Manhattan, especially recently, has been a breeding ground for development, with the most notable developers clamoring at the opportunity to snatch up a prime piece of real estate and build the next “it” tower. In the last eighteen months alone, there have been fifty-five new luxury developments in Manhattan, representing approximately 5,600 units. To give an idea of why developers have pounced on every lot available to the market, the average absorption rate for luxury condos over the past five years has been 7,500 units.
As a direct result of the shortage of high-end condos and the amount of not only domestic but international money flooding into New York City, the prices of condos have risen, whether new or old. Condo prices overall are up 4.8%, but the number that really stands out is the 28% increase in the median price of new developments. Condominium buildings have not only been selling high, but they have been selling fast. Contracts signed are up 15% from last year and time on the market has effectively decreased a hair under 12% from 2012. These numbers are staggering, and it’s driving the prices of not just new condos, but re-sales as well, through the roof.
Berko & Associates principal, Joe Berko, recently advised an international developer on the acquisition and development schematic of a loft building in Greenwich Village. The asset was purchased at approximately $1,000 per foot and needs complete renovation. The building’s units are poised to hit the market in 2014 with residential condominiums marketed above the $2,500 per s/f mark. Understanding this transaction, as well as evaluating many others throughout Manhattan, it seems to me that developers can go into deals feeling comfortable that even in what some would consider to be “off” locations, the local demand with allow them to far surpass the returns necessary for them to dive in headfirst at these elevated prices and break ground.
It is not only developers benefiting from this spike in sales, though. Sellers are asking and receiving incredible premiums on their development sites. Just last month, developer Steven Witkoff, along with his partners, purchased 101 Murray St. for $200 million, which represents approximately $600 per buildable s/f, a number that most analysts did not expect the property to fetch. This just exemplifies the exceptional condo market and how hungry developers are to get on the bus before it’s too late. Let’s see how long this can hold up, and what that next milestone unheard of could possibly be.Read More
The retail investment sector is ready to burst, and investment sales brokers agree that there has been a clear rise in requests for suitable retail investment properties. One major driving force behind retail acquisition is the re-born availability to finance large acquisitions of not only single properties but large portfolios of retail-heavy assets. Banks are now once again lending on retail, most likely due to the more optimistic outlook on leasing activity in and around the N.Y. Metro area.
As trend-setting leases are inked, many institutional investors are seeing their opportunity to gain enormous exposure and secure their stance within the retail market. In 2012 alone, the number of closed transactions for retail properties sky-rocketed 20%, and total volume rose 7%. At the beginning of 2013, this number is still over ten percent lower than retail was being sold for at its peak. The vast majority of investors are still expressing very strong interest in retail, and the steady decline in CAP rates has not thwarted potential suitors, although research suggests that retail properties in default will soon be brought to the market by lending institutions and will help stabilize the market and make retail investment more attractive and accessible to a multitude of investors. In addition to delinquent loans on a variety of retail assets, class B and class C assets in Manhattan and the boroughs have come to the market, at higher CAP Rates, and have quietly convinced a handful of institutions to invest outside of Manhattan.
Investment sales and advisory firm Berko & Associates president, Joe Berko, confirms that New York brokers have seen a sharp rise in activity recently, and adds that due to potential upcoming economic and political concerns, investors are aggressively looking to allocate funds into top-quality retail assets. Most recently, notes a senior associate at Berko, he had received bids upwards of $6,000 per s/f for a mixed-use property with a long term retail lease on the Upper East Side, exhibiting the willingness of institutional investors to appropriate exorbitant portions of their funds towards stable retail properties in paramount locations.
Retail is very cyclical, and seems to be on its way up. The influx of investment into the sector is a reassuring signal of the market’s recovery and bodes well for investors looking for a safe haven for their funds in a high-growth locale with tremendous opportunity and the ability to create a highly visible footprint on the New York City market.
