Source: Globe Street

Mission Capital’s Ari Hirt discusses why the self-storage sector should be getting developers’ attention.

Developers Are Missing an Opportunity

By Rayna Katz | New York

NEW YORK CITY—It’s not as sexy as retail or multifamily, but the self-storage sector should be getting developers’ attention. Not only is it a viable pocket of CRE—with super healthy returns—but in NYC, demand is far outpacing
supply, Ari Hirt, managing director, Mission Capital

Advisors, tells GlobeSt.com in this EXCLUSIVE interview.

Hirt: "Once a self-­‐storage property is leased, the facility will stabilize at around 90% occupancy."

GlobeSt.com: What's happening in the self-storage space? Ari Hirt, Mission Capital Advisors: New York City is one of the country’s most supply-constrained markets in terms of self-

storage facilities, due to the rising population and the large
amount of residential development. The national average for supply is 8.3 square feet per capita, but in the New York City metropolitan area, supply is around 2.7 square feet per capita and some areas in the boroughs have less than one-square-foot per capita.
There are four public storage REITs nationally and they’ve been growing aggressively. The demand for them to buy facilities or build properties themselves is tremendous. Properties have been acquired in NYC at cap rates as low as 5%.
We recently have done two self-storage construction deals in the New York City area. We closed the financing on one in the Bronx in April and we’re closing on one in Brooklyn shortly. We plan to close the financing on a third property, in Queens, in the third quarter.

GlobeSt.com: What is keeping investors from buying more of these facilities, or developers from building them?

Hirt: There’s not much land in New York City and what is available is very expensive. Hard and soft costs to build self-storage facilities here are about $200 per square foot, and given land costs of $100-


$200 a foot, it’s hard to find an adequate site. Also, because few deals get done in the sector, there are a limited number of lenders that understand the product, so it can sometimes be a challenge for operators to find construction lenders.
In addition, lease up-is long and turnover is high. It takes two to three years to lease up, and some investors want to be in and out more quickly. But once a property is leased, the facility will stabilize at around 90% occupancy.

GlobeSt.com: What might compel investors to look at the space?

Hirt: Over the past three years, the four REITs that I mentioned have outpaced the S&P index. One of them, CubeSmart, reports that the average cumulative return of these REITs was more than 110% during the three-year period ending in Q1 2015, while returns from the S&P index during the same period were just under 60%.

Also, there’s generally a 60-70% operating margin, which is higher than what you get on some apartments and most hotels. We view self-storage as a property type in between apartments and hotels, given the short-term nature of the leases and the volatility of the rental rates that can change daily.

GlobeSt.com: What's ahead in the self-storage space?

Hirt:Now that we’ve done several deals and have educated lenders about the self-storage product, we believe more investors and lenders will come to the market and we should see increased activity in the space.

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Source: Real Estate Fund Manager

The implementation of Basle III has raised many questions, not least for the way real estate lenders need to arrange construction loans in the future. Mission’s Ari Hirt comments.


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! The!implementation!of!Basle!III!is!changing!the!way!real!estate!lenders!are! structuring!construction!loans.!“The!Basle!III!regulations!have!increased!the!risk! based!capital!charges!associated!with!bank!financing!of!development!deals!which! can!be!categorized!as![high!volatility!commercial!real!estate].!The!composition!of! the!capital!stack!and!the!amount!of!borrower!cash!equity!in!development!deal!is! receiving!more!scrutiny!from!the!senior!lenders,”!said!James!Henderson,!CIO!of! Cornerstone!Real!Estate!Advisors’s!alternative!investments!group.!
! “We!have!observed!a!number!of!banks!interpreting!the!regulations!in!manner!that!is! shifting!them!away!from!mezzanine!financing!in!the!stack,!now!requiring!it!to!be! structured!as!preferred!equity.”!
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Mezzanine!debt!has!traditionally!been!preferred!by!lenders!given!the!more! favorable!foreclosure!rights!under!the!Uniform!Credit!Code!in!situations!where! there!is!a!default.!Many!of!the!structured!finance!shops!that!have!historically!

