By: Eric Lamb
WELLS FARGO
August 9, 2011
As everyone knows, the past few years have been a tumultuous time for the commercial real estate market. On the financing side, banks have spent a lot of time managing their loan portfolios of underperforming and nonperforming loans. Most banks have required more frequent reporting of property operations, and if there has been any deterioration of performance or loan maturity, a new appraisal has been ordered. Based on the value conclusions from the new appraisals, many times borrowers have been asked to make principal remargin payments to bring LTV’s (loan-to-value ratio), debt coverage ratios and loan yields back in line with bank regulator requirements. In most cases, borrowers and lenders have been able to come to an agreement where the bank received additional cash and the borrower received additional time.
Improved fundamentals
The operations of properties began to improve in 2010. Occupancies have been increasing across all property types and performance levels stabilizing. As such, the lending focus has turned back to originating new business. There are very few acquisition opportunities in the market, so the majority of the activity has been for loan refinances. One of the bright spots for the Tucson market has been the development of new multifamily projects, with several experienced developers/operators working on projects in Northwest, Northeast and East Tucson.
The key aspect to consider when seeking financing in today’s market is that the loan will most likely be sized based on the lesser of the maximum appraised LTV or minimum debt coverage ratio and loan yield performance levels. It is very common to have a refinance project that satisfies the required operating performance levels, but doesn’t meet the LTV requirement based on appraised value.
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