Lee Silpe is the senior analyst at Berko & Associates, New York, N.Y.Read More
I’m sure the vast majority know that the primary purpose of bridge loans are to act as short-term, temporary financing between the acquisition and/or development of a property and a permanent loan. Bridge loans are short-term loans that by definition are not the type of loan product or origination source, but the use of the loan itself. Bridge loans can be procured from various lenders, ranging from REITs to debt funds to private lenders, and with that comes a large spectrum of interest rates.
Bridge loans have become the answer to real estate investors and developers’ prayers. The bridge loan is a concept not considered by many real estate investors until recently, mostly because until recently, the money was far too expensive to make sense. But, as more and more borrowers begin to jump on board to the concept of the bridge loan, the market has become increasingly competitive, and rates have begun to drop significantly. In addition to the rapidly falling rates, bridge loans can very often be tailored to the specific needs of the borrower, and can generally be closed within two weeks.
Michael Korine, managing director of the Finance & Capital Markets Group at Berko & Associates, said, “For even the most intricate and convoluted deals, we haven’t pursued any lenders offering financing with interest rates above ten percent. For some, we have been able to procure bridge financing at four percent with LTV’s of 75%.” As a brokerage with a notably large lender network, we have the unique ability to sort through some of the more avaricious lenders and only address lenders willing to work with us at below market rates. With this in mind, a good finance professional has the ability to procure only the most optimal financing for their clients, and it is absolutely necessary for a finance professional to seek out the correct match for their borrowers. Certain lending groups are only attracted to specific assets, while others offer a broad array of products. Although it borders on the impossible to track the aggregate amount of bridge loans in N.Y.C. over the past couple years due to private lenders and international funds dispensing funds so quickly, I can, due to my own observations, see that interest rates have declined close to 35%, and continue to trend downward.
Lee Silpe is the senior analyst at Berko & Associates, New York, N.YRead More
To those who may not have thought of this option prior, there are some distinct advantages for real estate investors to allocating real estate owned into an IRA. Real estate is tangible, thus, you have strategic control over the management of the properties and which properties are purchased for the account. My personal favorite advantage as a real estate analyst would be the bevy of information on the real estate market available to an investor in the chosen locale. Similarly to utilizing the knowledge of a financial advisor to help them make choices for their retirement portfolio, an investor can entrust much of the decision-making process to a real estate advisory firm. An advisor will help determine location, asset class, and will be instrumental in facilitating the transaction and helping an investor realize the potential of their investments.
I am the senior analyst at New York-based investment sales and structured finance firm, Berko & Associates, and as compared to many other parts of the country, we can say with almost undoubted certainty that New Yorkers can bank on market appreciation in addition to the cash flow provided by the property itself, just another compelling benefit to your placing investment properties in your retirement account.
Now for an encore…an investor can still mortgage the property. Where else is it possible to leverage an investment at such a high LTV in your retirement portfolio? This is far and away the most valuable attribute to the idea of putting an investment property in your IRA (not to mention, if you decide not to leverage, you can partner with other investors through tenancy-in-common).
An investor does however have more than one avenue than just holding the title to the real asset. A couple other channels that can be followed would be to invest in an entity that invests in real estate, or, for the savvier investor, an IRA account can be used to loan money against other investors’ properties, thereby holding the note to the asset.
It is important to know that all expenses and operating decisions are made by under the IRA, not the individual, and payments for such expenses are made by conduit groups who manage the finances for the investment properties. These holdings provide all of the tax advantages and savings potential of any other IRA, with a few key advantages that should keep it at the forefront of any investor’s retirement savings plans. Berko & Associates are not tax-professionals and all tax-related inquiries should be directed to your tax consultant.
