RECI Reports More Positive News on the Realty Capital Front

CHICAGO, IL - Jeanne Peck, (top right photo)  executive director of The Real Estate Capital Institute in Chicago,  reports more positive news on the realty capital front as recovery from the current downturn is recapitalized by funds which were raised prior to commercial mortgage product being more widely available.

Funding demand is readily available for freshly originated capital underwritten to currently more stringent standards.

In particular, many non-investment grade credit funds desire new commercial mortgage exposure as secondary market spreads have rallied.

How does revived realty capital market translate to property-level funding kinetics?

* New Benchmarks - The Debt Yield (in-place NOI divided by total debt) has now emerged as a popular underwriting index. This index provides a quick gauge of the debt payment cushion, similar to the debt coverage ratio.

For example, 9.5% to 10% was common yield in during the market peak (2007-2008); now the index falls within the 11-12% for most types of permanent loans.

* Favorite Fives - The number five seems to be the most favorite digit for tweaking deals. Funding sources use the number five in many different underwriting scenarios including: 5% more leverage (70% vs. 65% LTV), 5% less debt coverage (120% vs. 125%), 5 years more in amortization (25 years vs. 20 years) and 5% more occupancy in improving markets (90% vs. 85%).

* Floors - In select cases, lenders reduce [or even eliminate] floors and rate protection for floating rate loans on shorter-term debt (e.g., 5 years or less). Rate protection can be waived for lower leverage loans, generally 50% or less. Simultaneously, rate floors are dropping to 3.5% to 4%, as funding sources favor quality over more realty risk.

* Thinking Outside the Box - New Market Tax Credits, Private Placement Offerings (e.g., CIS-Sanctioned EB-5 Foreign Nationals Program), Recovery Act funds and other non-conventional funding vehicles are gaining attention, especially for new construction projects requiring substantial subsidies and equity capital.

Such funds can be used for more challenging assets including senior housing, retail and mixed-use as well as lodging properties. Available on a select basis and in very focused areas, these programs are highly technical and therefore require substantial consulting expertise for processing.

The Real Estate Capital Institute's advisory board member Aaron Gruen  (lower left photo) suggests "Many economic indicators are improving or stabilizing indicating the worst of The Great Recession is slowly moving behind us.

"However, while the capital markets are showing improvement and signs of increasing stability and recovery, asset-level performance improvement is spotty and inconsistent. Heightened volatility and uncertainty continues to reign."

He adds, "Targeted risk analysis is especially important today, given that uncertainty and ongoing shifts in demographics, consumer behavior and variability in economic and fiscal performance between and within regions that can be expected."

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 at 7RE-CAPITAL (773-227-4825) for hourly rate updates.

Contact:  Jeanne Peck, Executive Director, Toll Free 800-994-RECI (7324)
mailto:director@reci.com,%20www.reci.com