Source: American Banker

Mission Capital’s Tom Hall discusses the seller’s market of Performing Loan pools.

Seller's Market Emerges for Performing Loan


November 19, 2015 By Jackie Stewart

It is a seller's market when it comes to performing loan pools.
A rising number of banks are looking to buy commercial loans for reasons ranging from a dearth of organic opportunities to a desire to diversify their asset mix. That surge in demand
is creating an imbalance that benefits institutions that have increased their originations.
Buyers, meanwhile, must be aware of
risks associated with buying loans from other banks, such as inadequate information, industry observers said.
Interest in performing loans is outpacing demand for distressed credits, said Kip Weissman, a lawyer at Luse Gorman. "Banks have been short on the loan side, and they're searching for yield because rates are so low," he said.
Performing loans usually fall into two categories: assets that are truly pristine and those that are receiving payments but have issues that include previously late payments or concerns over the income being generated by the underlying collateral, industry observers said.
Banks and other firms are keen on buying both types, though the cleanest credits command the best pricing. In some cases, pristine loans can fetch prices above par, depending on the yield.
"There are an enormous number of buyers, really, for all loans," said Jon Winick, chief executive of Clark Street Capital, a bank advisory and asset disposition firm.

"The difficult part is finding the sellers," Winick said, though there are instances where banks may want to generate fee income or boost liquidity by purging some of their better credits.
Still, the ranks of lenders looking to sell loans has risen in the last 18 months, said Tom Hall, managing director of sales and trading at Mission Capital Advisors, a firm that specializes in loan sales. Sellers include regional banks looking to derisk their balance sheets or exit noncore relationships, he said.
Selling loans can also help a bank reduce asset concentrations or get out of certain business lines. The Bancorp in Wilmington, Del., for instance, has been looking to sell its $1.1 billion commercial loan book. United Community Banks in Blairsville, Ga., recently agreed to sell its health care portfolio after realizing those clients needed larger loans that exceeded its appetite.
Nonbanks, such as General Electric, have also been shedding assets, Hall noted.
Buyers include small and midsize banks that want to improve their balance sheet mix, typically by reducing commercial real estate concentrations by bringing on more commercial-and-industrial loans, Hall said.
Lakeside Bank in Chicago is interested in buying a pool of performing loans, though it hasn't found the right portfolio, said Matt Howe, the $1.3 billion-asset bank's vice president of special assets. Chicago is competitive, and buying assets would be a way to deploy capital, he said.
"Banks are holding onto every earning asset because rates so low right now," Howe added. "This would be a way to step aside from our peers and find new loans and earning assets to put on our books."
Still, banks looking to buy performing loans must be aware of some risks, especially for credits with past issues, industry observers noted. There is always a "suspicion of purchased loans, especially when the loans are out of the bank's market," Weissman said.
Generally, the originating bank knows the borrower best, something that an acquiring institution will lack, Weissman said. There may also be gaps in the due diligence process, or missing information from the originating bank that could be hard to obtain, Winick said.
To help mitigate risks, Lakeside would conduct the same due diligence for purchased assets that it uses for originations, including reviews of a borrower's cash flow and financial statements and property inspections, Howe said.

Lakeside also steers clear of loans in industries like hospitality where it lacks expertise. The bank once walked away from a deal because of insufficient loan yields, Howe said.
"Information is key," Howe said. "There's a little bit more risk in buying loans. You verify everything, but you're also trusting that the original bank did everything right."

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Source: Real Estate Fund Manager

Mission Capital’s Ari Hirt discusses today’s lending market.

November 2015

A midst macro volatilities and widened spreads, the lending market remains largely a borrower’s market. For good quality real estate with lower leverage and strong cash flow, lenders are step- ping up on pricing, term and structure, market sources tell REFM.
“It’s a nervous lenders’ market to originate and because the market has certainly been wider, especially in the conduit and [collateralized loan obligation] world we play in, borrowers are subject to the market. On the lender side, it is active but more conservative given that there are a lot of deal out there,” commented Jon Trauben, senior managing director at Hunt Mortgage Group’s capital markets group. “It is a borrower’s market but borrowers are paying a bit more in spreads,” he added.
Even with the 10-year swap rate hovering around 2% and wider spreads in the bond market, borrowers – particular in the apartment sector – continue to garner attractive financing, according to Ari Hirt, managing director in the debt and equity finance group at Mission Capital. “[Some] apartments deals are getting done at less than 200 basis points over swaps. Depending on apartment type and location, overall borrowing rates are around 4% for apartments, low to mid
4% for anchored retail and office and slightly wider for hotels.” Apartment, hotel, retail/office loans are generally being originated with leverage levels of 80%, 70% to 75% and 75%, respectively.