Lee Silpe is the senior analyst at Berko & Associates, New York, N.YRead More
In the midst of the global predicament comes another hurdle for hoteliers to jump over; hotel construction financing has become increasingly difficult to achieve. While financing for the purchase or refinancing of strong hotel properties in New York remains strong, private funding for construction or redevelopment has been quite stringent. Hospitality financing groups have been actively seeking projects of all shapes and sizes, but are more inclined to look for low-leverage deals.
The equity necessary from the principal, as well as the strength and experience of the investor group, can be a determining factor in the terms and conditions of the loan. According to an HVS Career Network survey, financial stability, capital, and easy access to equity are critical characteristics. The experience necessary to push ahead on a loan from a traditional lender can far exceed the number of notches on most developers’ belts, and although financing rates are extremely aggressive, money is only awarded to those who can prove time and again that they know how to develop and own a hotel from soup to nuts. Surprisingly, there has been a major movement towards funding boutique hotels, as the cash-flows prove their worthiness in an ever-strong New York City market.
It is also important to understand some of the current products in the market. While traditional lenders are offering leverage hovering around 65% for boutique hotels and 70% for flagged hotels, there are alternative financing options available as well. USDA Business & Industry loans are offered by lenders but guaranteed by the government. Rates on this loan differ from lender to lender but hover around Prime+2.75% and can be up to 80% guaranteed.
Current rates that Berko & Associates have seen from traditional lenders are in the Prime+2% range with a floor of 6%. In addition to conventional lenders, there are other options. EB-5 Financing has begun to play an integral role for the development of many hotels. So much, in fact, that Marriott is actually urging developers to utilize the program to build hotels and add to their portfolio. Although EB-5 can be very difficult, and intermediaries are quite picky about which projects are chosen for the program, the benefits can be very fruitful for qualified developers.
Lastly, it is of the utmost importance that a borrower choose the right lender not solely based upon the numbers because let’s face it, they don’t differ all that much, but also on the comfort level that the borrower has with the lender, as they will be significantly intertwined throughout the building process.
Lee Silpe is the senior analyst at Berko & Associates, New York, N.Y.Read More
With Senior Lenders more conservative than in past years, bankers have been opening their doors to non-traditional alternatives to the fill the void in capital stack for qualified borrowers with well-positioned assets. It seems the stars have aligned for mezz lenders; a rapid increase in development in and around the boroughs, as well as a steady increase month-over-month in investment sales produced a concrete outlook for 2013 and beyond. Close to $70 billion worth of maturities are coming due within the next year, and due to the inauspicious relationships between lenders and borrowers forged at the bottom of the market, borrowers will be on the lookout for alternative sources of capital.
During 2010/2011, we saw rates in the high teens as funds as well as mortgage REITs were able to “cherry pick” as the demand far out-weighted the number of players in the market. Rates have come down significantly since, reflecting a more stable market and increased competition among lenders.
The swelling number of borrowers on the prowl for these alternative loans has driven lenders to get on board and ride the wave. Traditional lenders, funds, REITs, and individuals themselves have instituted mezzanine lending programs that they may not have had in the past, and surely were not at the forefront of their agendas. One of our recent assignments at Berko & Associates was to arrange for $9 million loan in junior position to a $34 million first position mortgage on a 104,000sf Chelsea office building. The borrower was a qualified investor and the loan came in at 14% (the first position loan was at 4.25%), since, we have most recently seen rates in the 11% range. Mezzanine may be pricey, but don’t let that steer you away. Sometimes, it just makes sense to increase your leverage. Take for example, this hypothetical: If senior debt on a commercial property is 3.5% at 60% LTV, and a mezz loan at 11% brings the LTV up to 70%, the blended cost of capital 4.6%, a rate easily swallowed by any investor. Let’s not forget that as a tool for the acquisition of a property by way of senior debt combined with a mezzanine loan, the necessary equity to transact is lowered, thereby allowing private investors to limit the number of potential partners involved.
