very unique from the perspective of an intermediary, given the sheer volume of shops ready to deploy capital on any given property.

“When we get a deal, we know where it fits into certain buckets and each lender’s tolerance for risk and reward,” he said. “There’s so much capital available that it’s about finding the right lender in the right position. The people taking the biggest risk are getting paid for it. It’s a good market for borrowers — and lenders, once they can articulate where they want to be.”

And in discussing the impacts of uncertainty, geopolitical factors and other aspects such as recent restrictive rent control legislation in New York, the panelists in this grouping didn’t seem too concerned about the long-term ramifications those potential disruptions could have on real estate.

“Right now, the low cost of capital generally heals all ills,” Ward said.

On the other end of the spectrum, somewhat outside of the realm of the biggest players spinning the largest deals to the highest-profile sponsors, the bridge lending market and the ever-expanding CRE CLO arena has created a bit of fervor in this yield-starved, low interest rate environment.

The second panel, entitled “Bridging the Gap: Bridge Lending and the CRE CLO Market” was moderated by Daniel Evans, a partner at Seyfarth Shaw. Bank of America managing director Matthew Kirsch, Cushman & Wakefield’s vice chairman and president of equity, debt and structured finance Steve Kohn, and Amherst Capital managing director Abbe Franchot Borok engaged in a lively discussion.

When asked if the sector can be considered “a whole new ballgame,” every panelist responded excitedly.

“From a rate perspective, it’s unheard of,” Kirsch said. “I work with people who’ve never seen Libor above 2.5 percent and [at one point, it had] never [been] above 1 percent. Ten percent of 200 participants in the space are doing 90 percent of the business; the big boys are doing most of it, and the impact is pricing compression. In our book from 2017 to 2018, our weighted average spread was down. And selfishly, I think market disruption will help a lender like me because it’ll take 30 percent of the [alternative] players out of the game over night.”

Kohn said “we’ve had, what, 125 months of expansion and 108 months of consecutive job growth? Because growth has been slow, [the market has] been more controlled, so there hasn’t been a ton of excesses in the system. The cost of debt is so low, why sell? While the sales market is healthy, the debt market has exploded. We hope we make it 130 months [of growth], or more.”

One of the biggest themes in the bridge space that’s accompanied low interest rates has been the bridge-to-bridge financing phenomenon phasing out the traditional bridge to permanent loan route and also a slight erosion of underwriting standards perceived by some.

“There’s a lot of liquidity in the market right now, so we’ve seen a lot of bridge-to-bridge financing,” Franchot Borok said about her firm, a middle market, value-add player providing transitional senior loans to institutional sponsors. “Maybe [a borrower] is halfway through a plan or leading into the middle of a cap ex plan, so they need more time.”

And Kohn added that he’s seen this more frequently in multifamily and that borrowers “want to repatriate some equity and improve the [internal rate of return]. There’s a lot of it going on, and it’s all positive; there’s still room for them to recover and get things done. But as time goes on and more money flows into space, we might see more issues.”

And, in terms of a possible erosion of underwriting standards, Franchot Borok said, “There’s been some slippage, but it feels ok. If you compared the CLO market to last year’s, you might see some erosion.”

“We’re seeing a reduction in exit debt yield requirements,” Kohn said. “And also a higher level of proceeds and advances as competition has heated up. Some lenders will go up to 85 or 90 loan-to-value in some multifamily.”

In order to be successful in the debt fund space, Franchot Borok said, “successful groups have had to find a niche. We’ll take execution risk and we won’t push leverage, so we want alignment with great equity sponsors who can execute or bring in another owner operator.”

Kirsch would rather not focus so much on sponsorship in his realm: “Of our balance sheet, I’d take the better real estate over a great sponsor,” he said. “You can get pricing or the sponsor wrong, but if you have the right location and asset type, you can find someone to get you out of that deal. A quarter of our business are new clients taking us to different markets. In some cases, executing game plans too quickly this environment solves a lot of problems.”

The third panel discussion surrounded a broader topic: “The Hottest U.S. Markets: Through the Lens of Lenders and Equity Investors.” Much of the chatter between the four panelists — PGIM Real Estate Finance managing director Bryan McDonnell; AKS Capital Partners co-founder and partner Aaron Appel; Mack Real Estate Credit Strategies managing partner and CIO Peter Sotoloff; and CCRE CEO Paul Vanderslice — centered around the shifts in the makeup and appetites of foreign investors. It was moderated by Mark Edelstein, a chair of Morrison & Foerster’s Global Real Estate Group.

