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.
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.
Conversely, the multifamily projects have usually met the LTV requirement due to CAP (capitalization) rates in the low 6% range, but are limited in loan size by the required minimum operating performance metrics. In either case, loan underwriting is focused on the in-place or projected operations in comparison to the market overall in terms of rents, occupancies, expenses and CAP rates. In general, good quality properties performing better than their direct market competition have the best chance of obtaining financing.
The interest rate markets have been very volatile since late 2008 and have fluctuated dramatically during the last 12 months. Given the recent U.S. debt ceiling crisis, ongoing budget debates and credit level downgrade, interest rates are currently at or near their lowest levels in the past 12 months. The chart below indicates rates over the past 12 months and as of August 8, 2011 for the various commonly-used interest rate indexes.
Given current levels, it may be the right time to contact your lender and evaluate your financing opportunities.
Eric Lamb is a Vice President and Relationship Manager for Wells Fargo Middle Market Real Estate where he is responsible for originating and managing a commercial investment real estate loan portfolio. A University of Arizona graduate, Eric began as a commercial real estate appraiser in Los Angeles in 1992 and began his lending career in Tucson in 1996 assisting small businesses with Small Business Administration (SBA) financing. From 2000 to 2005 he originated commercial real estate loans for a local mortgage broker and has been with Wells Fargo Bank since 2005.
Rendering by Robinette Architects via Inside Tucson Business