VANQUISHING VALUE In general, deals today are more challenging and require more flexibility to see to completion. Take a standard-bearer “value-add” transaction, where buyers target and renovate an underperforming property in order to put it under new management. Those deals were sold to investors using projections based on estimated profits after improvements to the property.
Today, lenders want to see deals that pencil out using current cash flow. “[The underperforming assets] are not going to hit the debt/service ratios and throw off cash the way a performing asset would,” Rothenberg says.
Whereas buyers could bring as little as 15 percent in cash to the table a year ago, lenders today want to see more equity up front. Downpayments of around 25 percent—or 75 percent loan-to-value deals—are more common.
“With development, you need a good track record, great location, and lots of cash,” says Alan P. Miller, a senior director at New York City-based brokerage firm Eastern Consolidated. He says he’s also noticed seller-financing coming back into vogue.
That means sellers need to be more flexible and realistic about what they expect for their properties. Pricing assets so their cap rates come in below 6 percent is no longer an option. “Purchase prices are coming down so buyers and sellers can reach a happy medium,” says Byron Steenerson, president of Woodland Hills, Calif.-based Alliant Capital, which syndicates financing for affordable housing deals.
CASH STRAPPED These new rules also mean that if you can find financing, you’re going to pay for it. “A lender told me that they’re pricing their money according to scarcity, not risk,” says Matt McManus, chairman of Philadelphia-based Bluestone Real Estate Capital, which pairs borrowers and lenders. “Lenders are getting dramatic premiums over what would otherwise be market pricing, simply because of the scarcity of capital.” What’s more, lenders now ask borrowers to secure their money with personal assets.
With those strong headwinds, closing a deal takes Herculean effort. Consider a recent Bluestone transaction. McManus says the firm approached more than 30 lenders before finding financing for a $17.1 million bridge loan for the Registry, a 558-bed student housing property serving Western Kentucky University in Bowling Green. Although the site’s owner had a marketing partnership with the university, the developer had missed lease-up for the previous semester, and only 55 percent of the rooms were full. That scared lenders who were looking for “more vanilla risks,” McManus says. In the end, Bluestone obtained the property owner a 6.5 percent interest rate on a loan from Boston-based commercial financier NewStar Financial. “That was [a lot of] work to get a $17 million deal done, but we finally found the right lender who could understand the story,” says Mc-Manus, who suspects that it will take 12 months before “the debt machine is fixed.”
That sentiment sums up what it takes to make deals happen in this market: enough cash and the right team, working on the right deal, in the right location. For Rothenberg’s eight-month epic in Atlanta, it was the fact that all the parties involved really wanted the deal to happen. “You need a group of people who are willing to come to the table and recognize what it’s going to take to get a deal done in this market,” she says. “For every person and every portfolio, there is going to be another story.”
Joe Bousquin is a freelance writer based in Sacramento, Calif.
ACTION ITEMS
CREDIT KEYS No matter what role you play in the deal, these tips will help you navigate the crunch.- Buyers: Make sure you have plenty of cash and a solid track record to show your lender. Low or no down payments are a relic of the past.
- Sellers: Price your properties realistically. Sub-6 percent cap rates are yesterday’s child; today’s rates are growing to 7 percent and 8 percent.
- Lenders: Listen to your borrower’s story, analyze their track record, and consider your risk appetite. Then make a move. Despite dire warnings, the sky has yet to fall on anyone’s head.
