California Mortgage Finance News Fall 2007
Commercial News
Trickle Down Financing
by William Bernfeld, K&L Gates, Fabio Baum, Key Bank Real Estate Capital
buyer has gone hard on its money,
borrowers may go by the
or bridge loans are becoming due.
wayside in order to avoid the
Though many borrowers are on
difficulty of finding investors for
the side lines right now, there’s a
subordinate traunches.
tremendous volume of 2 – 3 year
Trickle down economics, the
theme of the 80’s, postulated that
lowering the tax rate for the wealthy
will promote new investment, and
the benefit will “trickle down” to
those who are not in a higher tax
bracket – in other words, a rising
tide should lift all ships. The “trickle
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down” theme (in reverse) has found
its way into lending circles, and it’s
no mystery that the recent meltdown
of the residential subprime lending
market is “trickling up” to make a
significant impact on the commercial
finance market. The articles are legion
about the spigot being turned down
on the CMBS market, the tightening
of underwriting standards, and the
resulting increased demand seen by
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certain sectors of senior debt, such as
life companies and portfolio lenders.
Mezzanine lenders have not been
immune to these market forces.
The authors were recent
participants on a mezzanine lending
panel at the fall 2007 CMBA
Commercial Real Estate Finance
Borrowers are still seeking
bridge loans coming due over
numerous loans, but limited
the next 12 months, and those
commitments are being issued, as
side line spectators may soon
lenders are being selective. They
become unwilling participants in
are, for the most part, picking safe
a tight credit market. Once those
spots and giving quotes, but their
borrowers become active players,
deals are not being gobbled up. No
their expectations will quickly
one wants to jump – either rates
become realigned.
really need to come back down, or
Pricing is back to what it was
cap rates need to adjust to enhance
in 2004. Senior lenders are
deal economics. This, in turn,
doing deals, as the risk return is
will bring the confidence back in
at this level. Collaterized Debt
senior investment grade pricing
Obligations (CDOs) are out. The
that will then help determine
CMBS market, which was on
the appropriate pricing levels
an upward trajectory for the last
for mezzanine debt. Ultimately
decade, has been significantly
there will be adjustments on both
impacted, and that source of
sides of the equation. But the big
liquidity has been pared back in a
question that remains is when will
significant way.
this settle?
The recent lowering by the fed
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It’s a buyer’s (lender’s) market
of lending rates is indication of
right now, and existing
the severity of the situation, but
opportunities, both distressed and
will fall far short of allaying the
non distressed, are demanding
difficulties in the market.
higher return. Passive real estate
Those lenders who bring
investors who would typically
in investors, either through
buy either bonds or subordinate
syndications or through direct
CMBS paper have a lot of choices.
sales, will find that there’s a lot of
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With respect to loans that are
competition for this capital, and
becoming due, many lenders
they will have to structure their
are going to be forced to renew
deals accordingly to “clear the
their lines, with the hope that the
The exposure in the market place
market.” Many accommodations
credit market stabilizes, despite
right now is on deals where a
offered in the past to loyal
Conference in Las Vegas. Here are a
few trends that were noted:
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FALL 2007
Legislative news Continued from page 11
Commercial news Continued from page 6
the lack of continuing strong real
sponsors will continue and become
estate fundamentals.
more creative– a concept that only
There will be continued
seems popular when traditional capital
of Real Estate, with the cooperation of
readjustment over the next 6 to
sources are harder to find. Parties to a
the Department of Corporations and the
8 months, as loans become due.
loan transaction need to be “creative”
Department of Financial Institutions, to
2008 should see a lower volume
in order to build market confidence
conduct a review of the real property
of mezzanine loans and perhaps
so as to establish opportunities where
transaction disclosure process, including
even CMBS product accordingly.
few would otherwise exist.
AB 941 (Torrico) Real Property
Transaction Disclosure Process – AB 941
would have required the Department
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the purchase and mortgage disclosure
documents, to determine whether additional state disclosures can be added
and/or whether state disclosures can be
eliminated, consolidated, etc. to make
the process easier to understand for
consumers. The bill was amended in
September 2007 to remove all the provisions related to real estate transactions
and to instead focus the bill on emergency medical services.
So the general tone is that in
the short term anyway mezzanine
lending (and all real estate
William Bernfeld is a real estate
partner with the Los Angeles office of
Kirkpatrick & Lockhart Preston Gates
lending for that matter) will be
Ellis, and focuses on real estate lending.
more expensive and more tightly
structured, which demonstrates that
the “trickle down” theory presents
itself on both the bullish and bearish
Fabio Baum is a Vice Present of Key Bank
Real Estate Capital, and specializes in
mezzanine and bridge lending.
sides of the economy.
So what does 2008 have in store?
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- Lending on solid deals with great
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FALL 2007