Structuring a mezzanine loan does have its share of complex legal issues though, as both the senior and junior lenders must work out an intercreditor agreement to the satisfaction of all parties. The creditors will lie out on the table all of the different terms, conditions, and rights that each lender expects, which details the relationship between the creditors and the borrower. Since the junior position gets paid only after the senior debt is satisfied, the risk must be carefully mitigated. Typically, the second lien lender will have the option to acquire the senior debt position at par in the event of bankruptcy or borrower default as a way to protect its invested capital.
Over the past two years the slumping US economy, high unemployment rate, and curtailment of favorable financing opportunities have taken their toll on every sector of the real estate market. Millions of properties have either gone into foreclosure or are being sold below their original appraised value.
Multifamily and commercial properties that were purchased at the height of the real estate bull market are now worth less than their mortgages and are being taken over by the banks that financed them. As a rule, banks like to lend money, not manage real estate, especially non performing real estate, which means they want to get rid of these distressed assets as quickly as possible. Banks are holding billions of dollars worth of non performing real estate assets which they need to dispose of to try and recoup their losses and resuscitate their ailing balance sheets.
In addition to the assets already foreclosed on by the banks, there are billions of dollars worth of distressed assets that are still in the possession of their owners. These owners have three choices: renegotiate their financing with their lender, sell the asset, or default and walk away from their equity. In certain situations the banks are negotiating with the property owners in the hope of waiting out the economic slump and getting their money back when values rebound. However, many banks either cannot or do not want to renegotiate their loans. In areas where property values have somewhat stabilized, albeit at a lower value than before, the owners can sell and still have some equity left after repaying their debt. Otherwise, the property reverts to the bank.
While the distressed asset situation is bad news for owners and banks, it presents potentially unprecedented opportunities for savvy investors to acquire valuable assets at below market prices. However, jumping into the market too early could be disastrous, but waiting too long could mean missed opportunities. The competition for distressed assets is fierce. Billions of dollars of cash is waiting on the sidelines for the right opportunity. Timing is everything.
Pricing is also critical. Most owners are reluctant to lower their prices to reflect the true value of their asset for fear of losing all of their equity. Therefore, many distressed assets placed on the market by their owners are overpriced. Even banks have been resistant to selling their distressed assets for too much below value out of a desire to protect their ailing balance sheets. Recognizing too many loses could potentially put them out of business. Berko & Associates recently negotiated the acquisition of a portfolio of non performing commercial assets where the appraised values placed the loans at nearly 100% value. A classic scenario in today’s market, the lender agreed after a long negotiation process to discount the notes to a lesser LTV and move the portfolio off of his balance sheet.
So while distressed asset opportunities exist, they need to be properly identified, analyzed, and negotiated to assure that the purchaser is getting a deal worth their while. Investors are wise to use the services of an experienced advisor that understands the intricacies of distressed assets.
Berko & Associates have successfully advised nationally chartered banks as well as private equity funds and individuals. Our company sources the assets, analyzes it’s risk and potential rewards, and negotiates and closes performing notes and distressed assets. Our personal relationships with property owners, banks, and lenders in NYC and throughout the nation provide us access to distressed asset opportunities well before they reach the market. This is where Berko & Associates’ value added approach can present the greatest opportunity for our clients’ success.
Contact us today and let us put our expertise and experience to work for you.Read More
Looking ahead to 2012, one can only hope the previous year’s upswings will continue. However, predictions, by definition, are not certainties. Things can change on a dime: natural disasters, international upheaval, presidential election year surprises; they all have an effect on markets worldwide.
Economists point to 2012 as a year of both positive and negative trends for the commercial real estate sector, with slow improvement being the underlying theme, especially in the New York metropolitan area. While the U.S. economy slowly rights itself and construction activity remains at record-low levels, driving better rent and vacancy trends, foreign investors should continue to capitalize on advantageous opportunities. Cap and interest rates are coming down to pre-recession levels. However, the volatile political and economic situations in Europe could potentially put a wrench in that positive forecast and is something to monitor carefully.
