12/31/2008
Success Story December 2008: Cash in Hand for Remodeling
Our borrowers own a multi-purpose building in Portland that they purchased a few years ago from a seller who needed to quickly unload the property. At the time, there were already tenants leasing the space—a nightclub on the bottom two floors and individuals subleasing the upper floors as artist studio space. The goal of our borrowers is to remodel the upper floors as modern apartments to increase the value of the property.
Fairway America approved the loan based on the conservative loan-to-value and the strength of the borrowers’ credit and finances. They received cash-in-hand to begin the remodeling process.
The broker was paid $7750
Total loan value: $775,000
12/29/2008
Commercial Lending Industry Asking for Federal Relief
Troubled commercial lenders and developers are requesting money from the US Treasury, in an effort to prevent the same lending meltdown that occurred in the residential sector from happening to the commercial real estate industry. In a recent letter, 12 commercial real estate industry associates have requested an “extension of the Term Asset-backed Securities Loan Facility (TALF) to guarantee, finance, or purchase highly rated, asset-backed securities collateralized by newly or recently originated commercial real estate mortgages.”
It is estimated that in 2009, $400 billion in commercial real estate mortgages will come due, requiring refinancing. The problem is that the high demand, combined with frozen credit markets will strain the supply of funds, forcing many property owners that hold good, cash-flowing property into default.
The government did mention that TALF–who provides a lending capacity of $180 billion to secure lending backed by credit card debt, auto loans, etc.–could be extended to commercial real estate mortgages. Many fear, however, that a bailout will not have a significant effect, or that it is even possible to provide enough liquidity to commercial lenders to make a real difference. TARP (Troubled Asset Relief Program) money is already spoken for by banks to write down credit card debt, auto loans, residential mortgages, and other consumer debt. It is questionable whether there is any money available to extend to the commercial real estate sector.
Those who particularly favor a rescue package are primarily the retail and hospitality sectors. Retailers are facing upcoming balloon payments, and the inability to refinance prior to that due date would force them to default, further affecting consumerism and the economy as a whole. The hospitality industry is slightly less shaky, due to more correctly underwritten loans at origination. However, these loans will still require refinancing, and the question remains: are they good enough to refinance?
Various entities within the commercial lending and real estate industry are still brainstorming ideas to sustain it, and the Commercial Mortgage Securities Association has met twice with the Treasury Department to discuss options. A third meeting is scheduled after the New Year to further explore possibilities to prevent a downfall in the commercial real estate sector.
We at Fairway believe that the commercial real estate sector will certainly get hit to some degree, with some property types and geographic regions getting hit worse than others. This is why we have taken a conservative approach to our property valuations as well as the percentage we lend against that valuation. We believe also that this market environment will present many unique opportunities for people who have capital to lend and to invest in property that may very well be temporarily undervalued. While things are still very much up in the air as to the total impact of this market meltdown, we look forward to seeing what 2009 will bring.
12/22/2008
Subleasing Gives Tenants Bargaining Power
By now it’s no secret that the slowing economy has created a host of challenges that, in one way or another, have affected everyone. But now, it’s starting to affect commercial property owners in another way—subleasing.
As companies have downsized, so has the amount of space they need to operate. Yet, these companies are locked into rental agreements with the property owners, so what are they to do? Many have simply let their leases expire and then sought out smaller quarters, while others have opted to sublease their unused space—often for a much cheaper price. This has resulted in a spike in the amount of vacant office space available throughout the country.
What effect does this have, then, on office markets and commercial real estate as a whole? For one, it means there’s a lot more competition out there to get space rented out. Property owners are forced to compete with the tenants who are subleasing their space—which can mean offering built-out space as opposed to putting the responsibility of building out a space on the tenant. After all, the sublease properties often come with furniture and even phone and internet systems for a fraction of the cost.
Landlords don’t really need to worry about existing tenants, as they are bound to continue to pay rent until the end of their lease. The real concern involves what happens to those spaces after the lease runs out. The prospective tenant really has the advantage and bargaining power in a market where subleases are so abundant. To keep spaces filled, landlords will need to make more concessions than in recent years and offer exceptional customer service to really make it worth the tenant’s while, and dime.
Keeping these properties occupied is especially important to the property owner, as the revenues generated from the rentals often goes right into paying the mortgage on the property. If spaces become vacant, not only might there not be enough income to cover the mortgage payment, but it will be difficult to refinance the property later. If a lender sees that the property is not self-sufficient, they may be reluctant to make a deal—especially if the property owner has credit issues or any other financial challenges on his or her record.
Given this trend of accumulating office inventory, property owners really need to change their perspective on leasing. Whereas a few years ago, the landlord had the upper hand and could focus on making a profit and be selective with his or her tenants, the tables now have definitely turned. It is now up to the landlord to give a little more to attract tenants and keep their spaces occupied. It’s less about making a huge profit and more about making wise decisions to stay afloat during this stressful economic period.
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