the mortgage observer april 2013

APRIL 2013 | $10APRIL 2013 | $10

New Jersey Lenders Vie for Garden State’s Multifamily Harvest

Large Loans Are BackThe Massive Loan That Sped Along Joe Chetrit’s Sony Building Buy

In-Depth LookHow Low Interest Rates are Fueling a Multifamily Feeding Frenzy

POWER PROFILE

JEFFERY HAYWARD

Basis PointSam Chandan on the Improving CMBS Market and Credit Quality

20 West 53rd StreetDestined for Luxury, the Site’s Loan History Is One for the Books

Q&A The M.O. Sits Down With Cushman & Wakefi eld’s

Steve Kohn

Special Focus

Multifamily

TMO.0413.CS3.COVER.indd 1 3/21/13 6:42:19 PM

B&L Portfolio25 BuildingsMultifamily Portfolio

$160,000,000New York, NY

Multifamily Portfolio718 Units 10 Multifamily Buildings

$134,900,000Various Locations, NY

Maryland Portfolio5,517 Units10 Multifamily Buildings

$371,000,000Various Locations, MD

East 65th Street174 UnitsMultifamily Property

$140,000,000New York, NY

1 Battery Park Plaza New York, NY 10004 | 212-972-3600 | www.meridiancapital.com

In 2012, Meridian proudly advised on $15 billion in fi nancing for multifamily properties

220 Water Street134 UnitsMultifamily Property

$52,000,000Brooklyn, NY

Park City Estates1,049 UnitsCooperative Property

$44,000,000Queens, NY

Stonehenge 57 & 58385 UnitsTwo Multifamily Buildings

$100,000,000New York, NY

Harrison Station275 UnitsMultifamily Property

$49,950,000Harrison, NJ

The Majestic232 UnitsCooperative Property

$26,350,000New York, NY

East 22nd Street116 UnitsMultifamily Property

$22,900,000New York, NY

East 38th Street144 UnitsMultifamily Property

$35,000,000New York, NY

North Sixth Street44 UnitsMultifamily Property

$25,000,000Brooklyn, NY

Commercial Mortgage Observer - April 2013 - Multifamily Issue.indd 1 3/15/13 4:45 PM

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321 West 44th Street, New York, NY 10036212.755.2400

Carl GainesEditor

Jotham SederstromEditorial Director

Alessia PiroloSta� Writer

Sam ChandanJoshua Stein

ColumnistsMichael Stoler

ContributorNoam S. Cohen

Copy Editor

Barbara Ginsburg Shapiro Associate Publisher

Ed JohnsonProduction and Creative Director

Peter LettrePhoto Editor

Lauren DraperChristie Wright

DesignersLisa Medchill

Advertising Production

OBSERVER MEDIA GROUPJared Kushner

PublisherJoseph Meyer

CEOMichael Albanese

PresidentKen Kurson

Editorial DirectorRobyn Reiss

Vice President of SalesMichael Woodsmall

Director of Development, Real Estate TitlesZarah Burstein

Marketing ManagerMark Pomerantz

ControllerTracy Roberts

Accounts Payable ManagerIan McCormick

Accounts Receivable

For real estate advertising, contact Robyn Reiss at [email protected], or call 212-407-9382.

For fi nancial advertising, contact Barbara Ginsburg Shapiro at [email protected],

or call 212-407-9383.

To subscribe to Mortgage Observer Weekly, The Mortgage Observer’s companion PDF

delivered directly to your inbox every Thursday, sign up at commercialobserver.com/mortgage-observer-weekly-signup

April 2013 / ContentsCover photo by Matthew Rakola

08

20

1

16

28

Editor’s Le� er 02

News Exchange 04Mortgage originations, note sales, investments and industry researchu Large Loans Are Back: The Massive Loan That Sped Along Joe Chetrit’s Sony Building Buyu 20 West 53rd Street: Destined for Luxury, the Site's Loan History Is One for the Booksu The Largest Loans of the Month

In-Depth Look 08Lenders O� ering Lowest Rates for Multifamilyby Michael Stoler

Scheme of Things 10Monthly charts of commercial real estate fi nancings in the boroughs

Stein’s Law 12Mezzanine Lending, Post-Crashby Joshua Stein

The Basis Point 13Qualifying a CMBS Rebound: What an Explosion of New Deals Implies for Credit Qualityby Sam Chandan

