News around the nation indicates that capital markets for commercial real estate indicate that things are beginning to thaw.

First, the Wall Street Journal is reporting that Harvard Tests Market for Its Property Bets.

Harvard University’s $26 billion endowment is looking to unload a chunk of its $5 billion real-estate portfolio as it seeks better investment opportunities and to reduce its exposure to the troubled property market.

The folks at Harvard Management Company must think that now is a better time to market this opportunity than in the past two years. Stanford tried this approach last year and was offered between 80 and 85 cents on the dollar for their investments.

Second, Simon Property Offers $10 Billion for General Growth. Simon is the nation’s largest mall owner. The majority of their offer, $9 billion, was in cash. Simon would not put $10 billion on the line if they didn’t see commercial real estate markets improving.

Finally, GlobeSt.com is reporting Cautious Optimism for Finance at the 2010 MBA CREF Conference.

Unlike 2009 when the majority of lenders were out of the market, over 90% of the lenders surveyed by the MBA have indicated they have or plan to return to market to lend in 2010.

A good friend told me that while attending the conference, he was surprised by the optimism and the amount of funds available for investment. His concern was that there may be an abundance of optimism that would lead to a repeat of the folly at the height of the real estate cycle.

While none of these items make a case for a hot capital market, collectively they do indicate that markets are changing. By no means are the markets functioning at full speed, but they do seem to be thawing.

What do you think are markets thawing out?

Photo credit: Frozen Steak by stevendepolo.

This is a post from Peter Maclennan's blog Peter Pays Paul.

Thawing Out Commercial Real Estate Capital

Twenty-five Bay Area projects will receive funding totaling $189.85 million. By county, $47.6 million went to Alameda, $7.2 million to Contra Costa, $450,000 to Marin, $64.4 million to San Francisco, $21.8 million to Santa Clara, $1.4 million to Solano and $47 million to Sonoma.

The $7.2 million allocated to Contra Costa County will be split between Valley Vista Senior Housing in San Ramon and Lillie Mae Jones Plaza in Richmond. Both of these projects appear to be in the construction and development phase.

This is a post from Peter Maclennan's blog Peter Pays Paul.

$190 Million Awarded to Bay Area Affordable Housing

The abundance of low cost money from Wall Street allowed the Lembis to acquire properties at an unbelievable rate. Now much of the portfolio is in default.

Walter Lembi, on the other hand, was willing to go all in.

It’s not clear how and when the Lembis and Citi­Apartments started taking advantage of this wild new market, but by 2005, they were in the thick of their record expansion. Like Frank at the beginning of his career, Walter put very little of the Lembis’ own money into their real-estate purchases. Most of the financing was in the form of short-term, interest-only loans. Sometimes, the family financed more than 100 percent of the purchase price covering everything from closing costs to interest payments to the cost of future renovations—using buildings they already owned as collateral.

…

One effect of buying so much real estate in a neighborhood: “The Lembis were setting their own comps,” says David Gruber, whose family owns more than a dozen apartment buildings and who serves as president of San Francisco’s rent board. He is referring to the comparable prices for buildings sold recently in the surrounding area—the basis on which buyers, sellers, and agents set the price for other properties. Every time the Lembis paid top price for a building, they provided a precedent for the next sale, driving up the paper value of all their holdings. When it came time to refinance or take cash out of a building, they could use these higher values to get bigger loans.

The loans on the Lembis’ new purchases were then bundled into CDOs assembled by leading investment banks, such as J.P. Morgan. A July 2007 CDO, worth $5 billion, included some Holiday Inn Express hotels in Ohio and North Carolina, as well as the Health Net headquarters in Connecticut. The Lembi piece of this was loan number 11, the Lembi Portfolio, a $90 million loan for 662 apartments.

(HT: Square Feet)

This is a post from Peter Maclennan's blog Peter Pays Paul.

Wild Times in San Francisco’s Apartment Market

Smaller U.S. banks may need $12 billion to $14 billion in additional capital to cope with troubled loans still on their books, the Congressional Oversight Panel said today in a monthly report.

The weakness of smaller banks is evident in the number of banks that have been closed by the FDIC. That’s not to say that only small banks are being affected. Corus Bank seems posed for an eminent FDIC takeover.

Mish details the woes of some of Georgia’s banks in Zombie Subdivisions and “Pig In The Python” Shadow Inventory.

