Real Estate Sale-Leaseback Transactions Free Up Cash

In today's tough economy, small and mid-market companies are looking for ways to free up cash for acquisitions, growth, or to replace working capital lost when a bank line is not renewed because of reasons outside the business owner's control.
If you have equity in your commercial real estate, one option is to sell your property to a company that specializes in buying and managing property, then take the equity out in cash and lease back the property on a long-term lease. Compared to a refinance transaction, a sale-leaseback transaction will often yield more cash back to the company occupant.
Large companies have favored leasing their real estate for years. Dell Computer Corporation has many buildings in various locations in the U.S. but doesn't own any of them. Dell partners with a commercial real estate company to design and build them to Dell's specifications and leases the space. In Dell's case, the company doesn't want the asset and any corresponding liabilities on their balance sheet and would rather leave the building asset management to a professional organization.
Although small and mid-market companies might not have the bargaining power of Dell, they can still get cash out of their real estate to use for sales and operations purposes. For a company and property to qualify for a real estate sale-leaseback transaction, a company must be creditworthy enough to lease a building back from the new owner on a triple net lease basis for an extended period of time. The building must also be desirable for the new owner.
Requirements of a typical sale-leaseback transaction:
Single occupant building (office, manufacturing, distribution)
Located in one of the U.S. top 200 markets
Meet appraisal, property condition, and environmental surveys
Property with an acquisition cost of $4-$50 million value

Contact NAI True for more information 217-787-2800. For more information about NAI True visit our webpage www.naitrue.com

NAI Global Exective VP, Receives SIOR Instructor of the Year Award

David Blanchard, NAI Global Executive Vice President, Receives SIOR Instructor of the Year Award

NAI Global, the world’s premier network of commercial real estate firms and one of the largest real estate service providers worldwide, announces that David Blanchard, Executive Vice President, received the Instructor of the Year Award from SIOR, the Society of Industrial and Office Realtors. Blanchard provides leadership throughout the NAI organization while primarily interacting with and training more than 5,000 agents and principals.

The SIOR Instructor of the Year Award is given to one instructor annually, determined by evaluations completed by course participants during the calendar year. Blanchard completed his SIOR instructor training in 2007, and became a regular instructor in 2008. During the year he taught several seminars and courses on Advanced Sales Skills and Consolidating a Business Strategy, winning this prestigious award in his first year of instructing.

SIOR is a leading professional commercial and industrial real estate association comprised of knowledgeable, experienced and successful commercial real estate brokerage specialists. The award was presented to Mr. Blanchard by SIOR President, Craig S. Meyer during the SIOR Spring World Conference in San Diego, California.

Blanchard joined NAI Global in 1985 and has been instrumental in developing and integrating NAI’s U.S. member network. In addition, he played a founding role in the creation of NAI Global’s specialty council program, which facilitates sharing of knowledge and best practices among NAI members worldwide.

What the Bank "Stress Tests' Tell Us About Commercial Real Estate

This article posted by CoStar is refreshing insight about the impact commercial real estate has had on the banking systems. Wonderfully written by Mark Heschmeyer.

Most Potential Harm Seen Coming From Housing, Consumer Loan Defaults, Not Office, Industrial and Retail Property Loans
E-mail this article
Print this articleBy Mark Heschmeyer
May 13, 2009

If the current economic malaise brings down any of the largest banks in the country, commercial real estate likely WON'T be the culprit. Office, industrial and retail properties specifically are even less likely to bring down the nation's top banks.

The 19 largest U.S. banks, which account for 70% of the bank holdings of this country, were the focus of the U.S. Federal Reserve 'stress tests' results released this past week. Under the worst case scenarios envisioned for the current recession, commercial real estate losses would cost those banks $53 billion in losses this year and next.

While that is a lot of money, it still pales in comparison with residential loan losses, which still would make up the bulk of the projected losses, $185.5 billion. In fact, exposure to commercial real estate loans falls way down the line in terms of producing projected losses for banks. Trading and counterparty investments would lose $99 billion; consumer loans $83.7 billion; credit card loans $82.4 billion; business loans, $60.1 billion; only then comes commercial real estate.

