By Hugo Rapp, Analyst, Loan Sales, Real Estate Sales, Mission Capital Advisors

Click Here to Learn More About These Famous Rent Stabilized Buildings

In early June, New York State Lawmakers passed the Housing Stability and Tenant Protection Act of 2019. The legislation is a sweeping overhaul of rent laws aimed at increasing tenant’s rights and limiting landlord’s ability to increase rents, evict delinquent tenants and move units to free market status. There are a number of notable changes that come as a result of the rent reform, as outlined below:

Rent Regulation Law Expiration: The new rent regulations are permanent unless the state government repeals or terminates them. Rent regulations previously expired every four to eight years.

Statewide Optionality: Prior geographical restrictions on the applicability of rent laws have been removed, allowing any municipality that otherwise meets the statutory requirements to opt into rent stabilization.

Security Deposit and Tenant Protection:

  • Security deposits are limited to one month’s rent with additional procedures to ensure the landlord promptly returns the security deposit.
  • Evicting a tenant using force and/or locking them out is now a Class A Misdemeanor.
  • On free market units requires landlords to provide notice to tenants if they intend to raise rents more than five percent or do not intend to renew a tenant’s lease.

Vacancy & Longevity Bonus: Landlords were previously able to raise rents as much as 20% each time a unit became vacant. This bonus has been repealed.

High Rent Vacancy Deregulation & High Income Deregulation: Prior to the 2019 reform, units would become exempt from rent regulation laws once the rent reached a statutory high-rent threshold and the unit was vacated or the tenant’s income was $200,000 or higher in the previous two years. This decontrol is no longer applicable under the 2019 reform.

Preferential Rents: The new reform prohibits landlords who offered preferential rents to raise rents to the full legal rent upon tenant renewal. Under the current legislation, the landlord can only increase rents to the full legal rent once a tenant vacates.

Major Capital Improvements: Rent increases based on MCI’s are now capped at 2% annually amortized over a 144-month period for buildings with 35 or less units or 150-month period for buildings with more than 35 units. The new laws eliminate MCI increases after 30 years and require 25% of MCI’s be audited.

Source: Ariel Property Advisors

The new regulations make it difficult for landlords to upgrade and convert existing rent stabilized units into market-rate apartments, essentially limiting the potential upside from investing in primarily rent stabilized buildings. As a result, investment activity decreased significantly in 2019. Total sales volume for NYC multifamily properties was just $13.8Bn in 2019, down 26.1% from the $18.7Bn seen in 2018, according to Real Capital Analytics. The new regulations have halted individual apartment improvements as well as any major capital improvements as landlords are no longer rewarded with higher rents for improving units. It is important to note that while investment activity decreased significantly in 2019, sales volume still outpaced the $12.4Bn seen in 2017.

As we enter the first quarter of 2020, the possibility of discounted multifamily valuations coupled with historically low interest rates have attracted investors with a different business model buying loans at par where LTV’s have increased and maturity is looming. On the contrary, the new regulations create a unique challenge for those who have either purchased or lent on multifamily assets in New York under the assumption of significant future rent appreciation. For those investors/lenders, the future may not be as grim as they might expect. Despite several discount sales and declining sales volume, price per unit in the NYC multifamily market has remained steady, declining slightly at the end of 2019. Furthermore, cap rates have widened by just 26 bps in 2019, offering both investors and lenders the option to sell off assets that exceed their risk tolerance and mitigate any future losses. Investors and lenders should assess the viability of selling off assets that are heavily affected by the new regulations as strong pricing levels from market players with adapted business models may result in a less costly outcome than internal resolution.

[Source: Real Capital Analytics]

By Anthony Grasso, Mission Global

For over 30 years two federal laws, the Truth in lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA) have required lenders to provide two separate disclosure forms to consumers applying for mortgage loans, at or before closing.  These disclosures had overlapping information and inconsistent language that consumers found to be confusing. In 2015, the Consumer Financial Protection Bureau (CFPB) integrated the mortgage loan disclosures under TILA and RESPA, currently known as the TILA-RESPA Integrated Disclosure rule (TRID).

Since TRID’s inception, lenders have expressed difficulty selling TRID loans on the secondary market due to investor concerns over potential liability for minor errors. The CFPB stated that enforcement efforts in the beginning were focused more on lenders making good faith efforts to comply with the new rules; however, investors’ concerns on the other hand revolved around potential statutory and assignee liability.   TRID loans have undergone strict reviews by regulators and due diligence providers with high error rates in the first year and a half since inception.  Initially it was reported that over 90 percent of the loans reviewed contained TRID errors.