While foreign investment has softened, the panelists agreed that Canada continues to be one of the most prominent foreign investors in the U.S., while acknowledging the opportunities that China’s previous retreat created for bundles of European and Asian lenders and investors who see the U.S. as an obvious destination to fetch returns amid a relatively deflated global economy.

“Foreign transaction volumes are down 40 percent and they became net sellers for the first time in years,” Sotoloff said. “China [was] replaced by Canada and certain other Asian countries. We’re seeing transaction volumes below last year, down seven percent. When you look at a PGIM, operating big core funds, you’re seeing a bit of depreciation. There’s a lot of money still interested in value plays, but return expectations in debt and equity have come in. We are [a] beneficiary of that.”

Vanderslice said that the reason why money is flowing in is because “as rates have come down, cap rates haven’t, so the returns you can get [in the U.S.] are at least positive. The three biggest investors are Canada, Bahrain and Israel, so will [they be] more patient than the Japanese and the Chinese over time? I’d say yes.”

“They want diversification,” McDonnell said. “In the U.S., you can get scale, and it’s pretty well regulated. [Many are] attracted to the coasts because they recognize those cities, but in many cases, people want ‘B’ markets.”

As it relates to specific assets classes for foreign investors, Appel said that “certainly all the Chinese money went into condos and hospitality, and that hasn’t worked out for them, which is why you see them vacating [certain] markets. Canadians have always been long in office and multifamily; Israel is active in multifamily. The private capital oversees is behaving like domestic [money], willing to take on more risk. Retail is out of vogue across the board.”

Overall, Appel said the late-cycle landscape has created yield hungry investors.

“You start on the coasts, the middle-market [space] pushes value into secondary and tertiary markets,” he said.

The final panel took a temperature check on the health of the construction lending field and featured Dustin Stolly, a vice chairman and co-head of debt, equity and structured finance, Newmark Knight Frank Capital Markets; Gavin Evans, a partner at Normandy Real Estate Partners; Michael May, the president of Silverstein Capital Partners; and Matt Petrula, the group vice president of M&T Bank’s New York City commercial real estate lending practice. The discussion was moderated by Goulston & Storrs partner Brian Cohen.

The biggest topic was how to handle surprises and uncertain circumstances today that are inevitable in construction deals.

For lenders, getting involved with the right developer and having the ability to asset-manage and provide flexibility is key.

“It starts with choosing the right developer,” Petrula said. “Construction is one of the more risky routes you could take, so working with someone with deep pockets, who can write a check if there are cost overruns, is important. Budgets can change, but it’s how they react to those changes. It’s important that we’re not a hindrance in getting a project built. Being quick and being able to render a decision when things change is important.”

May, who leads a major mezzanine financing arm for one of the New York’s largest landlords, said, “We’re out developing everyday and we can manage issues similar to our borrowers. For example, if there’s a question about the cost of structural steel for a 1,000-foot tower, I can walk down the hall and ask [what it is]. We can understand what’s happening in a market. We structure everything to be able to handle any issues that come up.”

Stolly said he’s seeing a trend of developers “who are well regarded and have shied away from the commercial bank syndicate model” to fund projects. “It comes with the proliferation of the finance companies,” he said. “Every construction loan has changes along the way, and you need a partner who can handle issues that need to be solved.”

Westchester, N.Y.-based developer Lighthouse Living has nailed down $37 million in construction financing from Regions Bank to build The McClaren, a planned mixed-use and multifamily property in Greenville, S.C., Commercial Observer has learned. 

The three-year, full-term interest-only loan covers the start of development on the asset, which is located in a designated opportunity zone in Downtown Greenville, according to information from Meridian.

A Meridian Capital Group team comprising senior managing director Rael Gervis, vice president Eli Finkel and managing director Jonathan Stern — based out of the brokerage shop’s New York City headquarters — arranged the financing on behalf of the borrower. 

“The solid Greenville market fundamentals, strong sponsorship of Lighthouse Living and quality of the McClaren project, in combination, made this attractive to lenders and allowed [us] to structure and close this financing seamlessly,” Gervis said in prepared remarks. “The fact that this project is in an opportunity zone and was started before the December 31, 2019 deadline to maximize the tax benefits is another value-add for investors in the deal.”