The two-year loss estimates totaled about $600 billion in the more adverse scenario for the 19 bank holding companies.

Estimated losses on residential mortgages are substantial over the two-year scenario, consistent with the sharp drop in residential house prices in the past two years and their projected continued steep fall in the more adverse scenario. The effects of reduced home prices on household wealth and the indirect effects through reduced economic activity, also push up estimated losses on consumer credit, including losses on credit cards and on other consumer loans. Together, residential mortgages and consumer loans (including credit card and other consumer loans) account for $322 billion, or 70% of the loan losses projected under the more adverse scenario.

Even in terms of percentages of losses, commercial real estate loans hold up better on the banks' books than its other assets and investments. About 22.5% each of residential real estate loans and credit card loans would go bad but only 8.5% of commercial real estate loans would go bad.

To cover those potential losses, the Federal Reserve has asked the 19 banks to raise $75 billion in additional common equity by next November.

"This was a carefully designed, credible test," said U.S. Treasury Secretary Tim Geithner. "Banks supervisors applied a historically high set of loss estimates on securities and loans, as well as a conservative view towards potential earnings that could act as a buffer against those losses."

"These are estimate of potential losses and earnings that could occur in the event of a more severe recession. They are not a prediction of where the economy is headed," Geithner added. "The results are less acute than some had expected, in part because concern about the risk of a more severe recession have diminished, market have improved, and banks, in anticipation of the release of the stress test, have acted in the last few months to increased capital."

The stress test process involved the projection of losses on loans and investment assets, as well as the firms' capacity to absorb losses. To analyze commercial real estate loans, the bank holding companies were asked to submit detailed portfolio information on property type, loan to value (LTV) ratios, debt service coverage ratios (DSCR), geography, and loan maturities.

Loss rates on commercial real estate loans reflected realized and projected substantial declines in real estate values. However, federal supervisors analyzed loans for construction (both residential and construction) and land development, multifamily property, and non-farm non-residential projects separately. And the bulk of the projected losses in the commercial real estate come from the construction and land development loans. Income producing properties fared much better.

The stress tests projected a baseline loss of 9% to 12% for construction loans and a worse case scenario of 15% to 18%; multifamily losses had a projected baseline loss of 3.5% to 6.5% and a worse case loss of 10% to 11%; office, industrial and retail properties had a projected baseline loss of 4% to 5% and worse case loss of 7% to 9%.

The results of the stress tests "were good news and were generally received as such, although it is important not to take excessive comfort from what remains essentially a highly educated guess as to the future of the banks in a very uncertain environment," concluded Douglas J. Elliott , a fellow in economic studies at The Brookings Institution. "The test appears to be somewhat tougher than the base case of the International Monetary Fund, but not nearly as harsh as the most pessimistic analyses."

"This implies that while we may well have turned the corner, we can be far from certain that the solvency crisis in banking is over," Elliott wrote in a paper this week. "Even if it is, the stubborn credit crunch will last for considerably longer. The banks will be in a better position to lend more freely as a result of the modest influx of new capital and the greater benefit of the confidence boost from passing the tests. However, the depth of this recession and the shattering of the securitization market will keep credit tight for some time."

One unintended side effect of the results of the stress test, Elliott said is that they will work against the government's plan to encourage investors to buy toxic assets from the banks.

"The government's reassurance that these banks have, or will soon have, the capital to handle even the stress scenario without selling their toxic assets makes it harder for the regulators to pressure the banks to actually sell," Elliott concluded. "This matters because the banks generally believe that even with government incentives the private investors are looking to pay unreasonably low prices for these assets."

The banks would generally prefer to hold onto the assets until they can get a better price, Elliott reasoned.

Generally across the board, the 19 bank holding companies put to the stress tests, said they believe the stress test assumptions were unreasonably conservative and actual losses will be far less than projected.

Regions Financial Corp. in Birmingham, AL, questioned whether it should be required to raise additional capital now to provide for a two-year adverse economic scenario, particularly in view of the fact that Federal Reserve Chairman Ben Bernanke this past week said that he expects the economy to begin recovering during 2009.