Industry participants have interpretative disagreements with various aspects of the law, and TRID loans are scrutinized more closely as they make their way through securitizations.  Lack of regulatory cures and out-of-date statutory cures remain key issues. Regulatory cure provisions under Regulation Z only provide cures for non-numeric clerical errors and increases in closing costs. They lack the cure provisions for numerical clerical errors that cause liability concerns inhibiting secondary market investors from purchasing TRID loans initially deemed out of compliance.

The statutory cure provision resides in Section 130(b) of the Truth in Lending Act (TILA) that protects the lender, or assignee of the loan, from liability.  The cure provisions in 130(b) are outdated, and focus primarily on refunding under-disclosed APRs and finance charges. However, 130(b) cure provisions are currently utilized on numerical errors that cannot be cured through the regulatory cure mechanism.  Due Diligence firms have started using 130(b) cure provisions on numeric TRID violations that have “potential statutory liability” to cure incurable unsaleable loans.  It is ultimately left up to the investors to either accept the Section 130(b) cures for numerical clerical errors on TRID loans, or have them remain incurable saleable loans. Industry participants and due diligence firms have started to adopt the 130(b) cure provisions in their loan reviews.

The CFPB recently issued TRID 2.0 final rules that have updated TRID regulations that become mandatory on October 1, 2018.  The CFPB clarifications should put to rest many of the interpretative disagreements with the law to allow market participants and Due Diligence firms to be more aligned in their compliance reviews. Some of the significant changes with TRID 2.0 include clarification of no tolerance fees, construction loan disclosures, written provider lists, re-disclosures after rate lock, and cost reductions after initial LE.  For the most part, overall reaction to these changes has been positive because the CFPB addressed many uncertainties in the original rule that pertained to assignee liability.  However, others in the industry have been disappointed that additional cure provisions for violations were not included.

Mission Global delivers custom solutions to our clients for TRID reviews by leveraging our deep transactional experience, proprietary technology, subject matter expertise and best-in-class talent.  Click here to learn more.

See current transactions now in our market place, MissionMarket or return Home.

Investors in residential loan portfolios routinely engage third-party experts during the bidding and acquisition process to analyze risk, data capture / validation and compliance testing.  However, the most successful investors realize that Servicing Surveillance and Servicer Reviews are critical for risk management and simultaneously enhance portfolio performance.

While loan servicing has been big business for many decades, the basics have changed little over the years.  Payments are received and processed; escrow accounts are monitored and managed for payment of real estate taxes and hazard insurance premiums; investor remittances are tracked and paid; and late payments are chased.  What has changed is the complexity of state and federal laws and regulations, the emergence of debtor friendly courts and litigious borrowers.  These factors have exponentially increased the complexity and inherent risk of debt collection procedures, which directly affect investor risk.

Debt collection and delinquency control is not what it used to be.  Servicers must ensure their collections, loss mitigation and foreclosure departments are fully trained in the ever changing landscape of local legal requirements at the municipality, county and state level.  This training includes proper procedures for collection calls, required letters and notifications pertaining to servicing transfers, delinquency resolution, foreclosure / bankruptcy steps and timeline management.  Federal laws and regulations also have overhanging risks of borrower litigated disputes, contested foreclosures and regulatory audit.

The result of this expansion in risk is the growth and importance of servicer oversight, audit and review.  Servicing surveillance creates a liaison between an investor and their servicer, providing important risk management and servicing remediation information to a broad set of stakeholders.  These include major domestic and international banks and investors, private hedge funds, legal and consulting firms, as well as both large corporate and specialized boutique servicers.

Servicing Surveillance and Servicer Reviews are not only critical for regulatory responsibilities but are also important for investment performance and measuring counter-party risk.  Best practices in the field of Servicing Surveillance and Servicer Reviews include the following:

Policy and Procedures (“P&P”) Reviews: Confirmation that servicers’ published P&Ps are revised and updated regularly to reflect changes in current industry standards, newly enacted legal requirements and published industry best practices.

Servicer Operational Reviews: Assessment of servicer’s performance and adherence to their internal P&Ps, stand-alone Servicing Agreements and/or Pooling and Servicing Agreements.

Servicer Oversight: Ongoing identification of loan level systemic servicing issues needing resolution to increase loan performance and decrease loss severity.

Asset Management: Analysis of Collection and Loss Mitigation activity, for both whole loan and securitized mortgage portfolios, including loan level reviews, foreclosure and bankruptcy timeline management, and delinquency cure methods on Client-selected loan populations.