Dave Karson, executive managing director in equity, debt and structured finance group at Cushman & Wake field, observed that low-leverage strong collateral sees spreads that are in the low 100s over the Treasury, whereas construction
mezzanine sees a higher spread, at Libor plus low double digits. Interest rates for construction mezzanine can be in the low double digits, with some transitional
and secondary-market-based transactions getting rates in the teens.
Declaring that “it’s absolutely a great time to be a borrower,” Karson noted that creative term and structure are more attainable when dealing with a single balance sheet lender as oppose to a syndicated group of lenders. Indeed, working with CPPIB Credit Investments, a wholly-owned subsidiary of Canada Pension Plan Investment Board, the firm arranged a $526m loan for Kemper Development Company. e loan provides long-term fixed-rate financing and consists of four separate, distinct loans for each of component of the development site, including condo, multifamily, hotel and retail.
Karson added that institutional players like banks and insurance companies have become more tolerate in allowing subordinate capital behind or be part of their own loan.
Across the board, borrowers are getting high proceeds, low rates and flexibility in negotiating terms. “For certain borrowers we are seeing some lenders getting comfortable without shortfall reserves in value-add bridge deals. For strong borrows we have represented, lenders are willing to accept other structures in
lieu of interest reserves and are offering pari passu basis funding with lenders of future advances post-closing, instead of having to put up 100% of the equity upfront, which enhances returns for borrowers,” said Hirt.
But with transition volume high, the market is tiering. On the CMBS side, JPMorgan’s new commercial mortgage-backed securities deal priced at swaps plus 127, with the BBB- and C Class pricing at swaps plus 565 and swaps plus
380, respectively. e lower tranches are priced considerably wider compared to most deals, which see BBB- at swaps plus 510 to 520 and Class C at swaps plus
310 to 320, according to an investor. e deal has a total of four rating agencies including Moody’s Investors Service and Fitch Ratings on the deal’s AAA- rated tranches and Kroll Bond Rating Service and DBRS on the remainder of the deal.
“The market is definitely hearing the agencies. For a major conduit deal like this, when you build in buyer risk for the lower classes of bond, you really need to talk to both the buy side and the credit side. It’s not a huge universe BP buyers out there,” commented Trauben. “On the micro level, the biggest BP buyers have more power to craft individual deals, but from the macro bond buyer side, you have tiering where deals with lower LTV, like the Wells deal [WFCM 2015-NXS3], traded tighter,” he added.

All in all, the lending market continue to see robust transaction volume in an environment that capital, both domestic and foreign, are plenty. Market sources believe market tiering will continue, given that with more deals available buyers can be more selective, but also noted the market is more conservative compared to two months ago.

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Source: Real Estate Finance & Investment

Mack Real Estate Group along with designer Elie Tahari provided a $70m floating-rate loan to acquire 88 University Place in New York. Mission Capital arranged the financing.

Mack funds New York acquisition

November 6, 2015
By Sherry Hsieh

Mack Real Estate Group has provided a $70m floating-rate loan for an investment group led by fashion designer Elie Tahari to acquire 88 University Place in New York, the company announced. Himmel + Meringoff Properties sold the property for $70m in an off-market transaction. Mission Capital Advisors arranged the financing.

The 11-story, 94,000-square-foot corner building in Midtown South includes both office space and ground-floor retail. A forward lease is in place with WeWork.
The shared workspace provider, which expects to eventually occupy all 10 floors,
will first take up eight of the 10 floors. “It’s a wonderful deal for the sponsor, [the asset] is in a fabulous location,” commented Jon More, a managing director in debt & equity finance group at Mission Capital.
More declined to provide additional information on the transaction but added that the sponsor demonstrated real estate acumen by concurrently closing the transaction and forward-leasing the asset to WeWork. “[The sponsor] added value by handling a forward leasing upfront, prior to closing,” he added.
Capital improvement plans include new lobby entranceways, new elevator cabs, common area improvements and other mechanical upgrades. WeWork will be moving into the property at later date. Calls to sponsor and Mack were not returned by press time.

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Source: Real Estate Finance & Investment

Mission Capital’s Ari Hirt discusses the categorization of construction loans as high volatility commercial real estate.

REFI Breakfast: Alternative capital replace banks as construction capital provider

November 4, 2015
By Sherry Hsieh

With Basel III categorizing construction loans as high volatility commercial real
estate, banks are increasingly squeezed out of the role as capital provider for
development projects, according to panelists at REFI’s latest breakfast briefing.

“At this point, I am not seeing any [of the institutional banks providing] construction loans for condos, except maybe HSBC and Wells [Fargo], other than some outlying cases with very strong sponsor like Related,” commented Stephen Schweiger, a director in the real estate group at law firm Goulston & Storrs. He added that development projects are considered more risky in a city like Manhattan where land price is so high.