According to a new white paper from Forward Management, LLC, the recovery is expected to play out unevenly across the U.S. and international markets, with the first wave focused on knowledge-based, gateway cities and technology corridors. Cities recover more quickly than outlying areas, having more job growth and business opportunities. It spells a continuation of good news for the city of New York which also has greater ties to global and financial trading.
We at Berko & Associates are optimistic about the New York market as the fundamentals are only getting stronger. We have gone through expansion and aggressive hiring of professional associates with multiple complimentary backgrounds to our commercial real estate business; investment bankers, wall street finance professionals, developers and seasoned brokers have recently joined the ranks of Berko & Associates. I believe in our firm’s diversity as a way to reach a wider market segment and better serve our growing client’s demand for quality real estate services in the coming year.Read More
One of the most common questions we’re asked by potential real estate investors and commercial property owners looking to refinance and take advantage of today’s low interest rates is regarding Yield Maintenance. A misunderstanding of what yield maintenance is and how it can effect the profitability of a financing or refinancing strategy can have significant negative repercussions for commercial property owners. That’s why we feel it’s important for us to shed some light on this seemingly “mysterious” topic.
What is Yield Maintenance?
Yield maintenance is a prepayment fee, or penalty, charged by the lender. The purpose of yield maintenance is to compensate the lender for the loss he incurs as a result of the borrower’s prepayment. For example, a bank that issued a 5 yr. loan at a specified interest rate did so with the intention of earning a projected return based upon that specified rate. When the borrower decides to repay the loan after only 2 yrs. in order to take advantage of lower mortgage rates, the bank’s earnings projections are invalidated since instead of getting their original (higher) yield, they can only reinvest their capital at the lower current rate.
The yield maintenance penalty effectively allows the bank to earn their original yield without suffering any loss due to lower interest rates. The bank can reinvest the money returned to them, plus the penalty amount, in safe treasury securities and receive the same cash flow as they would if they had received all scheduled mortgage payments until maturity.
How is it Calculated?
The yield maintenance formula is the present value of remaining loan payments multiplied by the difference between the loan interest rate and the rate on a Treasury note of the same duration.
Let’s look at an example:
David takes a 5yr. loan for $750,000 (disregard fees and closing costs) at a rate of 4.47%, 30 yr. amortization. The monthly payment on this loan is $3,787. The total amount to be repaid at maturity is $683,373.
David decides to refinance the loan at a lower rate after year 3. The total amount owed after year 3 is $711,819.
Assume that the 2 yr. treasury rate at year 3 is 2.37% , which is the rate that the bank will use if they have to reinvest the loan proceeds to obtain an amount equal to the total they would receive at maturity of the original loan.
In order to receive the original maturity proceeds ($683,373) the bank will need to invest $735,450 at the 2.37% treasury rate.
The prepayment penalty calculation: $735,450 – $711,819 = $23,630
(Note: Each lender might have slight variations to the above formula.)
Why should you choose a loan with yield maintenance if it means you’ll have to pay a possibly large penalty if you decide to prepay? Most long term loans (over 5 years) require it, so you don’t have much of a choice in the matter. Also, by guarantying the lender that they will receive their interest for the life of the loan, you will get a better rate. Typically, rates on loans with yield maintenance are 50-100 Bps lower than similar loans with step-down or more flexible prepayment penalties.
What happens if you decide to sell your property? Most lenders who make loans with yield maintenance allow for their loans to be assumed by a qualified buyer. If not, then the prepayment penalty should be factored into the sales price. Of course, if the borrower’s rate is lower than the current market rate, the borrower will receive either a cash payment or a discount in the amount of the calculated difference at the time the loan is paid off.
We hope this basic overview has been helpful in clarifying the often complex and misunderstood topic of yield maintenance. If you have questions or require assistance regarding a specific situation please contact one of our finance and investment specialists.Read More