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Real Estate Finance 301: Raising Capital in Today’s Economy – Strategies and Deal Points (Richard Peiser) - ULI Fall Meeting 102611
1. Real Estate Finance 301
October 26, 2011
Tim Wright,
Senior Managing
Director
2. Debt Market Snapshot – Fall 2011
Life Companies
• 50% to 70% LTV (more going to 75% for multi-housing and higher quality deals)
• Life Companies do have plenty of money beyond 10 year terms up to 30 years.
• Interest rate floors have been instituted by most firms and are typically 4.00 to 4.50%. There are
some that will break 4.00% and stated floors for low leverage and shorter terms (7 yrs or less) and
spreads are 200-250 bp with floors (3.50% to 4.00%).
• 25 to 30 Yr. Amort. (low leverage loans – some will quote full term I/O)
• DSCR – 1.25x to 1.35x
• Must increase allocation for next year and hit target for 2011
CMBS Aggregators
• Up to 75% - May go higher as the focus is really on debt yields of <9% to 10% plus they now can
offer mezz to get them up to 85% LTV.
• Up to 10 Years (5 to 10 years are typical - some are now offering 7 yrs but at higher spreads)
• 30 Yr. Amort. (will offer 1 to 5 yrs. of interest only with LTVs of 65% or lower to win business)
• CMBS spreads are 325-350 bp with all-in rates between 5.5% (best deals) - 6.0% – Pricing on 5 and
7 year deals is higher but still results in the same rate range.
• DSCR – 1.25x to 1.35x
Source: HFF
HFF, L.P. Page 2
3. Debt Market Snapshot – Fall 2011
Mortgage REITs and Debt Funds
• 75% to 80%
• Up to 10 Years
• 30 Year Amort (will consider some 1 to 3 years of I/O)
• Pricing 6.0% to 10% - want fees of 50 bps to 1% up-front as well as exit fees of 50 bps to 1%
• DSCR – 1.00x to 1.25x
• Good news money or structure
Commercial Banks – Bridge Lenders
• 60% to 75% non-recourse in the 4% to 5% floating/fixed for 2 to 5 years for either stabilized and/or
transitional assets
• Low Libor floaters popular with institutional buyers 50-60% LTV
Agencies
• 70% to 80% LTV (lower LTVs & high quality assets with strong sponsors will break rates below)
• Requires 1.25x-1.30x DSCR (1.30x required for cash out)
• Cheapest fixed rate spreads are Freddie CME execution
• Freddie portfolio execution is roughly 50 bps higher than CME 4.25 vs 4.75%
• Fannie roughly 15 bps higher than Freddie CME
• Both compete well with each other buy losing some market share on high quality assets
Source: HFF
HFF, L.P. Page 3
4. Project: Circa 37 Apartments
Description: 306 Unit Class A Multi-Family San Diego
Total Budget: $72MM - $235,000 per unit
Assignment: Arrange maximum leverage non-recourse
construction financing
Challenges: Limited number of banks offering non- recourse
and those that were lower leveraged
Solution: Engineer a construction facility with a
mezzanine piece to get to 80% LTV
Tactics:
• Maximize cheaper first lien dollars, while still leaving enough mezz to be interesting to mezz
lender
• Demonstrate a sensitized exit scenario showing the mezz could be readily taken out with a
permanent loan.
Issues:
• Negotiating intercreditor such reporting and control could be done efficiently
• Ability to exit out of Mezz early as possible while offering investor a reasonable multiple.
Current Trends:
• More non-recourse debt available at higher leverage today, but still debt yield driven
• Mezz money has come down in pricing
• Structure becoming more common again in this cycle so pre-negotiated intercreditor
agreements are becoming easier to find.
HFF, L.P. Page 4
5. Project: Sheraton LAX
Description: 802 Key Full Service Hotel
Financing: $47.5MM
Assignment: Refinance existing loan with flexible, low coupon,
interest only debt
Challenges:
• Hotel recovering from downturn and T-12 underwriting
did not support requested financing.
• Hotel running at very high occupancy but needed to
push rate.
Solution: • Given tangible improvement in operating results, lender was able to provide aggressive initial funding
loan and offer a compelling earn out that could be realized in as little as 6 months. Major bank financed
at low spread over LIBOR for two years with two, one year extensions.
Tactics:
• Demonstrate a very low exposure per key to Lender.
• Touring the asset was a must because quality of the asset relative to peer group was readily apparent.
• Review of historical numbers reflected hotels performance is strong market and budgeted numbers were
inside of peak.
• Articulate clear business strategy to modify demand mix to push rate (less crew, new corporate
contracts) to fall in line with the peer group.
Issues:
• EBITA reflected operations at very high occupancy (90% plus)- lenders wanted to underwrite 80% or less-
exacerbating the sizing issue.
• Airport sub-market perceived as limited with respect to rate growth.
