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— Retail Properties Quarterly — February 2016
I
n the first quarter of 2015, I
wrote an article for Colorado
Real Estate Journal highlighting
how different types of com-
mercial real estate lenders had
unique lending appetites for retail
properties. The retail market can be
tricky, especially in an environment
where online sales are cutting into
brick-and-mortar revenues. Accord-
ing to a December Bloomberg report,
brick-and-mortar retail sales fell 10
percent compared to the prior year.
Despite the headwind of online
sales, the capital markets remain
robust, and lenders have plenty of
capital available for retail real estate.
Over the course of the 2015 cal-
endar year, I closed over $200 mil-
lion of retail loans, here in Colorado
and out of state. These loans were
arranged through a wide variety of
capital sources including life compa-
nies, commercial mortgage-backed
securities lenders, banks and credit
unions. Lenders are continuing to
offer extremely competitive terms,
sustaining a favorable environment
for borrowers. I’d like to highlight a
few trends that I expect will carry
forward into 2016.
Life Companies
There are a few notable ways life
companies will continue to compete
for retail business. First, their con-
tinued willingness to offer forward
commitments, which allow borrow-
ers to rate-lock far in advance of
closing, will be a perfect cure for the
anxiety some property owners have
about interest rates. Even though the
Fed’s decision to begin tightening
monetary policy doesn’t necessar-
ily mean mortgage
rates will increase
– in most cases,
mortgage rates are
derived from mar-
ket Treasury yields,
not the discount
rate or federal
funds rate – many
investors are con-
sidering refinanc-
ing early. They are
considering this
even if it means
paying a prepay-
ment penalty in
order to lock a cur-
rent market mortgage rate.
The forward-commitment option
offered by many life companies
eliminates the need for this trade-
off altogether, as borrowers have the
option to lock their mortgage rate up
to 12 months prior to closing, allow-
ing the prepayment penalty associ-
ated with their existing debt to burn
off. This is an attractive strategy for
borrowers. Forward commitments
were made on approximately half of
the life company loans I originated
last year.
Another way life companies will
continue to win retail business is
by offering longer-term, fixed-rate
financing – loans with rates fixed
longer than 10 years. Many life
companies can offer mortgage rates
fixed for 15 to 30 years with nego-
tiable amortization schedules. This
is powerful for retail owners who
plan to hold assets long term since,
for the most part, the only other
commercial real estate lenders who
can offer longer-term fixed rates are
agency lenders in the multifamily
space.
There are a few ways life compa-
nies may become more aggressive in
2016. In my aforementioned article, I
noted that life companies often were
sensitive to leverage points where
the loan-per-square-foot exceeded
$200. The CMBS market won many
of the loan requests falling into this
category last year; consequently,
many life companies’ portfolios are
underweight retail.
Moving forward, there’s a good
chance some life companies will
warm up to higher loans per foot
for select retail assets, especially
grocery-anchored centers and prop-
erties located in strong urban-infill
areas. Life companies also might
seek transitional assets more aggres-
sively. Last year, a few insurance
companies began offering nonre-
course bridge loans for assets with
short-term business problems that
could be solved in the near term,
but might not be ready for a tradi-
tional permanent loan. These debt
offerings come with competitive
rates compared with the traditional
nonrecourse bridge lending market.
Investors should keep an eye out
for expansion of these programs in
2016.
CMBS Lenders
Since CMBS lenders typically are
willing to lend up to 75 percent
loan-to-value on stabilized assets,
they’ve been a common source for
high-leverage nonrecourse loans.
But for the past few years, a handful
of CMBS lenders have become more
aggressive. For select properties, 80
to 85 percent leverage now is attain-
able via the addition of on-book
mezzanine debt, where CMBS lend-
ers make higher-interest-bearing
second-position loans on their own
balance sheet (behind their own first
mortgage). While the first loan is
securitized, the mezzanine debt is
not sold in the bond market and is
available in sizes of $2 million and
up. This eliminates the need to go
to a separate mezzanine debt lender
and makes smaller “mezz pieces”
available. Historically, traditional
mezzanine debt lenders haven’t
offered loans this small.
The availability of mezzanine
debt could meaningfully benefit
retail real estate, because many of
the loans maturing this year were
arranged 10 years ago, in 2006-2007
at prerecession valuations. For retail
assets in markets where cap rate
compression has not been enough to
counteract decreasing rental rates,
mezzanine financing will prevent
borrowers from having to bring cash
to the closing table to refinance their
asset. Mezzanine financing also adds
flexibility for transactions with mov-
ing pieces.
For example, I arranged a CMBS
loan to refinance a retail asset
where a large big-box lease renewal
was pending, and its execution was
uncertain. In order to provide the
borrower comfort that the existing
debt would be refinanced by the
maturity date, regardless of whether
the pending big-box lease was
renewed, we negotiated a loan appli-
cation stipulating that if the lease
Michael
Salzman
Vice president of
loan production,
Essex Financial
Group, Denver
Lending