Reps and Warrants Examination: Forensic loan level review identifying possible breaches in loan seller’s representation and warrants, and highlighting non-compliance issues affecting investor recovery opportunities.

MERS Third Party Attestation: Third party review and validation of the accuracy of MERSCORP members required portfolio policy and procedures documentation and portfolio monthly self-audit and reconciliation process.

Securities Surveillance Identification and monitoring pool asset trending and stratification, providing the investor with the benefit of early identification of potential or existing problems, and recommendations for remedying any discovered issues before they affect asset quality.

Servicing Transfer QC:  Boarding oversight and critical balance reconciliations to ensure accuracy and seamless servicer-to-servicer transfer for an uninterrupted flow of servicing activities.



Mission Global delivers custom solutions to our clients for Servicing Surveillance and Servicer Reviews by leveraging our deep transactional experience, proprietary technology, subject matter expertise and best-in-class talent.  Click here to learn more.

Commercial and industrial (C&I) loan portfolios are often overlooked when considering assets for disposition via the secondary loan market.  The more liquid nature of real estate debt versus C&I often results in lenders first considering disposition of these assets when making portfolio management decisions. Despite this, C&I loans secured by business assets and/or business real estate, should be high on lender’s list when considering asset sales due to demand by other banks (for performing or re-performing) and investors (for troubled or non-performing).

Per the FDIC, C&I lending has grown over the past several years, reaching an apex of $1.936 trillion dollars as of year-end 2016.


While much of this growth is the result of new businesses seeking capital, loan growth can also be attributed to lenders diversifying away from real estate and construction lending often at the direction of regulators. Some of this increase in loan growth can result in borrowers becoming over-levered, having taken advantage of easier money and loosening credit standards.

Since the end of 2016, the pace of loan growth has abated, with negative growth observed during 11 of the past 17 weeks according to Federal Reserve data.  Furthermore, delinquencies in the C&I space are rising, with the number of delinquencies growing every quarter since 4Q14. The FDIC reports that 1.56% of C&I loans are currently past due or on non-accrual (see below chart).  According to, in 4Q16, there were approximately $26.6bn of non-performing C&I loans, which represented 19.84% of all non-performing loans.

The increase in delinquencies is largely attributable to challenges within the energy sector, as readily observed at a regional level among banks with exposure to markets that derive an outsized amount of economic activity from oil and gas exploration. Additional delinquencies are likely to be observed due to macro-economic factors in the coming months. C&I loans not secured by fixed assets are frequently pegged to variable rates. As indices rise in response to anticipated Fed rate hikes, borrowers may breach debt service covenants, or find themselves in payment default, should they fail to grow revenue in tandem with increased interest expense.

Banks have responded to increased delinquencies by building reserves and increasing their loan-loss provisions by approximately $3.6bn in 2016.  At the same time, credit focused hedge funds / investment funds, merchant capital firms that specialize in providing working capital to small and middle market companies, value investment credit firms, global private equity firms, and opportunistic regional banks have raised funds to take advantage of market dislocation. Many of these investors have a penchant for assisting borrowers facing difficulty making good on their credit obligations by restructuring loans in tandem with providing additional “rescue” capital, accounting and other financial support, and general business guidance. In doing so, these investors are able to resuscitate companies that might otherwise suffocate under the burden of mounting debts.  This additional capital allows investors to offer compelling bids relative to the typical recovery experienced by lenders. A study conducted by the FDIC indicated that loss given default experienced by failed banks averaged 45.5% for C&I loans on a weighted average basis, significantly higher than losses associated with CRE loans, because of a myriad of operating company issues (difficulty paying vendors, obtaining raw materials, distributing inventory, making payroll) which result in a massive decline in enterprise value.

By way of example, Mission Capital recently traded a sub-performing C&I loan secured by the business assets of a home goods supplier whose credit had been frozen, resulting in difficulty obtaining raw materials and in turn constraining production of finished goods. The prognosis for this company was bleak in the face of declining revenue which would have further impaired an already struggling business. Mission created a market for the debt, generating multiple bids in a competitive process. Ultimately the loan traded to a buyer with a penchant for restructuring small business debt at a price that resulted in a gain on the lender’s book value.

At a time when lending activity is slowing, lenders may find themselves playing a game of “hot potato” with classified assets as borrowers struggle to refinance debt in the face of declining lending appetite and tightening credit standards. This, in tandem with increased delinquencies, creates an environment where high loss severities associated with C&I loans are likely to be realized.  In the face of headwinds in the C&I lending space, now is an optimal time for lenders to evaluate their C&I assets to determine if a loan sale is a viable and potentially optimal method of portfolio management.