Regions said it believes that the stress test results do not accurately reflect the loan losses that Regions is likely to experience even in the "more adverse" economic scenario. In particular, the anticipated two-year cumulative loss ratio of 13.7% projected on its commercial real estate is sharply higher than Regions' actual annualized loss ratio on its portfolio in the first quarter and sharply higher than that projected for the other banking companies.

Bank of America Corp. in Charlotte, NC, was projected to have a 2-year loss rate on its commercial real estate loans of 7.4%, or 3.7% per year. Bank of America said its actual first quarter annualized loss rate on the equivalent portfolio was 1.68%. So, loss rates would have to more than double to 3.9% and remain there for the remaining seven quarters to reach the FRB's projections.

Additionally, the FRB's loss rate is well above the combined commercial and commercial real estate peak loss rate experienced by Bank of America in either the 1991 recession or the 2002 recession.

Individual CRE Stress Test Results

Company Est. Worse-Case CRE Loss As a % of Loans
Bank of America $9.4 billion 9.1%
Wells Fargo & Co. $8.4 billion 5.9%
Regions Financial $4.9 billion 13.7%
BB&T Corp. $4.5 billion 12.6%
PNC Financial Services Group $4.5 billion 11.2%
JPMorgan Chase & Co. $3.7 billion 5.5%
U.S. Bancorp $3.2 billion 10.2%
Fifth Third Bancorp $2.9 billion 13.9%
SunTrust Banks $2.8 billion 10.6%
Citigroup $2.7 billion 7.4%
KeyCorp $2.3 billion 12.5%
Capital One Financial $1.1 billion 6.0%
MetLife Inc. $800 million 2.1%
Morgan Stanley $600 million 45.2%
GMAC $600 million 33.3%
State Street $300 million 35.5%
Bank of New York Mellon $200 million 9.9%
American Express not applicable not applicable
Goldman Sachs Group not applicable not applicable

Centennial Parks Receives A $400,000 State Grant

Springfield's Centennial Park will get an environmental education display area, along with walking paths, a picnic shelter and more over the next four years, thanks to a $400,000 state grant. The grant was announced Wednesday. Other projects include a picnic shelter and a fitness station, native tree plantings and wetlands. “A trail system already exist in certain sections of the park,” said Mike Stratton, executive director of the park district. “Plus, we will have connector trails so everybody can park in one location, and then bike or walk and enjoy the park.” At 190 acres, Centennial Park, near Wabash Avenue and Interstate 72, is one of the district’s larger parks. Existing features include a skate park, playground equipment and a sledding hill. “Without the grant, it would probably take a couple of years to consider this level of development,” Stratton said. “It would only be when funding was available.”
If all goes as planned, the project could go out to bid in 2010. The work will take about three years to finish.The $400,000 grant is a 50/50 matching grant. However, the park district did not have to lay out any of its own cash for the project.

NAI True currently has 62 acres listed across from Centennial Park for the brochure click here for more information http://http://www.loopnet.com/xnet/LoopLink/Profile/Profile.aspx?LL=true&STID=naiglobal&LID=15976806

NREI's Top 25 Brokerage Survey

NAI Global was ranked 4th on National Real Estate Investor’s (NREI’s) Top 25 Brokerage Survey. The ranking is based on the total dollar value of leasing transactions and investment sales globally in 2008. The article preceding the rankings, Looking for Trouble, discusses how commercial real estate firms are altering their services to take advantage of the growing distress in property markets, and features NAI Global’s Commercial Property Powersale.

Click here to read the article.

Click here to view the rankings.

Term Asset-Backed Loan Facility (TALF)

The Federal Reserve Board on Tuesday announced the creation of the Term Asset-Backed Securities Loan Facility (TALF), a facility that will help market participants meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities (ABS) collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration (SBA).

