Thursday, January 15, 2009

RECI Explains Lenders' New Black Box Forumulas

CHICAGO, IL - Lenders are more selective than ever with current underwriting techniques reflecting very conservativeparameters.

And in particular, higher leverage fundings based on project values of the last couple of years are shunned.

Instead, most lenders prefer internal valuation/underwriting models rather than simply applying debt service coverage and leverage restrictions to externally-generated valuations (e.g., purchase contracts and third-party appraisals).

These underwriting models are often known as "Black Box" formulas.

Black Box formulas offer "quick and dirty" answers for initially screening most types of permanent, fixed-rate loans characterized by relatively predictable income streams.

Two of the most popular Black Box formulas are "Front Door"(income-justified loan) and "Back Door" (loan-justified income). Each formula is described below along with a simple illustration.

Front Door:

The Front Door formula is used for computing the justified loan about based on a net operating income.

In summary, the debt service coverage ratio is capitalized by the mortgage constant, as shown by the following example:

* If a project has a projected figure of $1 million stabilized net operating income; the cash flow available for debt service would be $833,333 ($1,000,000 divided by 1.20 debt service coverage).

* Thereafter, capitalizing the cash flow available for debt service at an 8% constant equates to a loan amount of approximately $10.4 million.

* Dividing the loan amount by 75% equates to a rounded value of $13,900,000.

* The original $1 million of net operating income translates to a capitalization rate of about 7.2%.

Back Door:

In contrast to Front Door loan underwriting needed for sizing project income, the Back Door uses the required loan amount as the key variable.

The debt service coverage ratio determines the minimum net operating income as illustrated below:

* $10.4 million is the requested loan amount featuring an 8% mortgage constant restricted by a 1.20X DCR and a 7% cap rate.

* Multiplying the requested loan amount by the 120% yields a net operating income of $998,369.

* Capitalizing the net operating by 7% yields a value in excess of$13.3 million with a corresponding LTV of about 78%.

Loan Proceeds Restrictions:

The Front and Back Door formulas are often restricted by the lower of: (a) Loan-to-Value or (b) debt service coverage ratio.

For example, in the case of the Back Door method, the loan may be limited to 75% rather than 78% (even though the debt service coverage complies at 1.20X).

Return-on-Cost Targets:

The Return-On-Cost is based on capitalizing the projected, stabilized net operating income by the total project costs.

ROC calculations are especially useful for quickly computing justifiable project costs for new construction/substantial rehab ventures projects.

Generally speaking, ROC yields should be at least 100 to 250 basis points higher Front and Back Doorcap rates.

In the above examples, the project should generate cost returns of at least 8% to be reasonably profitable.

In the cast of the Front Door example, the development should be built based on total costs of approximately $12.1million-or-less to be considered a "profitable" development opportunity


Black Box formulas are limited to static underwriting situations.

Unlike dynamic underwriting formulas such as discounted cash flow analysis, static underwriting assumes a stabilized net operating income which increases or remains flat during the loan term (e.g., multifamily or net-leaseproperties). If the cash flows are expected to significantly fluctuate and/or are in the process of stabilizing, Black Box formulas generate inaccurate results.

ABOUT US: The Real Estate Capital Institute(r) is a volunteer-based research organization that tracks realty rates data for debt and equity yields. The Institute posts daily and historical benchmark rates including treasuries,bank prime and LIBOR. Furthermore, call the Real Estate Capital RateLine at7RE-CAPITAL (773-227-4825) for hourly rate updates.

Banks' Purse Strings Remain Tight

Real Estate Market Holds its Breath

By James Chappell
Managing Director
STR Global

LONDON--I was at an industry event last night, one that we present our data at every year.

The event—like most, it seems—concentrates on the real estate side of the business and is generally a pretty good barometer of confidence in the industry.

It was a good mix of owners, developers, asset managers, lawyers, consultants and agents, with a few operators thrown in. I noticed there were far fewer bankers than last year, but I suppose that is a sign of the times.

