Peter Pays Paul

When you take a piece of frozen meat out of the freezer generally the meat needs to thaw out before you throw it on the grill. Just because the meat has started to thaw doesn’t mean that it is ready to be consumed.

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.

San Francisco Magazine has an article detailing the rise and now fall of the Lembi family’s real estate empire in San Francisco. It is a long but interesting read.

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)

What was your favorite subject in school?

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

In need of new sources of funding, brokers are calling lenders they have never reached out to before. Too often, the broker in the first 30 seconds is unable to make a solid impression on the lender to establish a long-term relationship.

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.

I’m taking a few things home to read this weekend. Here they are if you want to print them out and read them too.

• Marcus & Millichap 2009 Real Estate Investment Outlook – Marcus & Millichap provides 12 pages of data for you to chew on.
  
• Everything You Wanted to Know about Credit Default Swaps–but Were Never Told – More than a 5 minute read from RGE Monitor – Home of “Dr. Doom” Nouriel Roubini.
• Putting Office Rent Declines into Historical Perspective – Torto Wheaton Research gives there thoughts on the direction of office rents are headed.

See you on Monday!

Very few independent commercial mortgage brokers take the time to interview the lenders on their lenders list. Here are three reasons you should interview your commercial lending sources.

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 month’s meeting for the Bay Area Mortgage Association was titled “What get’s financed in 2009?” The three panelists shared what each of their companies would be looking to finance in 2009.

Two life insurance companies and one national bank were represented on the panel. All three institutions expected higher cap rates, lower loan-to-value ratios, and stronger debt-service coverage ratios as requirements for new originations.

The bank is currently only planning to work with customers that have an existing banking relationship.

The life insurance companies face a difficulty because their global portfolio allocation have been skewed by the massive decline in the stock portion of their portfolios. For some of the life companies their portfolio is out of balance towards commercial real estate, as these assets have not lost value at the same rate the stocks have. This means that they will likely see a decrease in the amount of loans they can originate.

Survey Says

In a survey performed by Marcus & Millichap commercial financing ranked as the biggest concern for real estate investors in 2009 reported by Mortgage Bankers Association.

Financing availability, creditworthiness of tenants and rising vacancy rates top concerns for commercial real estate investors responding to a survey conducted by Marcus & Millichap Real Estate Investments, Encino, Calif.

…

Nearly 60 percent expected all-in mortgage rates to increase in the next year; nearly 75 percent believe financing will be as difficult or more difficult to obtain. While 60 percent of commercial real estate investors expected full recovery of the commercial mortgage-backed securities market, they said its return could take at least two years.

This provides a good opportunity for:

1. Commercial mortgage brokers and bankers that are able to find solutions for their clients,
2. Commercial real estate agents that are able to structure deals that get financed,
3. Real estate investors/lenders that have cash.

Creativity will be one of the keys to success in 2009 for those in commercial real estate. “Business as usual” is on vacation.

Photo Credit: The Pack

Calculated Risk’s post More CRE Woes: Multifamily housing details that loans on multifamily properties have seen an increase in delinquencies.

Apartment to Condominium Conversions

Some of this can be attributed to the reconversion of condominium conversion projects.

During the heyday of low interest rates and the housing bubble. Developers were buying apartment buildings, upgrading the units, filing a condominium map, and then selling the complex as condominiums to buyers. Often this was less expensive than buying land and building a brand new condominium project.

Condominium to Apartment Conversions

With lending criteria tightened, demand for condominiums has dramatically fallen.

Developers are being forced to offer these projects not for sale but for rent in order to make loan payments on their construction loans. These condominiums are being returned to rental status.

Rental Supply and Demand

Initially the condominium conversion projects decreased the available supply of rental housing, as apartment projects were bought for conversion. A decrease in supply lead to increasing rental rates.

Today, the opposite is happening. Condominium projects that are rented are increasing the supply of rental units and rental rates should decrease.

Calculated Risk’s post from Friday, The Residential Real Estate Market, details this exact scenario.

Adding to the woes are the fact that thousands of vacant single family residences are still on the market. As these are absorbed demand for rentals is likely to decrease again pushing rental rates even lower.

I returned Saturday from a trip to Central Asia. The trip was not work related, but I wouldn’t call it a vacation either. It was very pleasureful and rewarding, but it involved a lot of effort.

One of the interesting notes that I came back with is that the country I visited experienced a real estate bubble and liquidity crisis along with the U.S. market.

Real Estate Bubble

According to my contact in country, this is the story. Banks in the West and the U.S. would lend money to banks in the East. In turn these Eastern Banks would lend to the locals to purchase real estate, start a business, or buy a car.

As the cost of money (interest) grew less expensive, more individuals and companies were able to receive loans from Eastern Banks. As the number of qualified buyers grew so did real estate prices. They dramatically increased, almost doubling in a few years.

When the Western Banks suffered a liquidity crisis, the faucet was turned off for the Eastern Banks. The supply of money was gone. Fewer buyers could afford to purchase real estate causing the rising values to fall.

Speculation is not isolated to the United States. Prices have fallen in the past year. My contact in country told me that his organization had benefited from the sale of one asset during the peak of the market. After the bubble burst, they were able to buy a more affordable piece of property and begin the construction of a new facility to meet their needs.

The Cost of Money

Another new friend worked for one of the Eastern Banks. She was in charge of arranging loans from Western Banks to her Eastern Bank. The last transaction she arranged was $500 Million.

If you think interest rates are bad here, be glad you do not live there.

My friend told me that her Eastern Bank borrowed money in the 8-10% range from Western Banks. I assumed that the bank’s margin would be 1-3% to Eastern Borrowers. Her answer was “No, more like 6% to 9%. That is not including the fees. They have fees for everything.”

On the low end the Eastern Banks were going to charge 14% and up to almost 20% before fees. All this in a country where the per capita GDP is about $11,000.

Oh, so many things to be thankful for.

Head over to Yahoo! Finance to take a look at an interesting article by a former subprime lender.

Richard Bitner was an owner in a mortgage shop that made subprime loans and sold them to investors. He is writing a book about his experience from “behind the curtain”.

In the article he details 3 loans that cost his company thousands of dollars.

The article also describes how investors’ desire for mortgage related securities drove the market to make loans to borrowers with riskier and riskier profiles to satisfy the demand.

Confessions-of-a-Subprime-Lender-3-Bad-Loans: Personal Finance News from Yahoo Finance