Click here to learn more about Mission Capital’s Asset Sales team

Insight on the state of the multifamily capital markets from the Mortgage Bankers Association CREF/Multifamily Convention and Expo

The Mission Capital team spent President’s Day Weekend at the Mortgage Bankers Association (MBA) CREF/Multifamily Convention and Expo in San Diego…and the overall consensus is that commercial real estate lenders, acquirers, and investors continue to seek multifamily properties more than any other asset class.

Not all deals, however, are equal in the eyes of capital sources.  Certain multifamily deals are more difficult to finance.

Construction and renovation projects remain the most challenging.  The uncertainty of project funding schedules, significant capital expenditures, low occupancies, and a lack of in-place cash flow eliminates many capital providers from participating in these types of transactions.  Agency financing is not available for these projects either, as it requires a 90-day history of 85%+ physical occupancy and 70%+ economic occupancy.

By removing Fannie Mae and Freddie Mac from the equation and adding a strong mortgage broker, owners and operators can essentially “auction” their project to the lender with the best terms and lowest rates.  Hundreds of viable lending options exist with a wide variety of rates, terms, structures and capital stacks from every type of lender: bridge to agency, CMBS conduits, debt funds, hard money lenders, and mortgage REITs, as well as money-center, regional, and community banks.

Here are some examples of how conducting an “auction” process amongst lenders results in materially better economic and non-economic terms for Mission Capital’s borrower clients:



Queens Plaza South
Long Island City, New York

  • Senior & Mezzanine:
    • $148.5mm Senior
    • $40mm Mezzanine
    • 90% LTC – Mid single digits blended rate
  • Added Value:
    The Borrower achieved 90% leverage by allowing the land lender to be subordinate to the construction lender. The Borrower was able to dictate final terms by having multiple higher rate construction lenders competing in the final “auction.”  Mission negotiated a pay and accrue feature, versus borrowing the full interest reserve that reduced the capital stack by over $4.0 mm.   The lower total capital stack reduced the equity required for the transaction.


Multifamily with Retail –  Construction
Seattle, Washington

  • Senior Construction Loan:
    • $97.5mm
    • 65% LTC
    • High 200’s over LIBOR pricing
  • Added Value:
    The Borrower received offers from multiple banks, insurance companies, and debt funds for senior and mezzanine construction financing.  The Borrower was able to decrease the spread from an existing relationship lender due to Mission’s “auction.”  Financing offers gave the Borrower multiple points of negotiating leverage with relationship lender on proceeds, term, rate, structure, and recourse.



The Equitable Building
Baltimore, Maryland

  • Senior Bridge Loan:
    • $34.3mm
    • 70% LTV
    • Low 300’s over LIBOR pricing
  • Added Value:
    The Borrower received proceeds to fully refinance the Property and received a $3.0mm earn-out structure. The Borrower saved $1.55mm, after Mission’s advisory on the prepayment of the in-place debt. The Borrower saved an additional $125,000, as Mission negotiated a favorable interest rate cap purchase schedule.


Hollywood/Koreatown Portfolio

  • Senior Permanent Loan Proceeds:
    • $79.8mm over 11 loans
  • Term:
    • 65% LTV
    • Term: 10 years Interest Only
    • Low 400’s WACC
  • Added Value:
    The Borrower was given the ability to upsize the loan 180 days following closing even though standard agency lenders do not typically allow upsizes prior to the loan’s first anniversary. Individual loans provided the Borrower with flexibility and ability to avoid cross-collateralization.  Closing with a single lender significantly decreased closing costs.  Mission provided the Borrower with higher leverage options from non-agency capital sources- a necessity given a volatile agency market at the time of close.


Click here to learn more about Mission Capital’s Debt & Equity Finance team

Written by Dwight Bostic:

December’s Mission Monthly keynote article – ‘Importance of Due Diligence for Secondary Market Asset Sales’: reviewed the robust capabilities of the Secondary Market Surveillance (“SMS”) platform in providing permission-based portal access for all stakeholders in the loan evaluation process, streamlining due diligence by serving as a single repository for data management.

However, as with most technology based solutions/ platforms, the human element is critical to the success. Systems, in a singular capacity, are insufficient to address the tactical requirements of a successful engagement.To expand our capabilities, Mission Capital, in the 4th quarter of 2015, combined our services business with the due diligence firm Global Financial Review. The new entity, Mission Global, provides a comprehensive portfolio of due diligence and risk management services for institutions buying, selling, securitizing or managing mortgage, consumer and commercial loans. Mission Capital and Mission Global align human capital (with over 300 fulltime professionals) and advanced technology with a secondary market approach to meet your specific and demanding requirements.

