December 2009 - Capital Markets Update

Some mixed news last week as the market remains in flux. Opportunity funds are waiting for Santa to bring some discounts. Meanwhile banks and potential sellers are mostly unwilling to let go of assets at current market levels. Fortunately, low interest rates are assisting properties that might otherwise be in default. Some major events happening:

CMBS Markets – Believe it or not, the cmbs markets are showing some signs of life. As a follow up to the $400M DDR deal that Goldman did (which was a TALF deal with government backing), BofA securitized a $460M loan backed by 44 Flagler off & ind properties. This is the first non-government-supported CMBS issued in 18 mos. This is BIG news and could mean a return of the cmbs market in 2010.

FDIC Rules for Securitizations – The FDIC introduced a proposal for banks to maintain a 5% stake in future loan securitizations. While many feel it would be a great idea for banks to keep some skin in the game, others feel rules like this will slow down the recovery. But won’t Investors have more comfort in buying securities from a bank if they knew the banks were retaining a portion of what they are selling? Of course they would! This type of regulation would lead to better underwriting and lending practices overall (in lieu of having less informed B-piece buyers swallowing the first loss piece). Simply relying on govt regulators & rating agencies is not the best way to protect the banking system. We need some better checks and balances.

Net's Bonds – Last week Forest City Ratner’s bond sale raised over $500M for Barclays Center, the basketball arena and centerpiece of the $5B Atlantic Yards project. Orders from investors were 4x the supply of bonds, totaling $511M at a 6.48% interest rate. The deal was led by Goldman and Barclays. The bonds were rated BBB- by S&P, which noted the current performance of the Nets (now 2-26). Go Nets!

Rating Agencies - Fitch placed $21B of CMBS bonds from 33 floating-rate transactions on Negative Watch. As we know, floating-rate loans are often used to finance properties that are transitional in nature and therefore can be more susceptible to declining market conditions. In this regard, the CRE markets parallel the residential side. All those ARM deals with low teaser rates are eventually going to come home to roost. Fortunately, given how low interest rates are today (both fixed and floating), some of these properties can still be refinanced.

Fairfield Files Ch 11 - Fairfield Residential filed voluntary Chapter 11 bankruptcy last week and has (after failing to refinance debt and sell off investment properties) agreed to a consensual reorg plan that will enable continuity of Fairfield’s properties for the benefit of its creditors and other stakeholders. Fairfield invests in MF properties in 40 markets across the country (including southern CA and Las Vegas) and employs more than 2,500 professionals. Fairfield’s individual property entities were not part of the bankruptcy proceedings. Although this is another big player being hit with problems, the fact that the parties were consensual in the filing demonstrates a better alignment of lender/borrower interests - in a market where the bid/ask spread has been so wide.

Multifamily - Agency Debt – Fannie, Freddie and FHA HUD are still actively providing mortgage financing for multifamily projects nationally. This debt is all non-recourse with rates as low as 4.75%. LTV’s go up to 80% for Fannie and Freddie, and HUD is still leading the market with 85% LTV perms for existing properties, and 90% LTC non-recourse construction loans.

HAPPY HOLIDAYS!

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