The nine-story project, which covers just over half of a city block, has an official address at 1 Wardlaw Street, according to project information from Lighthouse’s website. It also has alternate addresses at 322 Rhett Street and 106-110 Wardlaw Street, according to Meridian. The development was named after Dr. E.E. McClaren, a black physician who in 1949 founded a clinic at 110 Wardlaw Street, next to his home, to service the area’s black community that was routinely denied care at Greenville General Hospital. 

The historic, roughly 3,000-square-foot clinic still exists and will be incorporated into the new development, Scott Johnston, the founder and principal architect of Greenville-based Johnston Design Group told Greenville News in March. Once Lighthouse learned of the significance of the clinic, it moved to incorporate it into the development, rather than demolish it, he said. 

The clinic will be lifted from its foundation and moved several dozen feet to a new foundation bordering The McClaren on the corner of Academy and Wardlaw Streets. Johnston told Greenville News that he wasn’t certain of the purpose the clinic will serve, but that it will more than likely be a cultural showpiece. 

The McClaren will comprise 244 rentals, with private balconies and in-unit washer and dryers; there will be 37 studio units, 86 one-bedrooms, 111 two-bedroom apartments and 10 three-bedrooms. Twenty percent of the rentals will be reserved as workforce and affordable housing, according to Lighthouse’s website. 

The development will have just over 14,000 square feet of retail space, 430 valet parking spots and around 22,766 square feet of amenities, including numerous TV lounges, a saltwater pool, barbecue stations, a firepit, a “chef’s demonstration kitchen” that will have outdoor terrace space, a 1,600-square-foot fitness center, a meditation room, a sauna and a movie theater. It will also have a rooftop observation deck, a bicycle garage and storage area and a dog park, as per information from Lighthouse’s website. 

An official at Lighthouse was not immediately available. A representative for Regions Bank was not able to comment before publication. 

Covenant-lite loans: Financing with fewer lender protections and fewer borrower restrictions. Weren’t they part of the problem say, oh, 13 years ago? Well, they’re ba-aack . . . 

Indicative of the heightened bargaining power they have in today’s competitive lending market, borrowers are unabashedly pushing back on the protective covenants that keep lenders sleeping easy at night, panelists at Commercial Observer’s Second Annual Fall Financing conference in L.A. said.

And, they’re doing it successfully. 

“There’s been a push towards the covenant-lite idea of less structure,” Danielle Duenas, a vice president at Mesa West Capital, said. “We’ve lost deals to [this borrower request], or we’ve chosen to walk away from deals because of it. A lot of sponsors today just want the money with less controls around it.”  

While some sponsors are requesting longer loan terms to get through their business plans, others are balking at tests and parameters around future funding and future equity contributions, Duenas said.

“We typically have minimum leasing guidelines and leasing holdbacks for future funding. Some sponsors aren’t wanting those [included] at all,” he continued.

“Cov-lite is happening because of the sheer number of players in the system,” Troy Miller, head of Starwood Property Trust’s West Region, said. “When everyone is gravitating around a similar spread or coupon level, guys are winning deals [by offering] cov-lite.”  

Seeing as Starwood is one of the biggest borrowers on the street on the equity side, Miller has an insider view into exactly what lenders are granting borrowers today: “I see what our guys can get on the buy side and it’s crazy; almost no covenants,” he said. “Of course, everyone knows what others are getting and we all push for that.”  

Seth Grossman, a senior managing director at Meridian Capital Group, said he sees a bifurcation in the market between the groups who are holding steady on structure and leverage, and those who are not.  

“There’s such a demand for yield that you can get what you need but you’re going to pay for it,” he said. “If you want the cheapest pricing then the lender will still dictate, ‘We need X, Y and Z to make a deal work.’” 

The pushing, pulling and stretching within the current lending environment quickly became the topic du jour during the first panel, with panelists describing some of the deals that got away. 

“We’ve seen a couple of loan sale packages and we love looking at those packages because we see a loan we lost and why we lost it,” Greg Michaud, head of real estate finance at Voya Investment Management, said. “It’s typically loan to cost. There’s a $800 million package out right now, we lost out on 25 percent of it and it was all over loan to cost.”

Duenas said that while Mesa West does not typically lend on ground-up construction, the lender came close to a deal that had an adjoining parcel of land as part of the collateral.