Work Force 14Hirings, promotions, defections and appointments

Power Profi le 16Je� ery Hayward of Fannie Maeby Alessia Pirolo

The Wild West 20Commercial Real Estate Lenders Vie for a Share of the Garden State’s Multifamily Harvestby Damian Ghigliotty

Culture 28Tune In, and Out: Noise-Canceling Headphones

Q&A 30Steve Kohn, President, Cushman & Wakefi eld Equity, Debt & Structured Finance Groupby Carl Gaines

The Sked 32Our picks for the month’s must-attend events

TMO.0413.ContentsCS3.indd 1 3/21/13 6:55:10 PM

2

Editor’s Letter / April 2013

For our April 2013 issue, which officially marks our one-year anniversary, it seemed fitting to focus on multifamily—which continues to be particularly hot at the moment.

Accordingly, Alessia Pirolo kicked things off by hopping on a D.C.-bound train several weeks ago for a series of interviews with Jeffery Hayward, a longtime Fannie Mae veteran who is currently head of multifamily at the agency. Mr. Hayward, number 8 on our list last month of the 50 Most Important People in Commercial Real Estate Finance, shared with us how he came to head the multifamily division at the agency, where he’s worked for 26 years now.

Then, because so many people are being squeezed out of New York City due

to skyrocketing housing costs here, we took a look at competition for multifamily lenders west of the Hudson River, in the Garden State. Damian Ghigliotty spoke to many of the lenders you’d expect to be competing strongly there, and some that you perhaps wouldn’t. He took a look at how these lenders, both veterans of and those new to New Jersey’s market, are competing for projects there. And it’s not all about lowering interest rates—though of course offering the lowest rates around doesn’t hurt your chances.

Multifamily

TMO.0413.EditorsLetterCS3.indd 2 3/21/13 6:52:28 PM

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4

SpotlightNews Exchange / April 2013

Got a news tip? Email Alessia Pirolo at [email protected] or call (212) 407-9308.

large loans Are Back: Closing of $925 M. Sony Building loan one of Several Signals » A wave of huge loans is sweeping through

New York City. The first quarter of 2013 alone has seen closings for deals in several multiples of hundreds of millions of dollars—for refi-nancings, acquisitions and even the construc-tion of large projects. Often the lenders are the usual suspects: national banks, conduits and REITs.

For the latter, an ability to guarantee a speedy closing has been pivotal in some re-cently closed blockbuster deals.

For instance, sources told The Mortgage Ob-server that it took less than a month and a half from the initial meeting between SL Green Realty Corp. and the Chetrit Group before the ink was dry on the $925 million bridge acqui-sition financing that facilitated Joe Chetrit’s $1.1 billion purchase of the Sony Building.

SL Green announced on March 20 that the loan it provided on the 37-story, 852,830-square-foot tower, located at 550 Madison Avenue, had closed.

“This deal illustrates SL Green’s ability to structure, syndicate and execute financing for complex capital transactions,” David Schon-braun, SL Green’s co-chief investment officer, said in a prepared statement when the closing was announced. He added that the REIT had emerged as a “major player” where structured finance was concerned.

“In that regard,” Mr. Schonbraun contin-ued, “SL Green is now the primary provider of subordinate capital for real estate transac-tions in the greater New York market.”

Dan Fasulo, a managing director at global research and consulting firm Real Capital Analytics, told The Mortgage Observer that REITs have been particular-ly active in New York City when it comes to closing larger loans.

“For Hudson Yards, Related Companies also chose a REIT,” Mr. Fasulo said, referring to the $425 million loan that Starwood Property Trust is close to provid-ing on the development. Players who have real estate expertise in the New York market, Mr. Fasulo added, “have the ability to quantify the risk involved,” and to guarantee “speed of execution.”

CMBS lenders have also been active recently in some the largest refinancings in the first quarter of 2013. Deutsche Bank and Bank of America just re-financed Worldwide Plaza, at 825 Eighth Avenue, for a total of $875 million, a loan that is now being securitized.

The loan on the Sony Building that SL Green pro-vided broke down with a degree of complexity that Mr. Schonbraun alluded to in his comments.

The Bank of China originated a $600 million senior loan. SL Green, meanwhile, sold $175 million in senior mezzanine debt to a private investment manager and also originated a $150 million piece of junior mezza-nine debt. After completion of the financing, SL Green

sold one half of its interest in the junior mez-zanine debt. The loan has a three-year term.

