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CRE Financing Adapts to the Times

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CONNECT CRE – July 28, 2022 BY AMY WOLFF SORTER

Once upon a time, debt was inexpensive, meaning more leverage for more commercial real estate investments and projects. Fast-forward today, and so-called cheap money is dwindling in the rear-view mirror. Up ahead seems grim news as the Federal Reserve attempts to pull back on inflation, and the GDP fell for a second quarter in a row.

What this means for commercial real estate is that “borrowers and lenders alike are becoming more discerning about their financing decisions,” said Gary Bechtel, CEO of Red Oak Capital Holdings. Or, as Bechtel and other experts told Connect CRE, commercial real estate financing borrowing and lending are far from dead. Rather, they’re undergoing some shifts as investors, owners and developers attempt to navigate through today’s economic reality.

Aeraj Patel pointed out that both investors and capital providers are coming up with what he called “several unique methods” that seem to be effective when considering economic and market volatility. “These include use of interest rate swaps, interest rate cap purchases and low-cost bridge financing,” explained Patel, who is Matthews Real Estate Investment Services’ Associate of Capital Markets. Still others are “seeking out assets that carry a debt structure, which includes assumably,” Patel added.

Meanwhile, iProperty Management, which works with apartment and property owners and managers throughout the United States, has long been examining other financing methods. “It’s definitely pushed us to look for other methods of financing, like hard money loans,” said CEO Leonard Ang. “We’re also starting to explore the idea of tokenization to raise money from investors.”

Other operators and investors that saw the writing on the wall in 2021 acted to add cash to their balance sheets. Terranova Corp. refinanced approximately $150 million of its properties in Q4 2021 in anticipation of a run-up in interest rates and an economic slowdown. “We entered the downturn with strong liquidity, ready to participate in distress opportunities as they begin to surface,” Terranova Founder and CEO Stephen Bittel said.

Along those lines, Patel noted that many investors are cashing out, re-leveraging and trading up into greater cash-flow assets, sometimes with help from 1031 exchanges. Meanwhile, Ang said iProperty is directing more financial resources into upgrading and improving units, and “automating our management practices to increase margins with less growth.”

Even in the midst of fearful economic news, the experts expressed confidence that plenty of capital is available for a multitude of projects. But in the current environment, obtaining that liquidity requires ingenuity, planning and some creativity. “The good news is the number of options available for borrowers is higher than ever, particularly from the alternative/non-bank lending community,” Bechtel said. “The capital stack has expanded, and borrowers now have a wide array of options, and don’t have to rely on one capital sponsor for the entire project.”

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Fed’s Latest Interest Rate Move Puts More Pressure on CRE

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GLOBEST.com – July 28, 2022 BY ERIK SHERMAN

Another month, another 75-basis point increase in the Federal Reserve’s benchmark interest rate. And as the overnight inter-bank lending goes – with a target range of 2.25% to 2.5% – so go many other interest rates, including what commercial real estate firms will be paying for access to financing.

“The Fed announcement of hiking their target Fed funds rate by 75 basis points was highly expected,” Kevin Fagan, head of CRE economic analysis at Moody’s Analytics, tells GlobeSt.com. “This was likely baked in by most commercial real estate market participants, particularly lenders where we’ve seen loan interest rates rise north of 50 basis points in 2022, mostly in the second quarter. That puts pressure on asset values and squeezes lender profits and borrower returns. Therefore, [we expect] both debt issuance and commercial real estate sales volume to pull back in Q2, as the industry assesses the near-term future.”

  The Fed’s Federal Open Market Committee, which is charged with keeping both inflation and unemployment in check, pointed to continued job gains, high inflation, broad price pressures, and Russia’s ongoing invasion of Ukraine as reasons for its actions.

“A clear bid/ask gap between buyers and sellers is chilling sales activities, as sellers seek the price attainable last year, while buyers expect a discount because of a higher cost of debt capital,” says Stephen Bittel, founder and chairman of Terranova Corporation. “Development deals that were already contending with higher construction costs are now also hurt by a higher cost of debt, coupled with an expectation of a higher equity yield.”

Impacts on commercial real estate are already visible. “The CRE market has seen a significant slowdown in transaction volume over the last couple months and the trend is expected to continue until there are signs of stability from the Fed,” Adil Hasan, director of real estate at Yieldstreet, tells GlobeSt.com. “The inability of CRE investors to determine market value of assets primarily due to uncertainty around debt capital markets will keep many investors on the sidelines. The rising cost of debt will hurt cash flow for properties that have floating rate debt, forcing many property owners to be forced sellers.”

Bill Doyle, co-founder and managing director at Equity Oak Ventures, said that investors who purchased property three years ago and are looking to roll over financing are getting one-year extensions from their lenders. “All forms of lenders, especially debt funds, are in need to rebalance those notes due to a large drop in appraiser valuation,” he says.  This rate increase only puts more pressure on the need to rebalance mortgages if there is an opportunity to do so.  The next 90-120 days will be very telling in the debt market for existing mortgages that need to be extended or refinanced or will we see keys handed back?”

But bad news can mean good for some. “This could present some attractive acquisition opportunities for investors that have the capital available,” Hasan says.

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Terranova scores $55M refi of Miracle Mile portfolio in Coral Gables

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THE REAL DEAL – November 29, 2021 BY KATHERINE KALLERGIS
Terranova Corp. secured a $55 million refinance of its Miracle Mile portfolio in downtown Coral Gables, as the firm continues to take advantage of low interest rates.

Miami Beach-based Terranova, led by Chairman Stephen Bittel, received the financing from City National Bank. The debt consolidates and replaces loans from three lenders on 14 properties, Bittel said.

The closing occurred about a month after Terranova refinanced its Marshalls/Lincoln Eatery building in Miami Beach with a $23 million loan, also from City National Bank.

The $55 million loan is backed by properties that include 220 Miracle Mile, 300 Miracle Mile and 253 Miracle Mile. The 220 Miracle Mile property could eventually be redeveloped into a hotel, but Bittel said those plans are on hold for now.

“The money will be used to repatriate some of our capital to accommodate tenant improvements and return some of our originally invested capital,” he said. His company has been taking advantage of “historically low interest rates,” he added.

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