“We proposed structure around the vacant parcel and entitlement situation,” she said, “but another lender came in and didn’t care; the basis would have been close to 90 percent loan to cost. If you don’t have parameters around your risk, you’re not mitigating your risk.” 

Ultimately though, “there’s a lender for every deal,” Grossman said. “If you want to borrow 95 percent we can typically find a lender that’s going to do that deal, but they’re typically going to charge you a ton of money and have a ton of recourse and put a ton of structure in there. If you’re borrowing 50 percent on a great project in a good market you’re going to get phenomenal terms.” 

The panelists agreed that while underwriting has remained pretty prudent for the most part, leverage has ticked up over the past year. That said, most lenders are staying in their lane. 

“Leverage is inching up for sure,” Miller said. “If you have lenders offering 60 to 65 percent stretch seniors, I need to offer 70 percent leverage [to be competitive]. Most clients are very cautious on leverage, they’ll maybe go to 75 percent. Where we’re seeing the real stretch is smaller borrowers trying to do bigger projects and fill up the capital stack any way they can.” 

Mesa West is keeping it conservative and lending at around 65 percent loan to cost. The debt fund has been busy with construction-to-perm financings and has a hankering for the industrial space, but it remains “super competitive,” Duenas said. 

Speaking of asset types, Michaud said retail isn’t always a dirty word, with Voya shying away from malls and big box retail but targeting grocery-anchored assets as part of its lending repertoire. Voya has also financed “a ton of apartments,” but via bridge loans and on a floating-rate basis, finding it hard to compete with Freddie Mac and Fannie Mae on the fixed-rate side.

“We don’t have cheaper money than the government, so we go where we get good relative value,” Michaud said. 

Starwood, on the other hand, has been busy with transitional office financings, Miller said and — given the DNA of his company — he’s financed several hotel deals. Ground-up construction comprises roughly a quarter of his lending book today. 

Grossman said he’s seeing a lot of ground-up construction, value-add, adaptive reuse deals cross his desk. When moderator Marc Young, an attorney at Allen Matkins, asked what that trend says about where we are in the cycle, Grossman said, “It says that fixed-rate stabilized assets are expensive and if you want to make your yield you need to create value. Everyone is trying to play in their comfort zone but you’re always looking for a little more yield when prices compress. So you stretch a little bit further on the value-add spectrum or go to a secondary market relative to where you’ve been.”  

Indeed, “the quest for yield is pushing people to different spots on the risk spectrum, which is natural and normal and speaks to where we are in the cycle,” Miller concurred, adding that several of the private equity funds Starwood works with are now moving to secondary markets in search of better returns. 

Before the panel ended, the conversation swung to another sticky subject: co-everything, with panelists overall steering pretty clear of coworking and co-living tenants within their portfolios. 

“If it’s in a deal it has to represent 15 percent or less of the income,” Duenas said. “We haven’t gotten fully comfortable with co-living. We’re definitely cautious in that sector. And a lot of multifamily deals include Airbnb or short-term rentals — which again, we don’t love.” 

As for WeWork, “It’s basically Regus with man buns and tattoos, right?” Michaud said.

Well said. 

Square Mile Capital Management has provided a $200 million loan to refinance Bell Works, a class-A office campus in Holmdel, N.J., Commercial Observer has learned.  

Meridian Capital Group’s Drew Anderman, Josh Berman and Eli Serebrowski negotiated the debt on behalf of sponsors Somerset Development Group and Adarsan Holdings. The loan will retire construction debt on the property and provide future proceeds for capital improvements.

“This represents an exciting milestone for Bell Works and the ‘metroburb’ vision as a whole,” Ralph Zucker, President of Somerset Development, said. “As we continue to approach full occupancy, this redevelopment has demonstrated the ability to create value in a suburban location that was once viewed as unachievable.”

The 1.4-million-square-foot property, at 101 Crawford’s Corner Road, was formerly Bell Works, a research and development facility for Bell Labs and Alcatel Lucent. Constructed in 1959, the complex was designed by modernist architect Eero Saarinen, and was the site of Nobel Prize-winning research, including physicist (and former U.S. Secretary of Energy) Steven Chu’s 1997 discoveries around laser-cooling technology.  