The Atlanta Journal Constitution is reporting fire-sale prices on some lots have dipped to 20 to 30 cents on the dollar as the Volume of ’subdivision’ vacant lots overwhelms banks.

You think it’s hard selling a house these days? Try unloading a subdivision. And not just any subdivision, but one with few if any completed homes and a weedy patch where the swim-and-tennis center was planned.

That’s the reality many Georgia banks find themselves in amid a foreclosure crisis that has claimed not only individual homes but also entire failed developments.

Real estate investors are seeing their equity erode. This is causing some of them to threaten/warn of imminent default. And we may continue to see more of these defaults as time goes on.

Phoenix From the Ashes?

The Dirt Lawyer may have identified the silver lining in all of this where he writes:

While I agree we are waiting for some properties to “die,” in a sense, I take a more phoenix-like perspective to the whole thing. After all, the property is reborn by its transfer to a new owner. So I like to think of this as the bottom of an evolutionary cycle, after which a lender dumps the property to a new buyer on the cheap or holds it for a while. As I keep saying, however, the problem, at least for many prospective buyers, will be finding money, because traditional lenders are not lending much and the CMBS market — well, we’ll see when or if that phoenix arises.

This is a post from Peter Maclennan's blog Peter Pays Paul.

Small Banks Still Facing Trouble

Lenders filed a record number of mortgage default notices against California homeowners during the first three months of this year, according to the research firm MDA DataQuick.

The company blamed the recession and of lenders playing catch-up after a temporary lull in foreclosure activity. A total of 135,431 default notices were sent out during the January-to-March period, an all time high in the  company’s database which goes back to 1992. That was up 80.0 percent from 75,230 for the prior quarter and up 19.0 percent from 113,809 in first quarter 2008, according.

According to the DQNews.com article Golden State Mortgage Defaults Jump to Record High:

The median origination month for last quarter’s defaulted loans was July 2006. That’s only four months later than the median origination month for defaulted loans a year ago, in first quarter 2008. That suggests a period where underwriting criteria were particularly lax.

Of the 3.7 million home loans made in 2004, less than 1 percent have since resulted in a lender filing a default notice. Of the 3.7 million loans originated in 2005, 4.9 percent have triggered a default notice so far. Of the 3 million in 2006, 8.5 percent have so far resulted in default. A particularly toxic period appears to have been August through November 2006 which had more than a 9 percent default rate. Of the 2.1 million loans made in 2007, it’s 4.6 percent – a percentage that’s likely to rise significantly during the rest of this year.

The lending institutions with the highest default rates for loans originated in August to November 2006 include ResMAE Mortgage (69.9 percent of loans resulting in a default notice), Master Financial (64.6 percent) and Ownit Mortgage Solutions (63.6 percent). Of the major lenders, IndyMac has a default rate on those loans of 18.9 percent, World Savings 8.0 percent, Countrywide 7.7 percent, Washington Mutual 6.3 percent and Wells Fargo 3.4 percent. Less than 1 percent of the home loans originated in late 2006 by Citibank and Bank of America have since gone into default.

The DQNews.com article also reported:

Foreclosure resales have emerged as a significant market factor, accounting for 58.1 percent of all California resale activity last quarter. A year ago it was 33.1 percent. Foreclosure resales varied significantly by area, from 13.0 percent in San Francisco County to 80.8 percent in Merced County.

Real estate values have not settled in California. This new “wave” of foreclosure notices is going to cause uncertainty in the markets for a while. This combined with the “shadow inventory” of as many as 80,000 homes reported by SFGate.com will keep prices depressed and may drive them lower.

This is a post from Peter Maclennan's blog Peter Pays Paul.

California’s Foreclosures Soar

I have a natural proclivity towards math. I enjoyed algebra and solving a challenging problem was always fun. (I didn’t like calculus or trigonometry, too theoretical.)

Writing for me was always more difficult. Whether it was a research report or a story I always had a hard time getting to the minimum word limit. English was not my favorite subject. (Now I can’t shut up.)

It Comes Naturally

Talents and Skills

Each of us has natural talent that makes some tasks easier than others. Solving a complex finance problem is easier for me than for some. Some men are gifted with their hands and can build almost anything. Other men have the ability to design beautiful buildings. Some women are naturally creative and can sculpt or paint beautiful works of art. Other women have an attention to detail that makes them incredible administrators.

Our natural talents often lead us to industries where we will be maximally productive.