What a difference a year makes. Or even six months, for that matter. I remember the event at the beginning of 2008, where there was a sense of expectation that some kind of correction was inevitable, but nobody knew how much or when.

The main issue then, as I remember, was the gap between seller expectations and buyer valuation.

The owning community was convinced that the kinds of levels that we had experienced in 2005-2006 were still possible, but was unable to find any buyers that agreed with that, so the market was stuck in limbo with both sides unable to meet.

The irony about what has happened since is that deals are there to be had, but financing for the purchases is unavailable.

This is a great example of what is happening in the wider economy, as the banks, scared of what is still yet to come, are ignoring the urgings of the government and are not loosening the purse strings.

Those companies that are sitting on cash can potentially do unleveraged deals, but how attractive is that?

That, I think, is the real challenge for the Investment community, and until the liquidity returns, it is hard to see anything changing.

Many agencies have seen the writing on the wall and have already eliminated wholesale redundancies and, in some cases, closed agency departments altogether.

Valuations remain, but without much to value.

CB Richard Ellis Orlando Closes Renewal Leases Totaling 301,248 SF

IKON Stays in 171,876-SF Warehouse for Another Two Years

ORLANDO, FL – The Orlando office of CB Richard Ellis is pleased to announce that Erik W. Schwetje, Vice President, brokered a two year lease renewal on 171,876-sq.-ft. representing the landlord Orlando Warehouse Portfolio, Inc. The tenant, IKON Office Solutions, Inc., was represented by Kevin Hoover (top left photo) of CB Richard Ellis. The space is located at in the Beeline Distribution Center, 2507 Investors Row, Orlando, Florida.

PrimeSource Building Products Negotiates 10-Year Renewal on 129,372 SF

ORLANDO, FL-- The Orlando office of CB Richard Ellis is pleased to announce that Erik W. Schwetje, (bottom right photo) Vice President, negotiated a 10 year lease expansion/renewal on 129,372-sq.-ft. representing the landlord AMB Property, L. P. The tenant, PrimeSource Building Products, Inc., was represented by Matt Bates of Homevest. The space is located at 7551 Presidents Drive, Orlando, Florida 32809 within the Orlando Central Park.

Contact: Angelique Greven, 407.839.315,

Foreclosure Activity Up 81%, RealtyTrac Reports

Nearly 3.2M Foreclosure Filings on More Than 2.3M Properties Reported

IRVINE, CA– Jan. 15, 2009 – RealtyTrac® (, the leading online marketplace for foreclosure properties, today released its 2008 U.S. Foreclosure Market Report™, which shows a total of 3,157,806 foreclosure filings — default notices, auction sale
notices and bank repossessions — were reported on 2,330,483 U.S. properties during the year, an 81 percent increase in total properties from 2007 and a 225 percent increase in total properties from 2006.

The report also shows that 1.84 percent of all U.S. housing units (one in 54) received at least one foreclosure filing during the year, up from 1.03 percent in 2007.

Foreclosure filings were reported on 303,410 U.S. properties in December, up 17 percent from the previous month and up nearly 41 percent from December 2007.

Despite the spike in December, foreclosure activity for the fourth quarter was down nearly 4 percent from the previous quarter but still up nearly 40 percent from the fourth quarter of 2007.
“State legislation that slowed down the onset of new foreclosure activity clearly had an effect on fourth quarter numbers overall, but that effect appears to have worn off by December,” said James J. Saccacio, (top right photo) chief executive officer of RealtyTrac.

“The big jump in December foreclosure activity was somewhat surprising given the moratoria enacted by both Freddie Mac and Fannie Mae, along with programs from some of the major lenders and loan servicers
aimed at delaying foreclosure actions against distressed homeowners.

“Clearly the foreclosure prevention programs implemented to-date have not had any real success in slowing down this foreclosure tsunami.