Bell Works spans 236 acres and comprises four separate six-story buildings connected via open space walkways and a grand pavilion. The ground floor features shops and restaurants and is known as The Block. Just last week, Somerset announced that four new tenants—including Renaissance Pilates + Wellness pilates studio and Justin’s Barbershop—would be moving to The Block, according to NJBIZ.

Somerset Development acquired the vacant asset for $27 million in 2013, according to The New York Times, undertaking an extensive redevelopment plan that preserved the existing architecture while modernizing the building to accommodate technology tenants. Current tech tenants include iCIMS and WorkWave and the property also counts Guardian Life Insurance and Jersey Central Power & Light in its roster. 

Total repositioning costs were expected to be around $100 million, according to an announcement from Somerset at the time of acquisition, and in July 2017 the developers landed a $70 million construction loan from Investors Bank to to accommodate capital expenditures for upgrades and tenant improvements. 

Today, Bell Works houses over 3,500 workers daily, as well as regular visitors interested in shopping, dining or perusing the weekly Farmers Market. The development offers a live-work-play atmosphere, and added three new entertainment venues this summer, including Swing Loose, an indoor golf facility; Escapology, a real-life escape game experience; and OasisVRX, a state-of-the-art virtual reality center. Property amenities include shower facilities, dry cleaners, a bank, food courts, bicycle storage, day care, fitness centers, a café and various dining and retail options.

In prepared remarks, Square Mile Principal Sean Reimer said the transaction gave the firm the opportunity to partner with a prominent New Jersey developer on a market-leading project and said the deal is representative of the flexible capital solutions that Square Mile provides to its clients.”

“The sponsorship had a vision that no one else saw—the concept of the “Metroburb,” an urban oasis in a suburban setting. In an incredibly short period, sponsorship leased nearly 1.4 million square feet of office and retail space,” Anderman said in prepared remarks. “Today, with Bell Works nearly 100 percent leased, this refinance allows the sponsorship to finish building-wide capital improvements, fund tenant improvements and leasing commissions, and pay off their existing debt.”  

Piermont Properties has picked up a $61 million refinancing on its new Q-East mixed-use property in eastern Queens, Commercial Observer can exclusively report.

The loan is from Annaly Capital, according to sources with knowledge of the transaction. The three-year, floating-rate debt carries an interest-only payment structure and will be used to cash out a portion of Piermont’s equity investment in the building, at 178-02 Hillside Avenue in Queens’ Jamaica Estates neighborhood.

Completed earlier this year, the structure combines 131 apartments with 25,000 square feet of medical office space and a 10,000-square-foot storefront that was pre-leased to CVS during the property’s development. The store is already open for business, according to the national drug-store chain’s website.

The apartments, which range from studios to two-bedroom units, come pre-equipped with niceties like cloud-based climate control and built-in media systems. Building amenities include a courtyard, a dog park and valet parking. Studios start at $1,925 per month, as per the building’s website, while the least expensive two-bedroom unit goes for $2,875.

The eight-story building was designed by Chris Carrano of ADG Architecture and Design, according to New York YIMBY.

Brokers with Meridian Capital Group, including Adam Hakim, Andrew Iadeluca and James Murad, arranged the financing with Annaly, which has provided debt on a slew of middle-market deals both in New York City and around the country in the second half of the year. Hakim said that the new property is boosted by its location near the crossroads of important neighborhoods for Queens’ development.

“Q-East is a perfect example of the transformation eastern Queens has seen in recent years,” Hakim said in a statement. “178-02 Hillside Avenue benefits from the established residential neighborhood of Jamaica Estates to the north, with the retail and transit-oriented convenience of downtown Jamaica to the south and west. The location attracts a great mix of tenants who are both empty nesters and young professionals.”

Piermont is evidently bullish on the area, too: It filed permits over the summer to start construction on a second residential project in the neighborhood, several blocks east at 188-11 Hillside Avenue. That slightly smaller structure would have 93 apartments and a slightly smaller parking garage, under the proposed design, by EDI International architect Victor Mirontschuk.

Executives at Annaly and Piermont didn’t immediately respond to inquiries.

Those who lived through the global financial crisis and survived to tell the tale no doubt have bad memories of the term “cov-lite.”

The widespread acceptance of covenant-lite (cov-lite) loans — or borrower-friendly loans that were made with a lack of protective covenants for the benefit of the lender — was a trend that was firmly in play pre-crisis.

