NREI – With approximately $700 billion worth of loans coming due on distressed properties over the next four years, transaction activity in commercial real estate is picking up this year, albeit slowly, and is expected to intensify in 2011 and 2012.

Investment capital that had been waiting on the sidelines from mid-2008 and the first quarter of this year is getting back into the game as confidence returns in the form of the market’s stabilizing fundamentals.

“For example, life insurance companies, a traditional source of capital, are back in the market,” says Craig Butchenhart, the president and director of capital services for NorthMarq Capital, a national firm that offers commercial real estate investment banking. “And as more traditional sources come back to the market, there will be available capital to access.”

Many of the loans originated in 2006 and 2007 — the height of the commercial real estate boom — come due in 2011 and 2012. Morningstar, an investment resource specializing in fund investing, believes that will create an environment that fosters asset sales more aggressively than in 2010. To date, 2010 has produced better opportunities for refinancing than outright asset sales.

“Most institutions that we deal with believe that values are fairly stable now,” Butchenhart says. “Confidence that fundamentals are stabilizing and not deteriorating further is bringing these institutions back to the market.”

Of course, available capital is just one aspect of the picture. Financial institutions are lending again, but underwriting requirements remain conservative as stronger cash flows continue to be required as well as longer leases, and the ability of the borrower to pay back its loan.


One surprise that may generate more transaction activity in the near future is the return of the commercial mortgage-backed securities (CMBS) market. Many analysts hadn’t expected the CMBS market to turn around this early after it was considered dead for nearly two years during the recession. Since then, few CMBS-backed deals have occurred as investors and issuers, aware of the creditworthiness risks involved, painstakingly do their homework on these securities.

In June, JP Morgan Chase Commercial Mortgage Securities Corp. issued a $716.3 million CMBS-backed bond, primarily consisting of retail properties, in the second such deal this year.

“There’s a little life in the CMBS market,” Butchenhart says.

There’s significant maturity in the CMBS loan pipeline, and most of those maturing CMBS loans are being refinanced due to low interest rates as they are maturing at rates higher than the current interest rates. If they can’t be refinanced, the CMBS loans are being modified or extended for a period of time as the borrowers await capital.

“As long as those properties have maintained a reasonable amount of leasing, loans can be refinanced,” Butchenhart says.

Should you pay upfront fees to secure financing for you real estate project? It is the 64 million dollar question. For developers it is hard to pay upfront not knowing if the broker will succeed in securing the financing. For the brokers it is often the only way that they can cover their overhead expenses.  With ten deals a day to review but only 1 out of 100 getting all the way to financing it is important to have a regular income stream to cover the cost of deal analysis. So when should a developer agree to pay up-front application fees?

Here are 7 things to watch out for with up front fees:

1. Is the fee a reasonable amount to allow the source to compete their due diligence or is it large enough that the broker can walk away satisfied even if the deal does not get funded?
2. Can the fees be staged over a series of milestones – upon application, following site inspection, upon delivery of the lender term sheet?
3. Following the signing of a NDA, will the broker disclose the name of the lender to allow the sponsor to do their own due-diligence before accepting the fee structure and loan proposal?
4. Will the lenders accept the current appraisals or are they requesting that everything be redone?
5. Has the broker got a solid track record that can be verified through references?
6. Has the broker successfully funded deals over the prior 6 months to your request?
7. Is there a clause that says that some of the fees are refundable if the term sheet is substantially different from the LOI?

If the answer to the above questions is yes then you may want to consider paying the fee if the lender has offered you a LOI that makes sense to your business model.

Good luck and good investing – The Equity Finder

Equity Interface is an online real estate investment service designed to connect developers and accredited investors. By offering unparalleled research tools and information, Equity Interface empowers members to discover mutually beneficial real estate opportunities. For more information, please visit www.equityinterface.com

Many developers begin looking for investors by producing  a comprehensive package of materials detailing their  opportunity.  Such packages often include, but are not  limited to, site maps, renderings, current state photos,  finished design samples, hard and soft cost proformas,  resumes and the all important “expected cash flow  summary”.  However, the packages often neglect to include  a snapshot of the deal from the investor point of view.  At a  high level – how much investment is required, for how  long, at what rate of return and how will that investment  and return be repaid.

Investors are interested to know if a deal makes sense for their investment strategy and how a particular opportunity stacks up against other deals that they are currently reviewing.  If a deal is presented in a beautiful, large package that has to be read from cover to cover to determine its essence it can be a major turnoff to the busy investment professional and casual investor alike.  This level of detail is only required after a first level decision has been made. To remedy this habitual overload of less important information, we suggest a simple spreadsheet investor summary.

Begin with the name of the project and a very brief description of the deal (it may be that this is the only document that the investor will look at to determine their interest in your project).

After this initial description comes the project cost and the request for funds – “equity requirements”. The equity requirement is similar to the sources and uses component of a traditional debt term-sheet.  It shows the investor how much the sponsor is committing to the deal themselves and how much is being sought externally. A typical equity split involves investors providing 90% of the required equity with the sponsor adding the remaining 10% (a 90:10 split).