"And the recent California law, much like its predecessors in Massachusetts and Maryland, appears to have done little more than delay the inevitable foreclosure proceedings for thousands of homeowners.”

The California law (SB1137), which required lenders to provide written notice of their intent to initiate foreclosure proceedings 30 days prior to issuing a notice of default (NOD), resulted in a reduction of NODs from 44,278 in August to 21,665 in September.

Notice of Default filings then surged by 122 percent, to over 42,000, in December. Similar patterns have occurred in other states, such as Massachusetts and Maryland, where similar types of foreclosure
prevention legislation has been enacted.

Nevada, Florida, Arizona post top state foreclosure rates in 2008

More than 7 percent of Nevada housing units (one in 14) received at least one foreclosure notice in 2008, giving it the nation’s highest state foreclosure rate for the year.

A total of 77,693 Nevada properties received a foreclosure filing during the year, an increase of nearly 126 percent from 2007 and an increase of nearly 530 percent from 2006.

Florida registered the nation’s second highest state foreclosure rate in 2008, with 4.52 percent
of its housing units (one in 22) receiving at least one foreclosure filing during the year, and Arizona registered the nation’s third highest state foreclosure rate, with 4.49 percent of its housing units (one in 22) receiving at least one foreclosure filing during the year.

Other states with Top 10 foreclosure rates for 2008 were California, Colorado, Michigan, Ohio,
Georgia, Illinois and New Jersey.

California, Florida, Arizona post highest 2008 foreclosure totals

A total of 523,624 California properties received a foreclosure filing in 2008, the nation’s highest state total.

Foreclosure activity in the state increased nearly 110 percent from 2007 and nearly 498 percent from 2006.

With 385,309 properties receiving a foreclosure filing in 2008, Florida documented the second highest state total. Florida foreclosure activity increased 133 percent from 2007 and nearly 412 percent from 2006.

Arizona’s 2008 total of 116,911 properties receiving a foreclosure filing was third highest among the states. Foreclosure activity in Arizona increased 203 percent from 2007 and 655 percent from 2006.

Other states with Top 10 totals for 2008 were Ohio, Michigan, Illinois, Texas, Georgia, Nevada and New Jersey.

Sunbelt cities plus Detroit land on top 10 metro foreclosure rates list

With 9.46 percent of its housing units (one in 11) receiving a foreclosure filing during the year, Stockton, Calif., registered the highest foreclosure rate among the nation’s 100 largest metropolitan areas in 2008.

Other California cities in the top 10 were Riverside-San Bernardino at No. 3 (8.02 percent, or one in 12 housing units); Bakersfield and No. 4 (6.17 percent, or one in 16 housing units); and Sacramento at No. 9 (5.20 percent, or one in 19 housing units).

Las Vegas documented the second highest metro foreclosure rate in 2008, with 8.89 percent
of its housing units (one in 11) receiving a foreclosure filing during the year.

More than 6 percent of Phoenix housing units (one in 17) received a foreclosure filing during the year, giving the city the fifth highest metro foreclosure rate in 2008.

The foreclosure rate in Fort Lauderdale, Fla., ranked No. 6, with 5.95 percent of the metro area’s housing units (one in 17) receiving a foreclosure filing in 2008.

Other Florida cities in the top 10 were Orlando at No. 7 (5.48 percent, or one in 18 housing units) and Miami at No. 8 (5.21 percent, or one in 19 housing units).

With 4.52 percent of its housing units (one in 22) receiving a foreclosure filing during the year,
Detroit registered the tenth highest metro foreclosure rate in 2008.
RealtyTrac publishes the largest and most comprehensive national database of foreclosure and bank-owned properties, with over 1.5 million properties from over 2,200 counties across the country, and is the foreclosure data provider to MSN Real Estate, Yahoo! Real Estate and The Wall Street Journal’s Real Estate Journal.
For current news and information regarding foreclosure-related issues and trends, visit our blog at

Media Contact: Michelle Sabolich, Atomic Public Relations, 415-402-0230