While we’ve come a long way since the Wild West days of 2006, more than a decade later cov-lite is one hard lesson from the crisis that’s apparently being unlearned. Today’s competitive lending environment, buoyed by the proliferation of debt funds post-crisis, has created a borrowers’ market and the resurgence of cov-lite — and, some say, almost cov-free — loan  structures.

One of the largest loans to hit the commercial mortgage-backed securities (CMBS) market last year was the $1.2 billion mortgage on Century Plaza Towers, a pair of office towers in L.A.’s Century City neighborhood. The non-recourse loan was structured without a bad-boy carve-out guarantor, thereby limiting loan liability to the borrower entity should a “bad act” occur, and waiving the accountability of the borrower entity’s parent company, or “warm body” guarantor.

The debt on the property, which is owned by J.P. Morgan’s Strategic Property Fund and a Hines joint-venture, was chopped up into several CMBS deals.

“The loan does not have a non-recourse carve-out guarantor for certain ‘bad boy’ acts, such as fraud, gross negligence, or violating the loan’s [special-purpose entity] covenants,” reads a Standard & Poor’s report on one of the deals, which listed the risk factors behind the loan. The debt, originated by Deutsche Bank, Wells Fargo and Morgan Stanley, does not amortize over its 10-year term and also doesn’t carry a separate environmental indemnitor, according to loan docs.

A Deutsche Bank spokesperson declined to comment on the structuring of the bad-boy carve-out, as did Hines and J.P. Morgan officials.

Deals like this — which include some of the industry’s heaviest hitters — are illustrating exactly how far lenders are willing to stretch for certain sponsors and setting high expectations for other market participants.

“When we’re bidding on deals today, we’re being told that the market has agreed to light covenants and we have to respond to that in order to compete,” said one balance sheet lender, who spoke with CO on the condition of anonymity, adding, “we absolutely have agreed to covenants that make us uncomfortable.”

Let there be lite

The push for cov-lite structures in deals has strengthened over the past 18 months, sources said, with the market awash with capital and strong sponsors calling the shots.

“Four years ago, you saw very large sponsors with low-leverage requests starting to push back [against covenants] and getting some traction,” said Seth Grossman, a senior managing director at Meridian Capital Group. “So, the request from borrowers has always been there but up until recently, most lenders didn’t give much leniency. Today we see movement for the right sponsors and projects. It’s not typical that a lender will give away everything, but reasonable requests for reasonable sponsors you’ll see get done.”

Conversely, you won’t see much stretching on covenants for the weaker or lesser known sponsors unless they’re working with lenders who charge hefty fees.

“If a traditional bank that offers a very low rate is not willing to move on covenants, sometimes the sponsorship can go through a different lender and pay a higher rate by several hundred basis points and, as a trade-off, they’ll have several of those covenants lighten up,” Grossman said.

Alternatively, a less experienced sponsor who is requesting cov-lite portions in its loan agreement may have to drop its leverage request from 55 to 50 percent in return for its cov-lite requests being accommodated, Grossman said, adding, “You weren’t seeing that [bartering] five years ago.”

The uptick in cov-lite structures has undoubtedly been driven by the cut-throat competition for deals, Grossman said. “They’re still trying to be prudent, but in each category, lenders are having to figure out creative ways to win the business. And rather than cut up pricing or win deals on rate but make less money, they’re keeping the rate where it is and trying to win on covenants because they still believe in the deal.”

Indeed, winning deals is no walk in the park these days.

“It’s extremely competitive,” Danielle Duenas, a vice president at Mesa West, said of today’s lending environment. “There’s a lot of capital in the market; it’s very liquid, and rate compression has been consistent. There are multiple lenders playing within the same space, with some bleeding into other lenders’ spaces.”

Josh Zegen, co-founder of Madison Realty Capital, concurred that competitive forces are what’s driving cov-lite structures.

“I don’t think it’s so light that it’s aggressive,” Zegen said, “but lightening up on guaranties and pari passu funding [which puts lenders on equal footing in making a claim on assets securing a loan] — that’s where things are becoming a little more aggressive.”

Knowing they’re in the driver’s seat, borrowers are routinely pushing back on covenants surrounding everything from minimum leasing guidelines to parameters around future funding to carve-outs around bad-boy guaranties.