Mission Capital and Mission Global support a broad range of business processes: Loan Syndication, Portfolio Acquisition and Disposition, Securitization, Warehouse Lending, Asset and Portfolio Management and Surveillance, Mergers and Acquisitions and Regulatory Reviews. This depth of experience along with the breadth of services offered allows Mission to deliver solutions to 7 of the top 10 banks along with engagements with the FDIC, various FHLBs and GSEs as well as numerous whole loan investors.



The following engagements demonstrate our extensive portfolio of services:

Top Five Major Global Bank: Mission is engaged by the Bank for both residential and commercial due diligence services. In support of the Bank’s multiyear, programmatic asset liquidation strategy for their residential portfolio, Mission acts as the Bank’s back office for all components of transaction management. Mission successfully imbedded over 100 full time professionals within the bank’s servicing operation conducting collateral file review and curative, vault management, title and lien curative along with managing post-closing contract management. In support of the Bank’s commercial group, Mission delivered due diligence and credit underwriting services for the acquisition of a credit facility secured by approximately $3bn of loans secured by more than 650 properties in Mexico. Due diligence included review of loan and credit files as well as third party work ordered in conjunction with the acquisition. Our deliverables, including market summaries for major cities and collateral types and individual asset summaries for all relationships, loans and collateral, were utilized by the Bank’s credit team in underwriting and approving the transaction.

Top Five US Bank: Engagement A supports the Bank’s warehouse lending group’s counterparty risk management through i) conducting loan level re-underwriting and compliance testing and ii) auditing servicing procedures for adherence to Bank and regulatory standards. Engagement B supports the capital markets programmatic RMBS Cleanup Calls and resulting whole loan liquidation. Services delivered are collateral exceptions curative along with preparation of a new assignment of mortgage from Bank. The transaction timeline is generally very compressed which require Mission to cure 1,500 to 3,000 executions within three to four weeks.

Leading Private Equity Firm: Mission supports the PE’s, one of the most active buyers of distressed residential whole loans over the past several years, whole loan acquisition and sales group delivering products for title and lien curative, compliance documentation cure and collateral documentation risk grading. Mission established a separate team of professionals dedicated to the specific and demanding needs of our client. Loan Originators – multiple asset classes: In support of new origination loan acquisitions by Conduit Originators, Mission performs loan level re-underwriting and applicable compliance testing for the following asset classes: Commercial Loans; Student Loans; QM and NonQM Residential Loans; and Community Reinvestment Act Loans. Mission Global and Mission Capital are uniquely positioned to partner with you on a variety of services to meet the complex challenges faced by all market participants. Mission Global is Rating Agency approved by S&P, Fitch, DBRS, and Kroll and both Mission Capital and Mission Global meet the demanding standards for vendor approval.

Click here to learn more about Mission Capital’s loan due diligence and consulting services.



In addition to our leading asset sale and capital raising expertise, Mission Capital delivers custom solutions to our clients by leveraging our deep transactional experience, proprietary technology, subject matter expertise and best-in-class talent.

Residential/Consumer Expertise:

Seasoned Loan Risk Analysis
Non-QM Reunderwriting
Agency Loan Reunderwriting
Forensic Reunderwriting
Compliance Testing/Risk Assessment
Data Review/Validation/Auditing
Robust Data Tape Construction
TRID/ATR Reviews
Valuation (Collateral/Loan/Portfolio)
Single Family Rental Re-Underwriting

Seasoned Loan Eligibility Analysis
Data Tape Creation and Validation
Bid Tape Submission (DF1, ULDD)
Agency Loan Reunderwriting
Collateral Delivery Management

Collateral File Review
Collateral Inventory / Exceptions Reporting
Collateral Risk Assessment
Cure Missing/Defective Docs
Lien/Title Risk Assessment
Title Policy Inventory Review
Cure Missing TP’s or Obtain New TP
Title Claims Management

Mission supports a range of business processes:
• Loan Syndication
• Portfolio Acquisition & Disposition
• Securitization
• Warehouse Lending
• Asset & Portfolio Management / Surveillance
• Mergers & Acquisitions
• Regulatory Review

Data Integrity Review and Data Cure
Pre-bid Risk Analysis
Portfolio Modeling/Valuation
Project Management/Planning
Project Manage Third-Party Vendors
Settlement Management/Reconciliation
Rep and Warrant Risk Management
Data Preparation and Mapping
Transfer Execution
Interim Servicing Reconciliation
Trailing/Missing Document Management
Corporate Advance Audit/Reconciliation