deployed!mezzanine!are!trying!to!incorporate!many!features!of!the!traditional! mezzanine!structure!into!preferred!equity,!Henderson!said,!explaining!that!this!is! tending!to!decrease!the!amount!of!first!mortgage!money!in!the!capital! stack.!“The!way!the!regulations!are!being!interpreted!and!implemented!by!senior! lenders!is!all!over!the!map,”!he!said.!!
! Banks!are!responding!in!varying!degrees!to!one!of!the!lesserOnoted!components!of! Basel!III,!which!provides!a!framework!for!soOcalled!HVCRE!such!as!construction! loans.!The!guidelines!were!instituted!in!January!and!the!effects!are!absolutely!being! born!out!in!the!market!place,!said!Douglas!Heitner,!a!partner!in!the!real!estate!group! at!New!York!law!firm!Kasowitz!Benson!Torres!&!Friedman.!“[The!borrowers]!are! not!saying!‘We!want!preferred!not!mezzanine,’!this!is!being!driven!by!the!senior! lenders!who!are!saying,!‘I!can’t!have!mezzanine!behind!me,”!he!added.!!
! Preferred!equity!providers!are!asking!the!exact!same!control!rights!as!the!mortgage! and!mezzanine!lenders!are!receiving,!in!the!form!of!operating!covenants!that! encompass!no!additional!debt,!no!liens,!transfer!restrictions!and!construction! administration,!according!to!Heitner.!“We!have!seen!many!preferred!equity! providers!ask!for!the!right!to!buy!the!sponsor’s!equity!for!$1,!which!is!an!effort!to! replicate!mezzanine!foreclosure,”!he!added.!!
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One!unresolved!question!is!related!to!a!15%!equity!requirement!from!the!borrower,!
another!newly!implemented!component!of!Basle!III.!In!the!past,!a!portion!of!the!
15%!equity!requirement!could!be!filled!by!appreciated!land.!“But!now!banks!are!
interpreting!the!new!regulations!to!require!land!to!be!contributed!at!cost,!which!in! many!cases!puts!a!developer!in!a!position!where!there’s!a!need!for!dollars!in!the! capital!stack!that!wasn’t!there!previously,”!Henderson!said.!Furthermore,!the!15%! equity!in!the!deal!as!measured!against!the!value!of!the!property!upon!completion! compounds!the!need!for!alternative!capital!sources.!The!question!of!if!subordinate! debt!can!be!included!in!this!15%!equity!requirement!appears!to!be!open!to! interpretation!by!the!banks,!he!added.!!
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This!shift!has!also!led!more!nonOtraditional!lenders!to!fill!in!the!gap!in!situations! that!are!too!risky!or!complex!for!banks.!“With!the!increase!in!the!number!of!debt! platforms,!we!are!seeing!fierce!competitions!that!resulted!in!borrowerOfavorable! conditions,”!said!Ari!Hirt,!a!managing!director!in!the!debt!and!equity!finance!group! at!Mission!Capital!Advisors.!The!firm!has!see!situations!with!leverage!of!up!to!90%! and!floatingOrate!pricing!as!low!as!1%,!he!added.!
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Mission!arranged!one!of!the!more!complex!structures!to!date!when!it!advised!on!a! rare!deal!that!carries!multiple!layers!of!subordinated!debt.!The!firm!represented! sponsors!Property!Markets!Group,!Kamran!Hakim!and!New!Valley!on!the!2014!deal,! backed!by!the!Queens!Plaza!South!in!Long!Island!City,!and!arranged!$148.45m!in! nonOrecourse!financing!for!the!development!of!the!44Ostory,!391Oapartment!rental! tower!at!23O10!Queens!Plaza!South.!
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“The!biggest!challenge!in!structuring!a!deal!with!multiple!layers!of!subordinated! debt!is!ensuring!that!each!capital!provider!has!adequate!rights!and!remedies,”!said! Hirt.!Deutsche!Bank!provided!the!construction!financing,!which!represented!70%!of! the!total!capitalization,!and!NorthStar!Realty!Finance,!the!first!mortgage!land!lender,! provided!a!$40.25m!mezzanine!loan.!The!total!financing!was!$188.7m,!or!about!
90%!of!the!total!project!capitalization.!
! While!the!leverage!was!high,!there!are!several!mitigating!factors,!Hirt!said.!The! sponsors!are!extremely!experienced!and!were!able!to!buy!the!land!for!less!than!
$200!per!square!foot.!The!deal!was!also!far!enough!along!in!the!development!
stage!to!reduce!some!of!the!associated!risks!with!construction,!he!added.!
! But!despite!nonOtraditional!lenders’!willingness!to!tackle!a!variety!of!debt!and! equity!combinations,!banks!still!dominate!commercial!originations.!Indeed,!banks! accounted!for!37%!of!the!total!volume!in!2014,!and!in!2015,!despite!the!dip,!the!
29%!of!nonOagency!commercial!lending!surpassed!that!of!conduits,!life!companies!
and!other!lenders,!which!each!captured!20%!and!26%!of!the!market,!according!to!a!
report!published!by!CBRE!Capital!Markets.!
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“Some!of!the!healthy!banks!are!willing!to!withstand!the!150%!capital!charge! associated!with!HVCRE!if!they!are!achieving!attractive!margins!on!a!particular!deal,! but!most!banks!appear!to!avoid!this.!The!net!effect!seems!to!be!an!increase!in! demand!for!subordinate!debt!and!a!shift!towards!structuring!what!previously!was! mezzanine!as!preferred!equity!even!though!they!occupy!the!same!spot!within!the! capital!stack!and!have!generally!similar!economics,”!said!Henderson.!“But!this!does! not!mean!the!market!is!frothy!or!overly!creative.!For!the!most!part!there’s!a! reasonable!amount!of!discipline!in!the!migration!from!mezzanine!to!preferred.! Should!a!provider!of!preferred!be!compensated!more!than!mezzanine!
–!yes,!slightly,!but!whether!the!market!bears!that!out!remains!to!be!seen,”!he!
concluded.!!
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Source: Real Estate Finance & Investment