Under the TALF, the Federal Reserve Bank of New York (FRBNY) will lend up to $200 billion on a non-recourse basis to holders of certain AAA-rated ABS backed by newly and recently originated consumer and small business loans. The FRBNY will lend an amount equal to the market value of the ABS less a haircut and will be secured at all times by the ABS. The U.S. Treasury Department--under the Troubled Assets Relief Program (TARP) of the Emergency Economic Stabilization Act of 2008--will provide $20 billion of credit protection to the FRBNY in connection with the TALF. The attached terms and conditions document describes the basic terms and operational details of the facility. The terms and conditions are subject to change based on discussions with market participants in the coming weeks.

New issuance of ABS declined precipitously in September and came to a halt in October. At the same time, interest rate spreads on AAA-rated tranches of ABS soared to levels well outside the range of historical experience, reflecting unusually high risk premiums. The ABS markets historically have funded a substantial share of consumer credit and SBA-guaranteed small business loans. Continued disruption of these markets could significantly limit the availability of credit to households and small businesses and thereby contribute to further weakening of U.S. economic activity. The TALF is designed to increase credit availability and support economic activity by facilitating renewed issuance of consumer and small business ABS at more normal interest rate spreads.

TALF Terms and conditions (44 KB PDF)
2008 Monetary Policy Releases

Next Economic Crisis Looms: Commercial Real Estate Defaults

By Kevin G. Hall
McClatchy Newspapers

McClatchy Press just published a story featuring Paul Waters, NAI Global's Executive Vice President, Brokerage - The Americas. In the story, Paul discusses how commercial real estate loan defaults are going to impact the market. The industry round-up article includes perspectives from banking trade groups, economists, the Risk Management Association and NAI Global.

WASHINGTON — Two years after fissures in the residential housing market gave way to a national collapse of home prices and sales, experts warn that the commercial real-estate market is the next shoe to drop, bringing more woes to the battered economy.

Thousands of commercial mortgages valued at hundreds of billions of dollars are approaching their renewal dates, and by some estimates, two out of three no longer will meet the original loan conditions and won't be able to refinance. With prices for commercial properties expected to plunge, a vicious cycle could unfold, much as it has in the nation's housing market.

"It's the next wave to hit. It's the next round of bad news," said Scott Talbott, the senior vice president of government affairs for the Financial Services Roundtable, a trade group for big banks and other financial institutions who are collectively concerned about the coming problems.

A commercial mortgage meltdown is likely to prolong the nation's economic recovery. Falling prices of commercial real estate would lead to additional bank losses at a time when banks already are sapped by home mortgage defaults and soaring credit card defaults. This could lead to future additional taxpayer assistance for the banks.

The reality is already evident. On April 16, the nation's second largest shopping mall developer, General Growth Properties, filed for bankruptcy protection. The Chicago-based company owns more than 200 malls across the U.S., and was unable to renegotiate its debts as they came due.

Six days later, a 40-story office tower on New York's Avenue of the Americas was seized by its creditor, a Canadian-owned pension fund. The tower's owner, Macklowe Properties, couldn't meet loan terms.

"On the street, the rumor is it is coming and it's going to come fast and furious. Some people are predicting September," said Paul Waters, a New York-based executive vice president of brokerage operations in North America for NAI Global, a top-five commercial real estate brokerage with operations around the globe.

Just as the housing meltdown did, the commercial real estate crunch is likely to begin as a slow bleed that gains momentum. It's likely to be spread evenly across the nation, in large part because of an outgoing economic tide that's spared few companies anywhere.

"There's going to be a lot of trouble on Main Street with some of these commercial and industrial buildings. The biggest impact will be on some of the smaller owners," Waters said. "The smaller local regional players that are stretched thin may have some great difficulties with their mortgages."

How bad it gets will depend on speed of economic recovery. Office space and multifamily apartments, two huge components of commercial real estate, are highly dependent on employment. Even if the economy begins growing again late this year as forecast, the number of unemployed is expected to keep rising well into next year.

"The translation is that office vacancy rates would continue to rise until mid-to late-2010," said Christopher Cornell, an economist specializing in commercial real estate for Moody's Economy.com, adding that "it's a drag on the recovery" well into next year.

The last crisis in commercial real estate — which includes office space, malls, industrial parks and multifamily apartments — came in the early 1990s. The problem then was an oversupply of new properties. Today, the driver is a deep economic downturn, with the economy contracting by more than 6 percent in each of the last two quarters.

