March 2-March 15, 2016 —
COLORADO REAL ESTATE JOURNAL
— Page 45
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egory right now is the commer-
cial mortgage-backed securities
market. A number of regulations
coming into effect over the next
few years are already affecting
pricing and certainty of execu-
tion. Dodd Frankwill soon require
CMBS issuers to retain 5 percent
of the face value of each class
of securities issued in a transac-
tion for a minimum of five years.
The inevitable threat of reduced
liquidity and tighter regulations is
impacting pricing as spreads have
widened significantly in the last
year to the tune of 100 to 150 basis
points. In addition to an increas-
ingly stringent regulatory environ-
ment, CMBS is subject to the vio-
lent swings in the global financial
markets. The same kind of irratio-
nal fear that sparked the reaction to
the Rocket Mortgage commercial
is dictating the pace and behav-
ior of global capital flows. Market
turbulence is influenced on a daily
basis by a number of catalysts,
including (but not limited to) the
Chinese economy, the energymar-
kets and turmoil in the Middle
East.
With no hedge against moving
interest rates, CMBS borrowers
are experiencing more re-trades
in pricing and structure up to the
day of closing, which can signifi-
cantly impact the return hurdles
planned for the investment. The
volatility in the CMBS market will
have its biggest impact on small-
er, private equity investors who
rely on aggressive debt structures
for commercial real estate invest-
ments.
On the bright side, the turmoil
in the securitized market has cre-
ated opportunity for other lenders
to provide new structures to be
competitive on higher-leverage,
“off-the-fairway” requests. While
many life companies are conduct-
ing business as usual, others are
tapping into different buckets of
balance sheet or third-party funds
in order to offer new loan pro-
grams. For long-term, fixed-rate
requests, some lenders will offer
high-leverage options (in some
cases up to 85 to 90 percent) by
breaking the loan into an “A-B”
structure, which consists of a mar-
ket spread/LTV on the “A” note
with an above-market spread on
the “B” note. Another solution
for life insurance companies is to
offer competitive, short-term float-
ing rate solutions for transitional,
value-add or core-plus properties.
Spreads on balance sheet, floating-
rate loans can be as low as 180
plus LIBOR for trophy assets but
are typically in the 300- to 500-plus
LIBOR range on an interest-only
basis.
Investors seeking value-add to
core-plus assets will also look to
banks and debt funds for short-
term, floating-rate money. Banks
are becoming more and more
selective with implementation of
Basel III inthenear future.This reg-
ulation will require banks to have
more liquidity, which in turn will
increase spreads to their customers
as a pass-through of funding costs.
In just the last few months, banks
have increased their floating-rate
spreads by 25 to 50 basis points.
Debt funds are immune to regula-
tory environments and for this rea-
son typicallywill takemore risk. A
number of groups in this category
are offering bridge loans that are
fully funded “on book” while oth-
ers rely on securitizing or creating
collateralized loan obligations. The
balance sheet debt funds are able
to compete more effectively for
business since they are in control
of their own capital.
In spite of the inefficiencies in
the market, real estate fundamen-
tals continue to strengthen on a
national basis. The year 2016 will
be an active year but will require
some creativity and the ability to
cast a wide net in order to capture
an ideal loan structure.
s
the court, again, stated: “We
will sustain respondent’s (IRS’)
adjustments disallowing for 2007
and 2008 petitioners’ charitable
contribution deductions.”
And, as to penalties, the court
said that since the taxpayers did
not include the appraisal with their
tax return filing, the taxpayers “are
thus liable for accuracy-relatedpen-
alties” See Code Section 6662(b).
And, as mentioned earlier, the
taxpayers were also charged with
a valuation misstatement, causing
them to have to pay a 40 percent
penalty.
■
Conclusion.
The moral of the
story that one can lose a charitable
deduction and face penalties – by
failing tocomplywith the appraisal
requirements to claim a charitable
deduction – which seems appar-
ent. Yet as mentioned earlier in this
article, these types of cases arise far
too often. (For a collection of these
decisions and related issues as to
charitable gifts, see the Levine and
Segev Work, Real Estate Transac-
tions, cited supra in this article.)
Clearly, this failure to attach a
qualified appraisal to the tax
return of the taxpayers was a
costly mistake.
s
as loans extended to a com-
mon industry or pool that may
perform similarly and may not
exceed 100 percent of their total
risk-based capital. With all the
rapid growth, this may result in
some banks scaling back.
Rob McAdams
The growing appetite for sta-
bilized, high-quality assets by
publicly traded REITs has made
it difficult for traditional private
investors and owner-operators
to invest directly in those prop-
erties. The public REITs benefit
from a favorable tax structure
and access to public markets,
which yields them the lowest
cost of capital. And they need
cash flow to feed dividends.
The private REITs, which
have a higher cost of capital, are
typically acquiring individual
assets or small portfolios with
the goal of aggregating sizeable
portfolios that can be sold to
public REITs. They’ll pursue “A”
assets with upside if the public
REITs aren’t bidding.
The traditional private-equity
players and owner-operators
have patient, albeit more expen-
sive, capital. Their higher return
thresholds have steered them
toward turnaround acquisitions
with the potential for value
creation. They’ve essentially
been eliminated from the “A”
asset buyer pool because REIT
demand has caused cap rates
to compress so low that it’s not
possible for them to outbid the
competition and hit their hurdle
rates.
With owner-operators and
private equity still account-
ing for around 60 percent of
merger and acquisition activity,
demand for HUD/FHA financ-
ing and conventional loans
remains strong. Because HUD/
FHA-enhanced financing allows
investors to borrow on the
credit of the U.S. government,
there always will be private-
sector demand for the attractive
nonrecourse terms provided by
that product. I expect to see a
reduction in both volume and
leverage from commercial banks
as a result of increased banking
regulations such as the high-
volatility commercial real estate
rule.
s
Finance
Law
Senior
Rob McAdams
Vice president,
Lancaster Pollard