“Outside of basic structure such as proceeds and pricing and in addition to collateral performance tests — LTV, DSCR, debt yield — we are seeing heavy negotiations [around] loan term, extensions, Libor floor, hurdles for future fundings, and cash management,” Duenas said. “There are a multitude of levers involved in negotiating terms, so you see a lot of pushing and pulling; if you give up structure, you have to price that risk in. But there is a limit to the amount of risk each lender is willing to take on.”

One lender CO spoke with gave the example of his shop waiving cash management for the first 18 to 24 months on a transitional loan, when it really should be in place from day one.

“Where we have concerns on these cov-lite deals is that you can be in a position on a value-add loan where you start to see cash flow erode and a business plan going sideways, but you just have to stand by and watch things get worse without any ability to start sweeping cash or call default,” he said. “You can be in a very tough position where your borrower is seeing value erode and your hands are tied — you can’t do anything about it.”

Playing with the big boys

Several of those CO spoke with said that the behemoth borrowers are often able to command out-of-market terms today thanks to their name and reputation alone, with one lender adding that certain industry titans, “basically write the term sheets for you. They have out-of-market provisions that they’ve had in place for forever, like caps on their liability on some carve-outs in a bankruptcy scenario,” he said. “Frankly, there are a few names we know and we like, but we essentially won’t lend to them because they demand too challenging of a structure in our view.”

But that doesn’t stop other lenders from happily agreeing to next-to-no covenants when those big shops come calling.

“There are a few borrower names out there where the perception as an [equity] limited partner is ‘if you invest with them, you don’t get fired,’ or as a lender, ‘if you make a loan to them, you’re not going to get fired,’ ” the anonymous lender continued. “They’re doing large deals, and so [the overarching perception is] ‘hey, good job, you made a big loan to a really high-quality sponsor.’ ”

But lenders should be wary of placing all their trust in a name, Duenas said.

“It may initially seem easier to justify a deal because [big sponsors] have deep pockets, but you ultimately have to look at your basis and ask, ‘Are we comfortable with where this deal is going to go or could go in a downside scenario?’ Because who knows, what if you do get the keys back, what if the operating partner in a joint venture isn’t as strong and isn’t able to execute?” Duenas said. “It’s exciting to do a deal with big sponsors, but at the end of the day, it doesn’t mean that you should agree to metrics that don’t conform to your investment strategy and risk profile. We’ve all seen the tide turn.”

As such, Mesa West is staying the course in terms of their lending parameters, she said.

“We aren’t doing deals that are outside of our wheelhouse; we’re still very disciplined,” Duenas said. “A Mesa West deal is going to have a certain amount of structure in it, and if someone pushes outside of that structure then it’s not our deal.”

But while several lenders are passing up deals that don’t necessarily conform to their strategies, others are happily diving in.

Speaking on a Commercial Observer panel last December, Troy Miller, head of Starwood Property Trust’s West Region, noted that the push towards cov-lite structures comes down to the sheer number of players in the system.

“When everyone is gravitating around a similar spread or coupon level, guys are winning deals [by offering] cov-lite,” he said.

As one of the biggest borrowers in the industry on the equity side of its business, Miller said Starwood’s lending platform has an insider view into exactly what lenders are granting borrowers today: “I see what our guys can get on the buy side and it’s crazy; almost no covenants,” he said. “Of course, everyone knows what others are getting and we all push for that.”

A risky business

So, which lenders are saying yes to the cov-lite deals that others are passing on?

“It’s usually lenders I’ve never heard of before,” Mark Fogel, president of ACRES Capital, said, speaking of the waiving of bad boy guaranties, specifically. “New lenders in the space with a lot of capital to put out who aren’t too concerned with what happens two years down the road. The groups that are grasping for deals are the ones that will really bend on covenants.” 

There isn’t one group out there who is considered the “Wild West” lender right now, “at least in our space,” said a bridge lender who also spoke to CO on the condition of anonymity. “There are groups where you’ll talk to anyone there and they’ll say, ‘We’re maintaining structure, we’re not agreeing to any cov-lite deals’ … Yet … these deals are getting done.”

The stretching on covenants is also trumping the relationship aspect of the lending business on occasion.

“We’ve lost or passed on deals with borrowers we’ve done a lot of business with because someone is coming in way more aggressive,” Duenas said. “Even if we get last look on a deal, sometimes the terms are something we simply won’t compete with, or cannot get comfortable with, and we confidently pass.”

Bad boys, bad boys, whatcha gonna do?