Current Trends:
• Bank lenders still looking for 11 to 12% debt yields on trailing 12 and properties with consistent history.
• Transitional properties remain difficult to finance at low life or bank rates (province of the debt funds)- 4%
vs. 7% plus
• CMBS not competitive with life co’s or banks but provide reasonable fixed rate alternative again.
HFF, L.P. Page 5
6. ULI Fall Meeting 2011
Real Estate Finance 301
Gary Gowdy
Managing Director, UBS Global Asset Management, Real
Estate
October 26, 2011
7. Overview of UBS Global Real Estate funds in the US
Gross assets – USD 16.1 billion
Assets by property type Assets by geographic region
(USD in millions) (USD in millions)
$567
Midwest
4% $5,025
$1,380 1, 474
10% 34% Apartments 11%
Office
$838 Retail
6%
Hotel East
Industrial 5,177
West 37%
$2,694 Farmland 4,987
$4,147
18% 28% 35%
South
2,447
17%
7
8. Participating mortgage structure
Illustrative example
San Diego, California
First mortgage with sharing in cash flow and
appreciation
San Diego, Class A townhome apartments
TPI construction/permanent loan
$40 million investment (90% LTV, $290 thousand per
unit)
6.0% 50% of 8.0% IRR hurdle
Total return
Interest
+ remaining
cash flow + plus 50%
of appreciation = to TPI
8
24. Southpoint Executive Center Opportunistic Distressed
Maitland Green I & II Recapitalization
Orlando, FL
Property Description
• Three suburban office buildings; 330,000 SF
• 50% occupied
• Purchase price $55 PSF
• Capital reserve $40 PSF
• 50% of replacement cost
Opportunity
• Market: 86% occupied
• 30,000 SF tenant signed at closing
Highlights
• Developer imputed equity disappears
• Developer funds 10% of new equity
• JV receives 20% after 15%
25. Opportunistic Distressed
One Park Square at Doral Recapitalization
Doral, FL
Property Description
Property: 11-story Class A office asset built in 2010 totaling 281,623 SF
Pricing: $27.5M ($98 PSF) – 30% of development costs
$43M ($152 PSF) – Projected all-in cost - 50% of replacement cost
Opportunity
• Purchased $56 million loan for $27.5 million
• Signed 100,000 SF lease at closing
• Provided $7 million in transaction costs at closing
Highlights
• Developer/Property manager kept in place
• No initial debt recapture to Developer
• 20% after 15% preferred IRR to equity; 20% after unlevered 12%
26. Value-Add Acquisition
Gut Renovation of Failed Condo
Property Description
• Unit Count: 86 of 260 in three building complex
Property:
• Size: 90,000 SF
Original Developer Basis
Acquisition Cost: $120,000,000
Capital Improvements: 45,000,000 Alden Tower Basis: $55 million
Total: $165,000,000
Project Capitalization
CHR Purchase Price: $18,000,000 Debt $18 MM
Renovations: 12,000,000 Dev. Equity $ 6 MM
Total Cost: $30,000,000 Mezzanine $ 6 MM
$6.0 million mezzanine at 10% current pay Total $ 30 MM
(60-80% of capital stack)
27. Value-Add Acquisition
Infill Development
Property Description
• Original units: 322
• Phase 1: 45 units
Property:
• Infill Units: 54
Project Costs
Acquisition: $52,400,000
New Construction: 8,400,000
Capital Improvement Reserve: 2,200,000
Total $63,000,000
Sources
Debt: $38,100,000
Construction Debt: 8,400,000
Investor Equity: 8,250,000
CHR Subordinated Equity: 8,250,000
Total $63,000,000
28. 2006 2012
Debt replaced equity Minimum leverage
Value determined price No value add debt
Cost equals value
Equity chasing deals Equity doesn’t want JV headache
Significant predevelopment dollars Risk averse—all risk must be wrung out of deal
available/at risk dollars shared
Trees grow to the sky—don’t want to lose Lack of trust in projections
opportunity
Guarantees by equity source are not real No equity guarantees available
equity—price to play the game/access deal
20% after 12% 20% after 10%
Evolved to 50% after 8% 50% after 17%
29. 2006 2012
Sponsor had leverage Hope certificate to Sponsor
Joint approval Equity controls decisions
Buy/sells Avoid legal complications
0-5% co-invest 10-20% co-invest
Opportunity funds and value-add funds Fund of Funds to local operators/funds
Lehman leverage/bifurcated tranches of Investment advisors of HNW family offices
conduit debt/equity
65-75% leverage
85-97% leverage
RECOURSE debt
Non-recourse debt
Notes de l'éditeur
Value Added ExampleCT deal in Beamont– $49 Basis on $.29 NNN RentsHigher LTC with Private Bank (60%) Higher rate (8%) Non RecourseLadders did the dealTough Underwriting (Market Rents, 1.2 DCR @ 6.5%)