‘Babes in the Woods’ Need Not Apply
Tom Acitelli March 23, 2010, 7:31 a.m.
When Ashish Parikh went looking for lenders late last year to refinance the nearly $30 million in debt that his company, Hersha Hospitality, assumed when it purchased the Hilton Garden Inn in Tribeca, he received some level of interest from 30 lenders, and six term sheets.
“If this was 2006 or 2007, there would have been 100 bidders and 100 term sheets,” said Mr. Parikh, Hersha’s CFO. But Mr. Parikh also compared the lending environment to June of 2009, when Hersha purchased the hotel. He said the company received “zero level of interest” from lenders in refinancing the debt.
“You can’t call this market frothy,” Mr. Parikh said. “But, it’s come a long way from the first half of 2009.” Hersha received a $32 million mortgage in late January from mortgage REIT Apollo Commercial Real Estate Finance, which has a larger principal balance, a lower interest rate and an extension of the loan terms.
After a subdued 2009, many lenders are once again sticking a toe in the commercial real estate lending pool. But lending terms bear little similarity to the hot environment of, say, 2006.
Lenders are insisting that any deal have a strong, experienced sponsor behind the loan, and are looking closely at both the sponsor’s track record as an owner-operator as well as at its balance sheet, said Paul Fried, managing director at Traxi LLC. “Lenders will talk about the strength of ownership before they talk about anything else,” he said.
Also, an asset’s performance and location are at the top of lenders’ punch lists. The days of lenders’ parting with their money on projections of increasing rents and lower vacancy are history. Instead, many borrowers must pass what David Schechtman, senior director of investment services firm Eastern Consolidated, called “stress testing.”
“They are taking in-place income, and discounting it by 15 to 20 percent, figuring that many landlords will have to offer rent concessions,” Mr. Schechtman said. “There are no more leaps of faith.”
Also, borrowers must be willing to put more money into their deals, or, as Mr. Parikh put it, “50 percent [loan-to-value ratio] is the new 70 percent.”
THE 340,000-SQUARE-FOOT 42-story office building at 53rd and Madison Avenue, 515 Madison, hits the bull’s-eye on most of today’s lending parameters. On Dec. 31 of last year, 53rd Street Associates LLC, a joint venture of the Gural and Hemmerdinger families, received a $70 million loan from Wells Fargo Bank for the purchase of the fee and leasehold interest from the Malloy and Sheffer families.
The property, 89 percent leased at the time of loan closing, had a 15-year history of 97 percent occupancy, and recently underwent extensive lobby and entranceway renovations. New, prebuilt office space was also added.
“Some of the smaller tenants in the building had been there for 20 years,” said Paul Talbot, principal of Newmark Knight Frank, which arranged the financing. (The managing partner of the ownership entity, Jeffrey Gural, is an owner of Newmark Knight Frank.)
The group began looking for financing in September, Mr. Talbot said, and from that time until December, more lenders entered the market, thus driving down the spreads the lenders charge.
A lender that favors operators with strong past performance lines makes perfect sense, Mr. Talbot said, particularly in tough times. “Tenants want to know that the owner is strong financially,” he said. “It’s also important to brokers. They want to know that they’re going to get paid.”
An overseas lender also made its presence felt in a recent major office-building refinancing. In early January, the Bank of China was the lead lender on the $475 million refinancing of 1515 Broadway, owned by SL Green, the city’s largest office landlord. The Bank of China provided $325 million of the $475 million, with two German banks providing the balance.
“Asian and German institutions have a solid interest in New York City office real estate, because it holds its value,” said Gregory Hughes, SL Green’s COO and CFO.
While Chinese and Japanese banks are heavy buyers of U.S. treasuries, many are looking to increase their returns by 200 or 300 basis points by lending on commercial real estate, Mr. Hughes said.
SL Green’s operational savvy likely played a role in securing the loan, as the REIT undertook a $40 million upgrade on the building in 2008 and signed anchor tenant Viacom to a 1.3 million-square-foot lease renewal.
Hersha Hospitality, an experienced hotel owner and operator in urban centers, also ramped up performance at the Hilton Garden Inn after acquiring it, installing its in-house management group. “The previous management knew the property was being sold, so that hurt performance,” Mr. Parikh said.
For today’s lenders, that just won’t cut it. Or, as Mr. Schechtman of Eastern Consolidated says, “babes in the woods” need not apply.
WHILE LENDERS ARE unlikely to lend at the volumes seen in 2005 and 2006, there does seem to be an increased willingness of many to reenter the fray.
And while strong and experienced operators who can put significant money into their deal and meet strict underwriting standards are most likely to secure financing, Mr. Talbot of Newmark Knight Frank said, terms for borrowers are quite favorable from banks and insurance companies, as borrowers can obtain rates of 5.5 percent on 10-year loans and 5 percent on five-year loans at leverages of less than 50 percent, which he said are “historically low levels.”
Mr. Hughes of SL Green said large banks such as Goldman Sachs and Bank of America are out in the market again, looking for loans that they can securitize. Also, insurance companies are stepping up their activity, he said. (See chart on page 19 of top New York finance deals since October 2009.)
“The capital markets are continuing to recover,” Mr. Hughes said. That is happening in tandem with an uptick in real estate fundamentals. “It’s not as fast as we might like, but they are picking up. There is a ways to go.”
Lenders are also looking at bigger deals, said Jeffrey Baker, executive managing director of Savills U.S. “Six or nine months ago, interest would have been pretty limited in a $100 million loan,” he said.
Major banks are starting to show interest again in lending on commercial property, Mr. Schechtman said. He was encouraged by a recent conversation he had with a representative at what he called a “money center” bank. “There was an eagerness to look at some deals,” he said. He predicts that major banks are going to start competing again for commercial real estate business with local banks. “For the last year or two, the lights have been off.”
For many lenders, the problem is finding properties that are “loan-worthy,” Mr. Talbot said.
“Where will the money go?” Lenders may loosen their underwriting standards to win more business, or “make their box bigger,” such as lending for construction, Mr. Talbot said.
Mr. Baker of Savills, in fact, is seeing just that. “Construction lenders are going back to their best borrowers, and asking them, ‘What do you have in the pipeline?’