The Chetrit Group had only a little time to close on financing for its purchase from Sony, which, according to reports, wanted certainty of closing upon tapping a buyer. With a short list of lenders able to close such a large loan so quickly, Iron Hound Management Company principal Robert Verrone, who represented the Chetrit Group in sourcing the loan, and Joe Chetrit weighed their options, met with a few other lenders on that short list, and went with SL Green.

Messrs. Chetrit and Verrone approached the REIT looking for a one-stop shop—a lend-er able to arrange the entire deal. It was imme-diately clear that the loan on the trophy asset was an appealing investment for SL Green, and the REIT signed up for the entire deal, confident in its ability to place all the pieces of the loan afterward.

Again, relationships mattered, with the lender leveraging its strong connection with Bank of China. Most recently, in February 2013, Bank of China, along with Deutsche Bank and Goldman Sachs, provided a $900 million loan to refinance SL Green’s 1515 Broadway, another of the huge deals that marked the beginning of the year.

After SL Green involved Bank of China, all the pieces came together.

If the beginning of the year is any indica-tion, competition for these larger loans will

only increase—with relationships remaining a decid-ing factor in who wins the assignments.

“Undoubtedly it is fair to say that there is more debt capital available for large deals this year than last year,” said Mr. Fasulo, the RCA managing director. “And infinitely more than at the bottom of the market in 2009.”

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Sony Building

TMO.0413.NewsExchangeCS3.indd 4 3/21/13 6:53:56 PM

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UpS & DownSnews Exchange / April2013

6

From the vault

Freddie macIn its 2012 earnings report, the

agency reported net income of $11 billion for the year, compared

with a net loss of $5.3 billion in 2011. Its multifamily delinquency rate was down to 0.19 percent as of

December 31, 2012, compared with 0.27 percent as of September 30,

2012, and 0.22 percent at the end of December 2011.

Sl GreenThe REIT is simultaneously the

top lender and the top borrower in the market. After having closed a $900 million refinancing on 1515 Broadway, provided by Deutsche Bank, Goldman Sachs and Bank of China, SL Green struck again,

providing the $925 million acquisition financing for the Sony

Building.

Jamestown PropertiesJamestown Properties is heading

to warmer climates. The real estate investment and management

firm has created a new division, Jamestown Latin America, which will

invest in real estate assets across the region. It is opening offices in Rio

de Janeiro and Bogota.

J.C. PenneyJ.C. Penney is the retail tenant with

the largest exposure in CMBS, with 258 commercial properties

securing 262 CMBS loans, according to Morningstar Credit Ratings. Its disastrous earnings report for the

quarter ending on February 2, 2012, showed a fiscal fourth-quarter loss

of $2.51 a share and a 31.7 percent drop in same-store sales.

Gramercy CapitalAfter reporting terrible results for

the fourth quarter of 2012, Gramercy Capital announced its exit from the

commercial real estate financing business. The company generated negative funds from operations of

$126.8 million for the fourth quarter of 2012.

For the Books1955The five-story building at 20 West 53rd Street is built. A branch of the New York Public Library opens as the Donnell Library Center. It is named for Ezekial Don-nell, a cotton merchant and an early library patron.

1977The New York Public Library occupies the building for 50 years, but public records show that the lot on which it was built changes hands through the years. On August 10, 1977, Charlton Building Associates buys the lot as a part of a portfolio of three Midtown properties, with a $46.2 million mortgage provided by Prudential Insurance. Later the same year, Sher-man and Edward Baron Cohen, two of the original founders of Cohen Brothers Realty, take over the portfolio.

1980sOn July 17, 1986, public records show a $1 million

mortgage on the property provided by Manhattan High As-sociates. In 1988, a fa-mous collection of the original Winnie-the-Pooh dolls is donated to the library. When in 1998 British politi-cians ask for the dolls to be returned to the U.K., The New York Times reports that Mayor Rudolph Giu-liani visits the library

to embrace Pooh and to offer him “permanent safe haven,” in New York.

2007-2009The New York Public Library announces an agree-ment to sell its Donnell branch to Orient-Express Hotels for $59 million. The sale is planned to partial-ly finance a major renovation by the architect Nor-man Foster of the main library on Fifth Avenue. The building at 20 West 53rd Street is vacated in 2008, but one year later, Orient-Express Hotels backs out of the agreement.

2011Tribeca Associates and Starwood Capital Group buy the building for $67.4 million. The Mexican Banco Inbursa provides $63 million to finance the acqui-sition. The former library is demolished in October. The developer plans to build the Baccarat Hotel & Residences, a 50-story luxury building.