Several sources said the biggest area of pressure on covenants and the most worrying trend is the number of lenders allowing the pushback against non-recourse bad-boy carve-out guaranties. The Century Plaza Tower deal is one example of this covenant being waived, but it’s hardly the only one.

“Most loans originated today outside of the traditional banking arena are non-recourse,” Jonathan Roth, a  co-founder of 3650 REIT, said. “Non-recourse loans have a certain level of recourse for ‘bad boy’ acts, but what I’m starting to see most prevalently is the willingness of lenders to accept corporate entities rather than a ‘warm body’.  Where the behavior against which a lender seeks protection is 100 percent within the sponsor’s control, the elimination of the warm body really makes me scratch my head.”

Fogel concurred that bad-boy guaranties are what borrowers are really fighting back on — hard. 

“Covenants are not really all that painful to deal with, but what can be very painful for a borrower is … bad-boy guaranties,” Fogel said.

To the extent that a borrower does something wrong, his or her loan becomes full recourse. This includes things like misappropriation of funds, fraud and bringing in new partners without the lender’s consent.

“All of those things can put a lender in a really bad spot — that’s why we have covenants in there — not so much because you’re going to recover money but because it gives you the leverage to control the transaction if things start going sideways,” Fogel said.

“We’ve seen more loans being done at typical value-add advancement rates in that 65 percent loan-to-value context with borrower-only carve-outs,” the bridge lender said. “It’s not something that we’ve done but we’ve definitely seen some of our peers in the debt fund space do it and we’ve lost deals because we’ve walked away.”

The anonymous bridge lender said that his peers who agree to these loans use justifications such as “they’re never going to let this loan go bad. They’re never going to file bankruptcy.” (Sound familiar?)

That said, “Fannie Mae and Freddie Mac don’t even require a warm body if you’re below 65 percent leverage and some other lenders will waive that as well, although most lenders won’t,” Grossman said. “There’s a lot more movement that sophisticated sponsors are getting in terms of the negotiation around carve-outs. No matter what, if you commit fraud or have willful misconduct of gross negligence you’ll trigger a carve-out. But there’s a lot of gray area in the loan documents and a lot of borrowers are pushing it away and getting really skinnied down carve-outs.”

Like the lender who spoke with CO, Grossman said he’s also seeing carve-outs being capped at certain dollar amounts. So even though there’s a warm body held accountable, the lender would be limited in the amount it can recoup.

Then, there’s the chipping away of the guarantor’s financial covenants.

“It’s very standard for a value-add bridge loan to get a net-worth covenant of 100 percent of the loan amount and liquidity of 10 percent from our guarantors,” the bridge lender continued. “That has progressively been chipped away at, particularly for larger loans, and there’s an acceleration of it over the last 12 months.”

R.I.P., structure?

Don’t go out and buy a black suit just yet, though. A degradation in covenants doesn’t necessarily signal a massive wave of upcoming defaults, losses or lawsuits. 

“Top lenders are making movements for top sponsors,” Grossman said. “Where you may see more issues are with the alternative lenders who are lending at higher leverage and higher rates and giving more away. But those lenders are lending at what is considered equity returns for debt and so they should be ready for there to be some issues. The expectation is not that all these loans are going to perform perfectly.”

“For the most part, lenders continue to exercise discipline,” Roth said. “Lenders are looking the other way, however, on things that historically we wouldn’t necessarily want to look away from. But will this be the death knell or the reason to lead us into the next real estate recession? I don’t think so.”

Roth continued with another prediction: “I candidly believe that the next crisis could very well be born out of all the leverage that’s currently embedded in the system, “ he said. “Lenders that go out and leverage the ownership of their loans will be impacted most when some event occurs in the capital markets where the lenders to those lenders have to make margin calls or exercise some other remedy.”

“I don’t think lenders are making stupid loans right now relative to what they could be doing or relative to 2007, 2008,” Grossman said by way of conclusion. “I think they’re definitely giving away more than they want to give away, so it’s a time to be cautionary, but it doesn’t feel like the end.

“If you come back to me in six months and I say, ‘We’re getting bad-boy carve-outs removed for any deal under 70 percent’ or [we’re] waiving completion guarantees on construction loans — that would be a scary thing,” Grossman continued. “To me, it feels more like nibbling around the edges to try to win transactions versus giving away the farm.”