Orgies and Feasts in the Real Estate Finance Markets
By Jotham Sederstrom March 22, 2011 12:40 pm
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For more than two decades, Howard Michaels, chairman of the Carlton Group, has overseen some of the more complicated and big-picture financing deals in recent memory. Earlier this month, in fact, the Carlton Group managed to pull 1180 Sixth Avenue from the brink of foreclosure by wrangling $245 million in new financing. Mr. Michaels, 55, spoke last week about new trends surfacing in the financing market.
The Commercial Observer: Several years ago you were interviewed for this same column. How has the market changed since then?
Mr. Michaels: I would say the market now is like an orgy. I would actually say that, as contrasted from two years ago. Two years ago was like being on a desert and now it’s like being at a feast-that’s the cleaner version.
What do you mean by feast? Is it easier to find and lock in financing right now?
Overall, we’re very bullish on the market right now. I would say that within the last six months, the entire psychology, with respect to lenders and investors, has totally changed. So the market right now is in a real deal mode, and there’s something like over $320 billion in capital looking to be invested.
So the issue today isn’t the money to invest or the desire to invest-it’s finding deals that work and that are priced right. That’s really the challenge in the market. So once you have a deal that’s priced right, finding the capital is-for someone like us-is fairly straightforward.
So, from what you see in the data, why is transaction volume escalating right now?
The other dynamic that’s occurring in the market is that there’s $300 billion of loans that are maturing this year, and now that banks are making profits again, and also have their arms around the value of their assets, they’re more disposed to make deals with borrowers who have the ability to pay off their loans.
So, basically, what you have going on now is you have improved property valuations, you have a lot more liquidity in the marketplace and you have lenders who can now afford to sell on a market-to-market basis-so that’s why you have more transactions going on in the market right now.
Are banks beginning to clear a lot of this debt off their books?
Yeah. Banks now, at this point, are more willing to make deals, and if they have a borrower who they have a good relationship with, who has capital or who can bring in capital, the banks or the commercial servicers are disposed to make a deal with the borrower rather than selling the loan or completing the foreclosure.
And it’s not only banks: The great majority of most of the larger deals that got done in the last few years before the credit crunch were done by Wall Street. So the bad assets or the assets that are overleveraged are really controlled as much by the commercial loan servicers as they are by the financial institutions.
Speaking of foreclosures, earlier this month the Carlton Group saved the Murray Hill Properties- and Carlyle Group-owned 1180 Avenue of the Americas from the brink of foreclosure. Was that a last-minute save?
We put that deal together last week. So, yeah, I mean, that was basically another miracle. I mean, what’s been reported is that that property was heading toward foreclosure, and the mezzanine lender was in the default. They commenced a UCC foreclosure. There was $245 million that had to be paid off, and we brought in an overseas investor to partner with Murray Hill. A hard contract was signed last week. The UCC sale has been canceled, and Murray Hill is going to continue to own this property along with this overseas partner.
That wasn’t quite last minute because there was two weeks before the foreclosure, but it was very close to the last minute.
What trends are you seeing in financing right now?
The other thing in which we specialize is restructures, which is really the hardest type of deal to get done. An investment sale is a two-party trade—so basically you have a buyer and a seller. And within few points of the asking price a deal can trade.
But in a restructure, which we specialize in, you have someone who owns the property, you have the bank that has the loan on the property—and that’s typically overleveraged—and then you have the investor that comes in and has their own capital requirements. So that’s a three-party transaction; so to try and get your mother-in-law on board, it’s harder than when you have two-party transactions.
So we’re seeing a return to the days when complicated financial deals thrived?
So the trend that we see in 2011 is that deals are happening again with speed and size. There’s a real environment right now where people want to do deals. Banks want to clean up their balance sheets, borrowers are starting to look to do new transactions and, also, with all the unrest and volatility overseas, investing in the United States never looked better.
What do you expect to see over the rest of the year and in 2012?
I think we expect to see transactions happening again, which is somewhat reminiscent of the height of the market. In the prime markets like New York, there’s a ton of money looking to invest into assets, as distinguished from some secondary markets, where there may not be any cash flow or it could be a busted transaction.
So, right now, for the people who are getting up and going to work in New York, it’s the best market in the country. I mean, you have a strong economy here, there’s tons of liquidity and deals are happening. The Manhattan market is extremely strong now.
jsederstrom@observer.com