2013A syndicate of banks led by Bank of America and in-cluding Capital One, Emigrant Savings Bank, CIT Real Estate Finance and Bank of East Asia provides a $235 million construction loan for the construc-tion of the Baccarat Hotel & Residences. The de-velopers announce the beginning of the sale of the residential units, for asking prices between $3.5 million and $60 million. The building is due to be completed in 2014.

The Donnell Library

CorrectionLast month’s 50 Most Important People in Commercial Real Estate Finance incorrectly identified BGC Partners as a subsidiary of Cantor Fitzgerald. The two are affiliates. The same feature misstated the number of loans that Jason Pendergist, head of commercial term lending for the East at JPMorgan Chase, oversaw in 2012, as well as the value of JPMorgan Chase’s U.S. portfolio. He oversaw a portfolio of 3,000 loans for the New York metropolitan region valued at $8 billion, part of Chase’s $43 billion portfolio in 15 markets around the country.

Baccarat Hotel


7

April2013 / News Exchange

7

The Largest Loans of the Month

To receive a trial subscription to the Mortgage Observer Weekly,

please visit commercialobserver.com/

mortgage-observer-weekly-signup

© 2013 CIT Group Inc. CIT and the CIT logo are registered service marks of CIT Group Inc.

CIT Bank makes loans without regard to race, color, religion, national origin, sex, handicap, or familial status.

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Every Friday, our newsletter Mortgage Observer Weekly brings stories to your e-mail boxes about the most interesting deals across the country. Here are some of the largest deals we covered in March 2013.

IN NEW YORK$275 MILLIONHerald TowersBORROWER: JEMB RealtyLENDER: AIG Asset Management The 20-year loan on the one-million-square-foot luxury rental residence, located on the same block as the Empire State Building, refinanced a $250 million mortgage originally provided by M&T Bank in 2007.

$235 MILLIONBaccarat Hotel & ResidencesBORROWER: Starwood Capital

LENDERS: Bank of America, Capital One, Emigrant Savings Bank, CIT Real Estate Finance and Bank of East Asia

$225 MILLIONGateway Center, BrooklynBORROWER: Related Companies

LENDERS: Bank of America, PNC Bank and Sovereign Bank

$127 MILLION1407 BroadwayBORROWERS: Lightstone Group and Lightstone Value Plus REITLENDER: Swedbank

Swedbank extended its existing loan on the building.

$90 MILLION300 Park AvenueBORROWER: Rockrose Development LENDER: AXA Equitable Life Insurance Company

ACROSS THE COUNTRY$300 MILLION155 North Wacker Drive, Chicago, Ill.BORROWER: John Buck CompanyLENDER: Prudential Mortgage Capital Company

$125 MILLION2001 Eighth Avenue, Seattle, Wash.BORROWER: AEW Capital ManagementLENDER: Prudential Mortgage Capital Company

$75 MILLIONThe Communities of Ascot Glen, Willowbrook, Ill.BORROWER: TGM AssociatesLENDER: M&T Bank

$44.1 MILLIONRockoff Hall, New Brunswick, N.J.BORROWER: McKinney PropertiesLENDER: Investors Bank

$34 MILLIONTwo-building office complex, Tempe, Ariz.BORROWER: Brookfield Asset ManagementLENDER: Mesa West Capital


8

In-Depth Look / April 2013 A comprehensive take on CRE finance trends

by Michael Stoler

Lenders O� ering Lowest Rates for Multifamily

It seems like the perfect storm: investors are paying record prices to acquire residential rental apartments in metropolitan areas.

And at the same time, fi nancial institutions—especially regional and local commercial and savings banks—are o� ering the lowest rates for long-term fi nancing for this asset class. Ramping up the competition, Fannie Mae, Freddie Mac, insurance companies, CMBS and conduits are all o� ering borrowers low rates, with terms we have not experienced in decades.

People in the commercial real estate fi nance world are left scratching their heads, intrigued as to why lenders are o� ering such amazing loan rates for fi nancing.

Ronnie Levine, a managing director at Meridian Capital Group, told The Mortgage Observer that doing the math helps make the low rates make sense for lenders.

“Even though the rates for fi nancing are low, the banks are earning considerably higher returns based upon the cost of funds,” Mr. Levine said.