Counter-party Risk Review
Workflow Analysis
Loss Mitigation Review
Policy and Procedure Review
Pay History Review
Validation of Servicing Efforts


Commercial Mortgage Loan/Lease Expertise:

Market Analysis
Syndication Packages
Lease Abstracting
Asset Summary Generation
Data Tape Generation
CCAR Reviews
ARGUS Analysis
FDIC Loss Share Valuation/Terminations
Valuation (Collateral/Loan/Portfolio)
Market Analysis
Third Party Report Review/Auditing
Relationship, Loan, Collateral & Borrower Data Mapping

Collateral Inventory and Exception Reporting
Document Imaging and Indexing
Virtual Data Room Hosting

Regulation Analysis
Process Assessments & Implementation
Data Review, Monitoring & Reporting

Document Inventory
Portfolio Analysis
Credit Underwriting
Cash Flow Auditing
Spreading Financials
Warehouse Loan Facility Underwrite

Covenant Checks
Letter and Call Campaign for Financials
Multi-Lingual Capabilities

One Loan/Multiple Collateral Analysis
Multi-Loan/Multi-Collateral Analysis
Robust Data Tape Generation


$55 Billion – Closed Asset Sale Volume

$495 Billion – Valuations Volume

$197 Billion – Closed Trade Support/Consulting Volume


ASSET TYPE – Debt, Mezzanine, Equity, Real Estate Portfolios, Collateralized Debt Obligations, Collateralized Loan/Lease Obligations

PERFORMANCE PROFILE – Performing, Sub-Performing, Non-Performing, Re-Performing, Bankruptcy, Seasoned RPL

COLLATERAL/TRANSACTION TYPE – Hospitality, Retail, Office, Industrial, Multifamily, Senior Living, Self-Storage, Student Housing, Manufactured Housing, Mixed-Use, Agriculture, Land, Equipment, Aviation/Marine, Single Family, SF Rental, Consumer, Unsecured, MSR, Student Loan, Non-QM

LESS-TRADITIONAL ASSETS – Quarries, Mineral Rights, Developmental Rights, Golf Courses


Banks – Community, Regional, Commercial, Investment

Funds – Private Equity, Credit, Debt, Opportunity

Credit Unions

Specialty Lenders – Bridge, Hard Money, Mortgage Reit

Insurance Companies

Special Servicers

Government – Regulators, FHLBs, GSEs, Federal Reserve

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Written by Mission Capital Asset Sales:

Secondary Market Asset Sales Environment
Liquidity in the secondary market increased substantially following the global financial crisis. High-yield debt funds attempted to raise a record $66.7 billion of equity to invest in high-yield commercial real estate debt in 2016. The $66.7 billion represents 21.5% of all attempted equity raises for investment vehicles in 2016 that invest in commercial properties, debt, or both. That figure represents the highest percentage of total equity raise devoted to high-yield funds since the statistic was first tracked by Real Estate Alert in 2003.This increased liquidity has further legitimized the whole loan trading business. What was once perceived as an avenue for distressed or special situations trading has evolved into a market for transactions occurring in the normal course of business. Motives for divesting assets now stem not only from risk management related to “problem assets,” but also from M&A activity, compliance with internal or regulatory concentration limits, along with a host of other routine portfolio management practices. Price expectations in this ever more liquid market, in conjunction with opportunity-cost for investors evaluating increased product volume, necessitates quality data to bridge the bid-ask gap.

Value-Add of Due Diligence
As the secondary market for whole loans continues to mature, the role data plays in facilitating timely transactions at market-clearing prices has become increasingly important. Banks, funds, servicers, and other lenders exploring the sale of assets may be penalized for incomplete data by investors making conservative assumptions to protect against downside. Servicing systems, designed primarily to manage loan administration rather than facilitate asset management, are inherently limited in their ability to supply the robust data needed to effectuate a loan sale. These systems often fail to memorialize collateral release and / or addition, relevant borrower and guarantor detail, along with other pertinent information for underwriting a loan. Additionally, over the life of a loan data may be “lost” due to servicing conversions, loan modifications, or hosting on legacy systems. Data pitfalls don’t end with the servicing system; further compounding data inadequacies are factors including regulatory changes requiring increased disclosures for compliance, document exceptions, and the dilemma of covenant checks where lenders are often dis-incentivized from confirming compliance (non-compliance necessitates a downgrade, whereas no action is required otherwise). Sellers are often tempted to market assets without first packaging diligence under the rationale that reducing time to market will increase interest and minimize externalities.  This is often done at the risk of impacting pricing and actual transaction timing. Responding to investor data requests during the course of a transaction diverts resources that are better focused on the marketing effort. Surprises, such as missing documents and lien issues, may be more difficult to cure during the course of a transaction and could even result in pricing adjustment or closing delays. Conversely, getting in front of diligence issues typically leads to stronger execution from a time and price perspective.