Personality Traits

Like natural talents, many of us have personality traits or characteristics that have been present from birth. One child is more gregarious, while the next is more reserved. Some people like their privacy and others will share almost anything with you.

Often time these personality traits determine how we act in our careers, how we relate to others, and our personal lives as well.

The woman with a driven personality may pursue her career at the expense of friends or family. The quiet teenager is less likely to take a sales role. The shy man is more likely to avoid speaking in public. The intellectual college student is more likely to pursue a career in academics.

Determined to Fail

Humans are naturally lazy (myself included). We like to follow the path of least resistance.

Frequently, our pre-determined character traits are the path of least resistance.  We follow them because they make us feel comfortable, we don’t have to change, and it is what we know.

Unfortunately, our determined character traits may cause us to avoid actions that may lead to greater success and a more fulfilling life. Have you ever heard:

“I can’t cold call, I’m not made that way.”

“I’ll never be able to do that. I was never good at …”

“I could never do that. It is beyond me.”

Self-Imposed Limits

These statements, and others like them, limit our inclination to change. We are limiting ourselves to what comes naturally and what is easy.

“No pain, no gain” is the colloquial saying. It is true. Without discomfort we will not change from our current status.

In essence we are saying that we are determined to fail because of our natural characteristics. We are admitting that our given character traits are too powerful for us to over come.

Breaking the Cycle of Failure

We can loose the chains of our natural tendencies and change how we act. We no longer have to be a slave to our predispositions.

It starts with a choice to act in a way that is consistent with what we want to achieve or to become, no matter how uncomfortable we feel. Over time the action will become more and more natural.

It is a bit like breaking in a new pair of shoes. The first time you wear them they may be uncomfortable for a bit, but as the leather stretches and becomes pliable they begin to form to your foot, and in two years’ time you may be sad to have to replace them.

In Your Personal Life

If you are shy, choose to talk to a stranger. If your natural tendency is to follow, find a role to be a leader. If you are timid, develop courage. Take a class to develop a skill or hobby. Read a book that stretches your mind and soul.

Your life won’t improve on accident. It takes discipline and dedication. But it can be done.

At Work

Choose to pick up the telephone and make those cold calls. Choose to give the presentation to the group of strangers, but potential clients. Choose to take a difficult course that will allow you to better serve your clients. Develop new habits that will bring value to your employer.

Choose to do what does not come naturally, but will be profitable for your work goals.

Today Is the Day

Make the choice today. Otherwise, you may be determined to fail.

Photo Credit: Akash K

This is a post from Peter Maclennan's blog Peter Pays Paul.

Are You Determined to Fail?

Phone Etiquette

In the first 30 seconds you can make a good impression with the lender and establish a solid relationship with them. Or in the first 30 seconds you can demonstrate incompetence and a lack of civility towards the lender.

Here are some tips of what to do in the first 30 seconds of your initial call to set up a solid long-term relationship with a lender.

Repeat and use the name of the person who answers the phone. This helps you to connect with the person. If you have a short memory or forget names, write the name down so that you can reference it throughout your conversation.

Keeping the person’s name may help you the next time you call with a loan request. You will know with whom you spoke previously and can use your previous contact to build rapport.

Do not ask how the person is doing. Most of the time we ask out of a sense of “social propriety”, not out of genuine concern. What would you do if the person on the other end of the line answered “Terrible!”?

This can be awkward:

Lender: Hello this is Frank.

Broker: Frank, how are you?

Lender: Fine. How are you?

Broker: Good thanks.

Lender: Who is this again?

Next, clearly state your name, company, and briefly describe what you need in 30 seconds or less. “This is Peter from Owens Financial Group. I am calling regarding an office complex in Seattle worth $4 million in need of financing for $2.75 million.”

This is your “elevator pitch” of the project. In order to effectively make the pitch, you must have studied the financing request. You must know the location, loan-to-value ratio, loan amount, and property type in order to make this statement in 30 seconds.

Finally, end with a question about the lender’s ability to do this deal. You don’t want to leave the lender wondering what they can do for you.

“Can you finance an office property at 69% of value?” Or “Do you handle commercial construction projects like this in Idaho?”

I would advise against asking a question about pricing. If the lender is unable to finance your project, price doesn’t matter. You are requesting them to answer a fruitless question.

Summary

By knowing in advance the reason of your call and details of the deal, you evidence your professionalism and that you value the lender’s time. It also prepares you to leave a detailed message for the lender if they are unavailable at the time of the call.