Indeed, with land prices having increased dramatically, developers are extremely cautious. Most prefer to stick to gateway cities, including New York, Boston, South Florida, Chicago and Los Angeles, with the exception of apartment projects in secondary and tertiary cities.

“Land prices in Brooklyn are rising more steeply than Manhattan on a percentage
basis,” pointed out Nick Werner, a co-founder at Largo Investments, a private real estate investment and development firm targeting multifamily real estate. He recalled having purchased land in Williamsburg, a popular neighborhood in Northern Brooklyn, for $250 per square foot three years ago. The price tag for land
in that submarket has risen significantly, ranging from $600 to $700 per square foot.
“There’s no budging, if you want to be there and buy something, you have to pay the
price. We have adjusted to being more selective,” he said.

On the bright side, with plenty of capital and alternative debt platforms, borrowers are able to secure affordable financing if the basis of a development project is sound. “If you have a developer willing to sign a repayment guarantee, you can go to banks to borrow cheaply, in the 2% range for apartments and 3-4% for condo,” said Ari Hirt, managing director of the debt and equity finance group at Mission Capital Advisors.

Hirt added that if a developer does not want to sign a repayment guarantee, other options include public real estate investment trusts or debt funds. Mortgage REITs typically ask for a minimum of 20% equity and the loan is sized at 60% to 70% of projected sellout value.

Debt funds can take down the entire capital stack and split the loan into senior and mezzanine tranches post closing, selling the senior debt to banks who need a 3% to
4% return and holding the mezzanine piece at a high interest rate. “Even though it could be cheaper to go directly to a senior lender and a mezzanine lender, many developers prefer a one-stop shop, as one of the biggest cost overruns in a
development deal is time. In choosing two separate lenders, you will need time to work on the inter-creditor agreement and deal with multiple set of attorneys and requirements, which could extend the closing timeline,” Hirt explained.
Indeed, developers wishing to limit their personal liabilities often seek non- recourse, or sans repayment guarantee, debt. But with Basle III regulations altering the composition of the capital stack, specifically the 15% equity requirement from borrowers, banks are finding it increasingly challenging to compete with non- traditional lenders. “Banks can buy a piece of deal originated by
another [debt] fund, but that’s not common. [The new regulation] is almost like they
are advocating demise of the banks, limiting the banks’ ability to originate,”
commented Schweiger.
Banks are responding in varying degrees to Basel III, and most of them asks for subordinate debt in the form of preferred equity and not mezzanine. “In today’s changing environment of risk, an originator at a bank will quote you based on what he thinks will be approved. Most banks don’t want [mezzanine debt] behind them. [The banks] definitely want to make sure you have enough money in the game,” said Hirt, adding that every construction loan has to be in balance.
All in all, panelists agreed that fundamentals remain strong across all real estate classes with tremendous capital, domestic and international, willing to lend. New York market continues to see robust demand for housing. Supply is tight and rental vacancy is at 3.45%, according to a 2014survey from NYC Housing Preservation & Development. Opportunities include The Bronx, Bushwick (an up-and-coming Brooklyn submarket) and Long Island, according to panelists, “Anywhere in New York with a close commute to Manhattan.”
But when it comes to discovering the next “emerging market,” Werner cautioned against overpaying. “The problem with emerging market is an emerging market [that] wants a non-emerging market price.”


The difference between a repayment guarantee and a completion guarantee is that the former provides full repayment of the loan amount if the borrower defaulted whereas latter promises a one- time, lien-free completion that expires when the building receives a certificate of occupancy. In contrast, a repayment guarantee not only guarantees construction completion, it also safeguards the lender in the case where an asset fails to sell.

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Source: The Commercial Observer

Matthew Polci joined Mission Capital Advisors in the firm’s debt and equity finance group in early July 2015.

The New Players of Commercial Real Estate

and CRE Finance

November 4, 2015

Matthew Polci, 31

Director at Mission Capital Advisors

Matthew Polci joined Mission Capital Advisors in the national advisory firm’s debt and finance equity group in July 2015. Within the first half of the year, he closed nearly $485 million in debt deals nationwide with Ackman-Ziff Real Estate Group, which he joined in 2009.
In his first deal with Mission Capital, Mr. Polci is representing a Harlem-based developer to secure financing for a development site in Upper Manhattan. The young debt broker also closed a $210 million loan for a luxury residential buy in Brooklyn and a $175 million loan to refinance an office building in Washington, D.C.
Mr. Polci holds a bachelor’s degree in commerce from Queen’s University in Canada and an M.S. in real estate finance and investment from New York University’s Schack Institute of Real Estate.—R.B.

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