Mission Capital is marketing a portfolio of performing commercial mortgages on behalf of a private equity firm.

Rialto Shops Distressed Portfolio

Rialto Capital is offering a hodgepodge of distressed, small-balance assets as a package.

The portfolio contains 411 loans with a total original bal- ance of $125.8 million and a current balance of $92 million. Some 63.7% of the total is secured, primarily by residential lots, land and single-family homes that are concentrated in the Southeast. The remaining 36.3% consists of unsecured commercial loans.
Virtually all of the real estate loans are in various stages of foreclosure, “providing investors with an abbreviated and clear path toward obtaining title to collateral,” according to marketing materials distributed by Mission Capital, which is advising Miami-based Rialto on the offering.
Investors must bid on the entire portfolio. Initial offers are due Oct. 5. A sale is expected to be completed by mid- November.

REAL ESTATE ALERT: September 28, 2016, 5 Marine View Plaza, Suite 400, Hoboken NJ 07030. 201-659-1700

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Source: Commercial Real Estate Direct

Mission Capital Advisors is offering, on behalf of a private-equity fund client, a $21.7 million portfolio of mixed-quality loans, including commercial mortgages.

Commercial Real Estate Direct Staff Report

Mission Capital Advisors is offering, on behalf of a private-equity fund client, a $21.7 million portfolio of mixed-quality loans, including commercial mortgages.
The 79-loan portfolio includes 48 loans with a balance of $16 million that are backed by commercial properties. Those loans, which are backed by a mix of owner-occupied properties, office, retail and medical-office buildings, comprise one of four pools in the portfolio. The other pools contain loans against residential properties, land and business assets.
Many of the loans have continued to perform as expected, but some have been modified, re-sized or restructured in one way or another. Some have recourse to their borrowers.
The portfolio's weighted average coupon is 5.6 percent and its weighted average maturity is November 2020.
While Mission Capital aims to sell the entire portfolio to one investor, it would consider offers for individual pools. It will take indicative bids for the portfolio next week and will conduct a best-and-final round of bidding on Sept. 1.

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Source: RENTV

Ridge Capital Investors has obtained $27.4 mil in non-recourse acquisition financing for Britannia Business Center III, a 191k sf office and R&D portfolio in the Bay Area city of Pleasanton. The REO property was purchased for $35.1 mil.

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