When making a phone call, you want to establish rapport and accomplish the purpose of the call. Getting off on the right foot is imperative to achieving this goal.

This is a post from Peter Maclennan's blog Peter Pays Paul.

Pick Up the Phone Already

is one of the few lenders to report that the Treasury Department intends to reject the bank’s application for funds from the Troubled Asset Relief Program, or TARP.

Ouch! The bank must be in trouble if they are admitting that they were rejected by the Treasury Department.

Corus has about $2 billion in unfunded construction commitments and that in the event of a federal takeover, regulators wouldn’t be obligated to fund these commitments.

This would be a major disaster. The article doesn’t specify how many projects this is spread over, but imagine if all of them were forced to stop mid-project.

Corus funded condo projects nationwide could come to a standstill. Depending on the FDIC’s decision, some of these projects could languish incomplete for a long time.

This is shaping up to be a huges mess.

This is a post from Peter Maclennan's blog Peter Pays Paul.

Corus Bank Woes

2009 forebodes to be a difficult year for certain commercial real estate sectors. Much in the residential real estate industry has changed since 2006, we can expect similar changes in the commercial real estate. They key is to be one of the survivors that come out on the other side.

Adding Value

Most borrowers would not pay a broker’s fee if they did not get something in return for it. A commercial mortgage broker must provide something  the client “needs”.

The client may “need” a smoother transaction, a greater selection of lenders, a higher LTV, a lower rate, or more flexible loan covenants. In exchange for this the broker receives their loan fee.

All of these were solutions to problems that a broker could provide that might not have come through direct contact with an institutional lender

In the current market brokers are having more difficulty providing these items of value. LTVs have decreased, rates have gone up, and many banks are only lending to existing customers.

How does a broker survive and add value in this market?

Bring Equity

A broker that was able to provide an equity injection to a property that needs refinancing will have no shortage of business. Borrowers that cannot qualify for a refinance with new, lower values may be open to a fresh equity injection to facilitate the refinance and ownership of their property.

Offering this as a solution to a borrower’s problems will make it more palatable. Many borrowers may balk at this idea at first.

However, if the only alternative is foreclosure, this idea is likely to become less offensive.

Finding Equity

This will require some work on your part as the broker. Finding reliable and reasonable sources of equity capital. The equity investor must have the funds available to respond quickly. They also must not be so greedy as to kill a deal and offend your borrower.

One way to do this is call your existing database to see if they know anyone that might be willing to invest in projects for an equity position. Some of your existing clients may have extra cash that they would be willing to invest in the right project.

The deal structure will need to be worked out between your equity investor and the borrower.

Commercial mortgage brokers need to continue to add value to their clients’ transactions in this difficult financing environment. How do you plan to do this for 2009?

Photo credit: somethingstartedcrazy

This is a post from Peter Maclennan's blog Peter Pays Paul.

Commercial Mortgage Brokers Should Add Value (and Equity) to a Transaction

1) It Saves Time.

Commercial brokers will see a variety of deals come across their desk. Instead of calling 100 lenders to find out if they finance retail properties when the deal arrives, a broker can call the 10 lenders that are looking for retail properties to finance. It also allows you to collect the necessary information to accurately present the deal to the commercial lender.

It also saves the lender’s time. You do not end up calling them every five days with a deal that cannot be financed by their institution.

2) It Increases Perceived Professionalism.

We all want to be taken seriously and perceived as professionals in our field. You can appear more professional by consistently calling a lender with deals that are appealing to that lending institution.

A husband knows that his wife likes daisies, is going to score more points for bringing home daisies than petunias. Showing apartment loans to a lender that likes apartment loans, demonstrates that you listened to the lender and are serious about getting deals done with them.

3) It Increases Successful Closes.

Fewer wasted phone calls and a focused plan of attack allow you to devote more time to deal producing activities.

As lenders begin to trust you with the deals that you bring to them, they look forward to working with a person they know and trust. Marginal deals are more likely to get funded if the lender has a relationship with you.

This process also allows you to filter out the deals that you can’t readily place with any lender. This will save you from wasting precious days chasing a deal that is not able to be financed.

I hope you enjoyed my two cents on why you should develop a relationship with your commercial lender. Can you think of other reasons to develop a relationship of this type?

This is a post from Peter Maclennan's blog Peter Pays Paul.

3 Reasons to Interview Your Commercial Lender