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NAMB/SOUTHEAST begins in New Orleans

Aug 18, 2008

Opinions from the commercial sideAnthony M. Gramzaobstacles, commercial transaction, pipe dreams Are you always getting the real facts about the current state of affairs in the lending arena, whether it is on a local or national level? You may think you always are, until you are ready to submit that commercial transaction and find out differently. Isn't it ironic that when we get to the point of formal presentation, the obstacles pop-up from clients as well as lenders. I didn't think I needed all that liquidity for the closing! Well, I thought I owned the land! How much participation is the hedge fund requesting? But they are providing me with 95 percent financing! Who said I have to personally guarantee? What's this? Your doors are closed for the next 60 days? When did your policy change to a maximum 70 percent loan to value? When did you decide to no longer work in the construction loan business? That type of commercial is no longer of interest to our committee! Our requirements for loan size have increased to $10 million. Here we are, six months into the new year, and as we view the markets today, the concerns of four months ago are becoming greater. From my vantage point, I know for a fact that clients, as well as lenders, are currently suffering from what I refer to as "procrastination fever!" It must be the economy. Would the fact that we are witnessing thousands of foreclosures and late mortgage payments? Would it be that the lenders are concerned with increases in this current problem? Would it be that the next wave of delinquencies will be in the credit card marketplace? Would it have to do with the $5 per gallon of gasoline charges? Guess what, it's all of the above. Over the past few months, letters of intent that were placed on the table for clients to consider were left to fade away. Whether clients thought that there were better offerings in the marketplace or whether they decided that they could not meet the liquidity requirements of the lender, transactions were, and are not being made. Could the client's decision be made based on the current economic conditions? Were they uncertain as to the future business in the marketplace? Have the sub-prime fiasco and the Wall Street blunders put the fear of God in their decision-making process? The answer is yes, to all the above questions. At the beginning of this year, the main players in the real estate financing game were the hedge funds. Commitments for a joint venture were being offered with little or no equity on the part of the investors, as long as the client was willing to give up 40 to 70 percent of the transaction. Many of the commitments were total equity injections, with no debt financing. Some were on a 30 percent equity injection and 70 percent debt, under very favorable conditions. And guess what, many of the clients rejected the offers because, in their minds, the "sugar plum fairy" was flowing in their head, with thoughts that they could get better elsewhere. From our vantage point, greed stepped in. Our regular institutional lenders have pulled way back, and in some cases, have reduced their work force by as much as 75 percent. Many are saying: "We are not in the market at this time." or "We have tightened up our due diligence process." or claiming the project or client "just doesnt qualify." We are getting back to the days of the late '80s and early '90s when liquidity was king and lending policies were at reasonable levels. If you are currently involved or plan to be involved with commercial loan brokering, let me add some advice. "First of all, do your homework. See if the project qualifies. Know your lenders policies. Dont try to pawn a bad deal to another broker in hopes that they will be the miracle worker. "On a major project, encourage the obtaining of a feasibility/viability study. Does the project make sense? Can it be justified? Can the area support it? Will it generate enough income to cover expenses, as well as debt service, with a cushion left over for possible vacancies? "Does your client have pipe dreams? Are they planning to do this on a shoe string? "Are you being asked to be the miracle worker, the saint of lost causes or the guru from the far East? "Be realistic. Know when to say, No. Dont let a potential, and I mean potential, retainer or commission cloud your decision-making process. In the Dec. 31, 2007 Wall Street Journal article, indications were that the hedge funds would thrive; they would get bigger, but returns to investors would be lower. However, the June 8, 2008 Wall Street Journal, Section C article by Jenny Strasburg, "Hedge Funds Brace for Wave of Bailouts," provided us with another side of the industry. Her comments state that the hedge funds are at the mercy of the antsy investors, and a wave of withdrawals was expected by the end of June 2008. In the past two months, hedge funds have revised their lending policiesnow a minimum of 10 percent injection on the part of the client is required, and in some cases, even more. In addition to higher equity participation, the hedge funds are being much more selective. Because of all the transactions out in the marketplace, both domestic as well as international, the hedge funds can rightly pick and choose. The word on the street is that the biggest risk in the market today is the lack of liquidity. But enough of all the gloomy news that most of us already know about. Many of my readers know, I come from an 18-year background in banking and have been a commercial real estate broker and Mortgage Broker for the past 16 years. I have been a contributing author of many articles for The Mortgage Press, and over this period of time, I have seen all of the up's and down's, and have suffered through the bad times and benefited from the good times. My ending comments for your consideration are: "Think positively, and be realistic in your real estate decisions. "Real estate is still, and will continue to be a good investment. Inflation will actually help, as it has helped in the past. "Many lenders have failed or will fail, as they have had to in the past. Dont be discouraged. The marketplace will correct itself, and consolidation is not bad. "Potential projects are great, but in todays market and in the foreseeable future, if you do not have liquidity, stay out of the game. "Partnerships are not for every investor, but if your client decides to go that route, they need to be willing to give up a good size of the pie. Dont let greed block your venture. "Justify your project. The guessing game in todays market will not fly. Feasibility/viability studies will be required in justifying your decision to move forward with a lender. "And lastly, have patience, for it is a virtue that we all need. The lending process will take longer, and lenders will be much more scrutinizing. Be prepared, and accept the modus operandi of todays marketplace. Anthony M. Gramza is president of Rochester, N.Y.-based AMG Commercial Mortgage Group Inc. and has been in the mortgage banking industry since 1961. He may be reached at (858) 766-9540 or e-mail [email protected].
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