It is then important to show the investor what they will get in return for participating in your deal – “Expected Returns to Investor”.  Here you overview what you are going to pay (typically broken out per year) followed by an internal rate of return calculation. The IRR tells the investor what their annual return would be if they invested in your project for x number of years. Three to four years is a typical investment timeframe, but investors do love deals that have long term high returns as long as they are verifiable (It should be noted that the “I hope to hold this deal for my grandchildren” is not always the best response to the investor timeframe question!).

Once you have laid out the equity requirement and the associated returns over the timeframe, you next have to prove your model.  In the example template below we have presented a breakdown of the cashflows to the investor and the sponsor and the refinance assumptions that feed the model.  On the supporting worksheets in the financial package it is prudent to model every aspect of the deal so that when an investor sees a number in the summary sheet that is questionable, he/she can follow the links and understand where that number originates.

Pulling together an investment summary can be a relatively easy process especially if you have the proforma model outlining all the costs and revenues – it is really just highlighting the right information and presenting it in a clear and concise manner.  Without it however, your deal can die before it is even reviewed by the investor.

We hope this helps you to think like an investor and to more easily secure the equity you need for your projects.

Sample Template

Analyzing real estate opportunities can be a daunting task. In an industry renowned for its terminology and abbreviations it can be difficult to see the wood from the trees. ERV’s, LTV’s, NNN’s, jump off the page and often only serve to muddy the waters when scanning over a possible deal. However, there are a number of key indicators that can help you quickly decide between those that merit further investigation and those which are resigned to the ‘ghosts of real estate deals past’ pile!

So, what should I be looking for? To make it easy here are 5 key indicators that should help you weed out the “good” deals from the “not so good”.

1.  Developer Experience

Typically, one looks to invest equity with the developer or joint venture partner who has sourced and strategized the deal. In essence, you are really investing your equity in this person, as they are the ones who will drive the project and hopefully deliver the estimated returns at exit.

With that in mind the more information that you can uncover about this sponsor/developer the better. Ideally, you want to see a long list of previous projects in the same geographical and property type market.  At the very least, you should be looking for one previous venture of a similar fashion.

2.  Developer Interest

‘Skin in the game’, call it what you like but you want to see the sponsor having an equity involvement of their own in the project. If they talk a good game about the potential returns of this ‘unmissable’ opportunity but have no investment of their own on the line then alarm bells should be ringing.  Sponsors who suggest that they have put “sweat equity” into the deal should be discounted. Ten percent of the equity requirement is a much safer investment for a passive investor to rely on.

3.  Returns

You’re in this to make money right? So it follows than the project return is the key performance indicator that you will first assess. Returns are usually stated as percentage IRR (Internal Rate of Return). Another abbreviation, but if you’re going to rank them, this is the most important! Essentially IRR is a measure of how hard your money is working for you; this should be aligned with the risk profile of the deal, and the type of investment. Look at similar deals in the market and what they purport to be turning out, or ideally, source information on historic deals and what returns were achieved. Endless information should be available on the kind of return to expect from such a project so make sure the figures are attractive but more importantly that they make sense and are viable given current market conditions.

4.  Fees

Its one thing finding a respected, experienced developer to joint venture with, however if they are maligned by greed then it renders their abilities and experience void. Both parties should be in the project together so it should not be necessary for the sponsor to pile on high management and general partner fees to ensure that they are compensated regardless of how much profit is generated at the end of the deal.  They are due compensation for management and for sourcing the deal in the first place, but make sure that fees are in line with market standards. It is often prudent to base fees on results that motivate the developer to hit target returns to the investor before being compensated themselves.

5.  Support Team

A Real Estate investment by its nature is relatively complex and so requires a number of complimentary professional resources to come together at both its inception and in order to function throughout its term. From CPA’s to attorneys the set-up needs to be as professional as possible. The initial offering memorandum should state the various firms working at each level of the deal. Here we look for reputable names and businesses that are established in their field. This will not only give us solace in our support team, but will give us further indication of the seriousness and commitment of the sponsor to proceed with the deal. We don’t want to see the local one desk, one employee law ‘firm’ listed here, but rather the seasoned attorney who has seen it all before.

If you are satisfied on these five elements of the deal that you are reviewing it is definitely worth picking up the phone and having a conversation with the developer to dig a little deeper into the deal.  A site visit and a review of the partnership and operating agreements is next, followed by a more careful analysis of the market and the sponsor’s business plan.  If you are still interested in the deal at this point it is worth your while to start paying some professionals on your side to assess the merits of the investment.  Use the best advisors that you can and listen to their advice, but remember the decision ultimately comes down to you – your advisors are trying to reduce your risk exposure, but that means money in FDIC insured accounts at 2%, you can probably stomach some risk and do slightly better than that. Good investing.