Mission Capital’s Answer: Secondary Market Surveillance
Providing a succinct diligence package can seem like an arduous task, but doing so in advance of a transaction invariably pays off in the long term. Aggregating data from various systems and obtaining documents from numerous sources, including custodians, file vaults, asset managers, and outside counsel, in itself can be a challenge. Once data and files have been gathered from disparate sources, organizing this information into a succinct diligence package often appears a monumental undertaking. Mission Capital has solved for this challenge through our proprietary due diligence platform, Secondary Market Surveillance (“SMS”). The SMS platform provides permission-based portal access for all stakeholders in the loan evaluation process, streamlining due diligence by serving as a single repository for data management. SMS is constructed on relational database technology, which allows seamless underwriting and analysis of multi-loan asset relationships as well as loans with numerous collateral items and borrower / guarantors. Real time reporting is available through customized dashboards and data extracts. Banks, servicers, and funds that have leveraged SMS to perform due diligence in advance of a loan sale have uncovered real value through the process. By utilizing SMS, Mission Capital was able to determine that a significant portion of a client’s non-performing loan portfolio slated for sale was nearing the statute of limitations for initiating legal action. Asset managers and third party counsel accessed SMS reports to determine which loans were in question, and either initiated legal proceedings or structured a sale such that closing would occur prior to the end of the statutory period. SMS is equally useful for uncovering value with performing loans. When underwriting a re-performing loan pool in SMS it was discovered that the lender frequently took additional collateral as part of loan restructuring. Robust data tapes extracted from SMS reflected nearly 20% more collateral than had been reported in the client’s initial servicing tape. Another due diligence project involving a portfolio of seasoned performing loans revealed that the risk profile of the portfolio had declined since origination, allowing the lender to present a data tape featuring improved property occupancy and NOI relative to that which had been reflected in the servicing tape. Increasingly competitive markets favor good data and rapid transactions. Robust data tapes allow investors to quickly and accurately price portfolios, while arming sellers with rebuttals to potential concerns that arise during the course of investor due diligence. Utilizing a diligence platform could mean the difference between a smooth transaction which meets deadlines and achieves strong bids, and a drawn out, resource intensive trade or dreaded “no-trade”.

To learn more about Mission Capital’s Due Diligence services and SMS platform please click here.

Written by David Behmoaras, Analyst:

Encountering commercial real estate encumbered by ground leases is inevitable when pursuing acquisitions and poses challenges to lenders.  We can overcome the obstacles they present to the capital markets by understanding them.

Lenders treat ground leases as financing subordinate to their loan as the leasehold lender, which has implications on how lenders analyze ground leases when underwriting the transaction.  Instead of evaluating leverage on a Loan to Cost basis, lenders value the ground lease on a Loan to Value basis by factoring in the effective cost of the ground lease to the capitalization in order to determine their position.

Lenders commonly approach this analysis by calculating the NPV of the outstanding rent payments through the term of the ground lease using the prevailing market cap rate for the asset class in question as the discount rate.  Lenders will add the value calculated in this analysis to the total capitalization to determine the effective cost of the ground lease and will conduct an exit analysis to assess what the risk will be on the exit.  Specifically, lenders need to understand how the net present value of the ground lease payments might impact their loan’s ability to be paid down with proceeds from refinancing the asset at the loan’s maturity date.

It is important to note that most lenders will underwrite any uncertain or variable terms in the ground lease conservatively by assuming the maximum value defined in the ground lease.  Key items subject to this scrutiny include fair market value adjustments and annual rent escalations (typically based on the Consumer Price Index).  Ground leases with rent escalations or fair market value adjustments that are not capped will be especially challenging for most lenders because the uncertainty pertaining to the ground lease payments in the future substantially complicates the exit analysis described above.  The assumption is that the take out lender will have a similar problem that is further complicated by having less term remaining on the ground lease.  Negotiating caps on any and all adjustments to ground lease payment increases is highly recommended and often a crucial factor in successfully securing financing for your ground lease transaction.

