Turning the Corner by Tony Petosa and Nick Bertino
Everybody seems to be feeling it: there has been a change
in the commercial real estate lending market, including lending for
Manufactured Home Communities (MHCs). Have we finally reached the light at
the end of the tunnel? With many lenders projecting an increase in lending
volume and hiring additional staff, we appear to have at least started to
turn the corner.
Third party financing for MHCs has traditionally been obtained from the
following sources:
· Fannie Mae
· CMBS Lenders
· Banks
· Life Companies
Let’s take a look back and a look ahead at the lending climate for each of
these sources:
Fannie Mae (FNMA) – FNMA was a major lending source for MHCs in 2010. They
offer long term, fixed-rate nonrecourse loans, and over the past two years
have provided the most attractive overall terms available for MHCs. These
loans are originated though a network of DUS (Delegated Underwriting &
Servicing) lenders who are designated to underwrite, close, and service MHC
loans for FNMA. Eligible properties are 3 to 5 star communities with
stabilized occupancy.
In 2010, all MHC loans were designated as “pre-review” – that is, FNMA had
to review all MHC loan submittals before the DUS lender was permitted to
formally quote an MHC loan. This was in reaction to a three-fold increase in
MHC lending volume being originated by DUS lenders and a concern that credit
standards may be slipping. Beginning in 2011, FNMA agreed to remove from
“pre-review” status most age-restricted MHCs, and we anticipate that lower
leverage all-age properties will follow. The “pre-review” designation and
the required pre-approval before processing a loan can actually be viewed by
the borrower as a positive step in the process, particularly for
acquisitions. Although the borrower won’t yet have a firm commitment, they
may take comfort that FNMA has reviewed and conditionally approved the loan
request prior to depositing money with the lender for third party reports
and processing.
FNMA’s 2010 MHC lending volume was down over 50% from 2009, which can be
attributed in part to the pre-review requirement. An increase in interest
rates during the 4th quarter also likely contributed to the decline as well
as short-term extensions of existing loans. We expect FNMA to continue to
adjust pricing and terms in 2011 to remain competitive, and that they will
be a dependable lender in 2011 for many borrowers.
Commercial Mortgage Backed Securities (CMBS Lenders) - In 2008, the CMBS, or
“conduit” industry was all but dismantled. However, in 2010 we experienced
the early stages of a comeback in CMBS lending that has continued in 2011.
Most of the prior major players have started to re-staff, yet few are now
staffed at their prior levels. The largest conduit originator in 2010 was JP
Morgan. They are now being joined by familiar names including Wells Fargo,
Deutsche Bank, CIBC and Goldman Sachs to name a few.
Aside from more conservative underwriting standards relative to the
pre-meltdown conduit days, the largest obstacle to increased loan production
has been the need to recreate the origination infrastructure. Because most
of these investment houses are staffed with just a fraction of the people
they had two years ago, the focus in 2010 was on large loan transactions –
typically $10 million and above. However, as the staffing levels are
increased and competition unfolds, we expect conduit lenders to be willing
to entertain smaller loans in 2011. In fact, two lenders, Wells Fargo Bank
and Guggenheim, have created loan origination programs geared specifically
for smaller loans between $1 million and $5 million. This is welcomed news
for many MHC owners. Underwriting is still conservative and is likely to
remain so through the balance of 2011. Maximum loan amounts are typically
70% LTV, with a minimum debt yield (NOI divided by loan amount) of 9.0% -
10.0% for sizing of the loan, and up to 30 year amortizations.
A dozen or more conduit lenders have announced that they will be active in
2011, and we expect a significant increase in CMBS lending volume this year.
However, total volume this year is still only expected to be about 25% of
the annual volume levels achieved in the years leading up to the recent
credit crunch.
Banks – In 2009 and the first half of 2010, there had been a “rush for the
door” by banks of all sizes struggling to shrink their loan portfolios.
However, in the latter part of 2010, many banks reached the point that their
real estate exposure was “right-sized,” so we expect many banks will gear up
loan origination efforts in 2011. If they are able to write off enough “bad
loans” on their books, they will be motivated and able to replace those
loans. Bank loans are typically recourse, and borrowers can expect a more
detailed review of all of their real estate assets, particularly any loans
that mature within the next 12 months.
Insurance Companies – Unlike banks and conduit lenders, insurance companies
have an ongoing need to invest cash. Millions of us continue to make
payments on our property and life insurance policies, and that money needs
to be invested so that sufficient funds will be available when the insurance
proceeds are needed. Insurance companies have many places they can invest,
but historically they have preferred long term fixed rate investments (like
commercial real estate) with defined maturities. In 2010 some insurance
companies were actively pursuing lending on high quality MHCs, and we expect
insurance companies to be a major player in the commercial real estate
sector in 2011. With respect to MHC lending specifically, we expect that
they will continue to quote MHC loans, although they will be focused on
higher quality assets and underwriting at more conservative leverage levels
than what can often be achieved with other lenders.
In summary, the re-birth of CMBS lending should provide a significant
increase in the money available for all commercial real estate loans, and
especially for MHC loans. Conduit lenders have a strong appetite for MHCs
because they have difficulty competing with Fannie Mae and Freddie Mac on
apartment loans. MHC’s qualify as “multi-family properties” for conduit
lenders, therefore providing much needed diversification in conduit loan
pools. Having said this, there will be high demand due to normally scheduled
maturities as well as the expiration of recent loan extensions so we suggest
borrowers start the refinancing process early. Last year we predicted that
commercial real estate lending would improve as 2010 progressed. We are
pleased to say that overall this seems to be the case.
For more information, contact:
Tony Petosa Nick Bertino
(760) 438-2153 (760) 438-2692
tpetosa@wellsfargo.com nick.bertino@wellsfargo.com
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