years ago by limiting the buyer activity on the largest buildings
to institutional buyers for the most part. Many of the buyers of the
2005-2007 era, in contrast, were private buyers who used financ-
ing of up to 85 percent LTV, which allowed them to pay more for
buildings with less money at risk, driving prices higher, cap rates
lower, and keeping the market exceptionally “liquid.”
For value-add properties, generally the market for larger loans
($10 million and larger) has seen institutional private lenders will-
ing to provide non-recourse “bridge” lending options with single
digit interest rates. Outside of their sweet spot, however, there are
mostly more opportunistic bridge lenders charging 10 percent to
12 percent or more, plus sometimes two or more points to the
lender. For less risky properties that cost of debt is too expen-
sive to allow for a well-functioning market, which puts landlords
at a disadvantage, and tenants at risk. Mezzanine lending too has
also been at lower leverage points than market equilibrium would
normally see, and has limited itself to larger, class A properties in
select core markets. Class B properties in second and third tier cit-
ies are only just starting to see the financing markets reopen.
Many markets, particularly in the Midwest, can’t fathom spec
development today. However, there are several exceptions to this
for big box industrial product, including the Inland Empire in
Southern California, Salt Lake City, Miami and the 1-81 corridor
of the eastern Pennsylvania market. Absent reasonable traditional
financing, some of this speculative development, including Liberty
Properties’ and Exeter Properties’ Pennsylvania projects respectively, are being built entirely with cash equity on hand, using no
Skanska is in an even more elite league right now, building
one of the very few large speculative office buildings anywhere in
the country–a 300,000 square foot building in Houston’s Galleria
submarket. This project, too, is being constructed without lender
“Good News” Moneys & Other Niche Funding
For tenants and tenant reps, this often unmentioned funding can
be the most critical piece of a landlord’s being able to execute a
lease negotiation. Making sure the landlord can pay the tenant
improvement moneys–and the leasing commissions–is something
tenant reps used to take for granted, but this practice is no longer
applied. Today there are many tenant reps with painful war stories of landlords that couldn’t fund the leases they signed. In one
such instance, it took the downfall of Anglo-Irish Bank to force the
sale of a loan on the class A 225 West Washington in downtown
Chicago for a new lender to enter the picture with a willingness to
fund a $7 million TI and commission package for a large lease with
Allianz–a lease that had been held in escrow, not knowing if the
landlord would be able to fund those and keep the tenant.
Recognizing this as one of the last (and historically weakest
and mispriced) sectors of the market, Angelic has just opened a
new $500 million fund in a joint venture. The fund will provide
non-recourse financing on 100% of the costs of tenant improve-
ments, commissions, and other transaction-related costs for high
quality tenancy. The City of New York and Kraft are two tenants
who have recently completed projects with this unique funding
option. I expect to see other creative niche financing products born
from the adversity of this current market as “normalcy” continues
to remain elusive.
Recourse vs. Non-Recourse
Anyone whose real estate career spanned from 2003-2008 may not
know the definition of the word “recourse.” At Angelic we very
rarely structure and place recourse loans, with the exception of construction loans, which will almost always be recourse to the developer during the construction period. There are still non-recourse
lenders for almost any property today, but we have found that often
there are only one or two lender options available for a given deal,
making it difficult to set up a very competitive lending process.
To avoid recourse on higher LTV loans, we structured some loans
with lender participation in the future equity upside; in essence
giving up some potential future investor profits to the lender in
order to avoid having the borrower take recourse risk on the loan.
In other cases we have had traditionally non-recourse borrowers
acquiesce and seriously consider recourse or partial recourse loans
as alternatives, though we have successfully avoided having to go
that route on any project thus far.
For smaller properties and for user-owned projects, considering
recourse loans will open up more opportunities with community
and state banks, which are generally more healthy and ready to
lend than their larger regional and national counterparts. A well
functioning CMBS market is something we sorely miss for smaller
loans in secondary locations, as CMBS lending was one non-recourse lending source that charged very little premium for being
in a secondary location or class B product before the recession.
For tenants, brokers and investors in smaller metro areas, this is
still having a very negative impact on market dynamics. The restabilizing of small loan CMBS programs will be one of the key
areas to help restore equilibrium between borrowers and lenders,
and in turn between tenants and landlords in those markets.
Overall, we can see that at the beginning of 2012, the financing markets are almost universally improving over the recent past,
but not at the pace that most market participants would like to see.
There are significant low cost financing options available to most
buyers of multi-family, good credit single tenant and trophy multi-tenant office buildings. Construction loans with pre-leasing to
credit tenants are available in most situations. However, construction loans for spec development are almost non-existent and second and third tier markets are still ignored by many larger lenders.
A better functioning financing market will help improve overall
market transaction volumes and will help building owners provide
tenants the funds they require from their landlords to fund building
and tenant improvements and to pay brokerage commissions.