Written by Lexington Henn, Analyst:

The border of Ridgewood and Bushwick, collectively “Ridgewick,” is a vibrant neighborhood located in the northern part of Brooklyn, New York.   As prices continue to rise for retail, residential, and office properties in neighboring Williamsburg, creative types have been filing into Ridgewick bringing with them new bars, Michelin rated restaurants, hip coffee shops, live music venues, and gallery space that all continue to flourish.  Bushwick is gaining global attention, having been named the “7th Coolest Neighborhood in the World” by Vogue Magazine.  Although Ridgewick is constantly reinventing itself, an authentic bohemian heart still beats beneath its remodeled exterior.

The art scene, from galleries to festivals, is a hallmark of Ridgewick.  Reputable galleries include: The Lorimoto Art Gallery and Jim Hodge’s Art Gallery; The BogArt; Loft 594; Regina Rex; and Harbor Gallery.  Up and coming artists are finding a home in the new developments of artists’ lofts on Wyckoff and Eldert Streets creating an artistically driven environment.  The Bushwick Collective is an outdoor street art gallery that allows famous NYC graffiti artists and international painters to legally paint on buildings all over the district.  Bushwick Open Studios is a three day arts and culture festival and New York’s largest open studio event.  Broadway Stages is drawing actors of all types including George Clooney and Bill Murray, who recently filmed a movie at 1019 Irving Avenue.  The flow of artists, students, families and young professionals continues to move east along the L train, as Williamsburg prices push them out.

Ridgewick is home to many restaurants and live music and entertainment venues including Billy’s, Pearl’s Social Club, The Evergreen, The Acheron, Lone Wolf, and Shea Stadium.  Microbreweries continue to pop up in the area including Bridge and Tunnel Brewery, and Queens Brewery.  Shops at the Loom is a converted textile mill that now serves as a 20-store mini-mall.  It includes a yoga studio, community darkroom and skate-board shop.  Top restaurants and cafes such as Northeast Kingdom, Roberta’s, Blanca’s (Michelin 2 star rated), Momo Sushi Shack and 108 Central Café attract patrons from all over New York City.  Ridgewick also includes Houdini Kitchen Laboratory and Rudy’s Bakery, home to the classically trained pastry chef, Cristina Nastasi, and her famous Black Forest Cake.

Creative Commercial
Rising rents in Manhattan and other parts of Brooklyn, such as Williamsburg and Greenpoint, make Ridgewick an affordable and attractive alternative with superb public transportation.  A recent report showed that 34% of Brooklyn renters are employed by tech or creative companies, compared with 25% in Manhattan.* These tenants typically require a large amount of space, high ceilings and excellent column spacing.

As of July 2013, approximately 2.6MM people live in Brooklyn, making it the third largest city in the United States.  With 43MM square feet of office space, the Brooklyn office market is already larger than the downtown Los Angeles office market, and continues to expand.  Brooklyn is currently seeing its first speculative office building since the 1920’s taking shape at 25 Kent Avenue and a growing live-work environment is attracting numerous tenants.** Properties with lower rents, access to transportation routes and proximity to a skilled labor force will draw many companies to Ridgewood and Bushwick.

TAMI Tenants Leading Creative Commercial Growth
The technology, advertising, media and information industry (TAMI) is in a growth stage and Brooklyn is an untapped market for these companies given employees live here and want to work nearby. In the first half of 2014, the TAMI sector exceeded the financial sector in terms of the number of tenants in the market and their demand for space.  According to a report from Newmark Grubb Knight Frank, Brooklyn’s office market availability rate decreased to 4.1% from 6.5% one year ago, compared to Midtown South, which at 8.8% is widely believed to be one of the lowest availability rates in the US.  The warehouse-conversion to creative retail/office prototype has been proved successful in various neighborhoods of Brooklyn.  Many companies now desire a Brooklyn address to draw in younger employees who already live there and prefer the energetic atmosphere and cutting-edge amenity selection.

The migration of young professionals from Manhattan to Brooklyn has helped spur the TAMI sector growth in the area as well.  Well-known companies such as Livestream, Kickstarter, Etsy and Vice have chosen North Brooklyn for their offices.  Vice Media, an internationally renowned new media company, recently signed an 8-year, 70,000 SF lease on the south side of Williamsburg at 285 Kent Avenue for $55/SF.  Last year WeWork signed on for 40,000 SF above the Williamsburg Whole Foods for $50/SF.  This is emblematic of Williamsburg as a whole, as office tenants are now signing leases comparable to space in Manhattan which is overflowing into East Williamsburg, Ridgewood, and Bushwick.


* As Per, a provider of electronic tenant screening and lease-processing services for landlords.
** Colliers International Q4 2014 Office Market Report.