As in the housing meltdown, weakened lending standards are a big part of the story for commercial real estate. Unlike housing, however, the ill effects from weakened commercial lending standards have been camouflaged to date because they've had a longer horizon than housing did over which to implode.

"If you take a look between 2005 and 2007, the underwriting standards on both the consumer side and the commercial side were spinning out of control," said Kevin Blakely, the president of the Risk Management Association, a Philadelphia-based trade group for financial risk managers. "I think it is a bigger issue than we like to admit."

In housing, many of the loans with poor underwriting went bad within two years, when adjustable-rate mortgages were due to reset to higher interest rates and raise monthly payment costs for homeowners.

However, commercial properties carry mortgages with lives of five years or 10 years. And these loans issued from 1999 to 2007 are coming up for a rollover — refinancing under similar terms. Today's economic downturn and credit crunch makes that unlikely, however, as credit standards have tightened.

As in housing, many commercial properties have mortgages that were bundled together in pools, sliced and diced and instead of being held by banks were sold to investors as bonds and securities. Thousands of these commercial mortgage-backed securities, or CMBS, are reaching their maturity dates over the next three years. Ten-year mortgages issued in 1999 and 2000 start coming due late this year, and five-year loans issued from 2005 to 2007 come due early next year.

"If you stop and think about what is coming up for maturity over the next couple of years, either on the banks' books or CMBS, there is going to be a day of reckoning as those loans mature and they have to be rebalanced and reset to today's underwriting standards," said Blakely, who worked 17 years as a bank regulator followed by 17 years as a bank executive and risk officer.

A March study by the Wall Street arm of Deutsche Bank, Germany's largest financial institution, points to this day of reckoning. It found that the number of U.S. commercial loans that hadn't refinanced within a month of their end date had tripled.

Refinancing usually happens months ahead of the end date. Since October, commercial refinancing has dropped from a pace of more than 400 mortgages a month to fewer than 100 a month, the bank said.

The report, entitled "Commercial Real Estate at the Precipice," said that under lenient underwriting standards, 56.8 percent of existing commercial mortgages wouldn't qualify for refinancing. Using conservative standards, two thirds won't make the grade.

That suggests that lenders will have to extend loans, much like they've tried to freeze adjustable-rate residential mortgages at their original lower rate to avoid a foreclosure. Even if the commercial loans are simply extended for a year or two, however, commercial real-estate prices are forecast to keep dropping so the time bomb will be delayed not defused, the report concluded.

"In our view, much of these losses are unavoidable, even in a mass (loan) extension environment," wrote Richard Parkus, the report's author.

Forecaster Moody's Economy.com expects $375 billion in losses on the $3.5 trillion in commercial mortgage loans and securities outstanding. That's a loss rate of about 11 percent, nearly twice the rate of home mortgage foreclosures, and the forecaster thinks that about $200 billion of those commercial losses are still ahead.

"This is significant, but small compared to the over $1.1 trillion losses ultimately expected on residential mortgage loans and securities. Commercial mortgage losses will be a significant problem for many mid-sized and small banks," said Mark Zandi, the chief economist for Moody's Economy.com. "In fact, most of the banking failures that occur in the next several years will be due to losses on commercial mortgage loans."

Earlier this year, the Treasury Department and Federal Reserve announced a program in which they'll lend to investors willing to purchase the safest, top-rated commercial mortgage-backed securities. The Fed is trying to use its power as a lender of last resort to help keep some credit flowing into commercial real estate markets. This effort, however, is of limited importance because it targets the safest of commercial mortgages and won't address all that ails this important sector.

Additionally, pools of commercial mortgages are expected to be included in the auction of so-called toxic assets being readied by the Treasury Department through a public-private partnership.

Still, commercial real-estate brokers are bracing for protracted hard times.

"There will be a re-engineering of the culture of the real estate business," said Waters, the NAI Global executive, who expects few new development projects until the mortgage problem runs its course. "All the avenues to dispose (of bad commercial loans) are going to be utilized."

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McClatchy Newspapers 2009.