Mr. Levine’s assertion was echoed by the executive vice president of a commercial bank, who, preferring to remain anonymous, pointed out that spreads to comparable Treasuries are above 200 basis points. “Several years ago, lenders were lending at spreads to Treasuries of less than 100 basis points,” the person said. “They are making considerably higher returns in 2013.”

While rates are at record lows, industry leaders are worried that banks might be under pressure to meet budgets for loan production, while reducing the level of due diligence and underwriting. This was the concern of a chief lending o� cer for a local fi nancial institution who also requested anonymity.

“Way back in 2007—fi rst interest rates went to record lows,” this executive told The Mortgage

Observer. “Now borrowers are trying to gain on the structure of the loan, which includes interest-only, lack of covenants and underwriting at lower criteria.”

Nevertheless, lenders are being o� ered the opportunity to fi nance high-quality multifamily residential real estate with very low loan-to-value and, in certain instances, debt service coverage of nearly two to one. For example, an owner of a prominent residential rental property near the Metropolitan Museum on Fifth Avenue secured a 10-year fi xed-rate fi nancing, interest-only, at a rate of 2.95 percent.

Banks are fi ercely competing for business, lowering rates for prime properties. Many of the leading lenders in the arena are o� ering fi ve-year fi xed-rate fi nancing ranging as low as 2.75 to 3 percent. Some regional banks that are interested in gaining market exposure are o� ering interest-only loans for one to two years and capping legal and appraisal fees.

Fannie Mae and Freddie Mac are competing with the local banks, o� ering attractive rates and terms. Fannie Mae is actively marketing a 12-year loan with a current rate of about 4.5 percent. Insurance companies are o� ering long-term rates and are in competition with CMBS and conduit lenders.

No one wants to lose market share, especially the established leading multifamily lenders, which include New York Community Bank, Capital One, Signature Bank, Investors Bank, Sovereign Bank, Chase Commercial Term Lending, M&T Bank and TD Bank.

Accordingly, regional savings and commercial

banks that have been active in this arena for a number of years are also lowering rates to meet the competition. These include Astoria Federal, Dime Savings Bank of Williamsburgh, Ridgewood Savings Bank, Flushing Bank, Oritani Bank, Intervest National Bank and Amalgamated Bank.

Adding to the competitive landscape are the new players, or lenders that have become active in the

market. These include Apple Bank for Savings, People’s United Bank, Bank Leumi, Popular Community Bank, Mercantil Commercebank, First Republic Bank, BankUnited (formerly Herald National Bank), Provident Bank of New York, Provident Bank of New Jersey, 1st Constitution Bank and Customers Bank of Pennsylvania.

Because rates are so low and the market is so packed with lenders o� ering unbelievable rates,

borrowers are busily negotiating prepayment rates with their existing lenders to refi nance at lower rates. And this is causing banks to accept lower prepayment rates in order to keep loans on their balance sheets.

It is defi nitely a borrower’s market today, with borrowers clamoring to seize the opportunity to lock in long-term fi nancing ranging from fi ve to 10 years.

Urban American CEO Philip Eisenberg perhaps summed it up best, adding his own words of advice on the trend.

“In the two generations that my family has been in business, we have never [seen], nor do [we] expect to see, rates at these record lows,” Mr. Eisenberg said. “Therefore, take advantage and refi nance your properties.”

TMO.0413.CS3.InDepthLook.indd 8 3/21/13 5:49:33 PM

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Untitled-19 1 3/21/13 12:41:34 PM

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10

Scheme of Things / April 2013 Monthly charts of commercial real estate financings across New York City

» For April 2013, financing data—captured as The Mortgage Observer was going to press—shows a slight uptick in financing, purchasing and refinancing activity from January to February 2013. Financing activity remained centered in Brooklyn, with Prospect Park South, Ditmas Park and Williamsburg more active than the other areas.

Mortgage Charts

346 373

76 118

JAN FEB

REFINANCES JAN FEB

PURCHASES

Refinances vs. Purchases

Top 10 Lenders

Total Sales by Borough

JAN FEBALL

JAN FEBMAN.

JAN FEBBRONX

JAN FEBBROOK.

JAN FEBQUEENS

BANK JANUARY 2013 BANK FEBRUARY 2013

195

25 50 7941

204

41 3083

50

Most Active ZIP Codes—Financing

Signature Bank 46 Signature Bank 26New York Community Bank 42 Flushing Savings Bank 24JPMorgan Chase 32 New York Community Bank 23Capital One 18 Astoria Federal Savings Bank 19TD Bank 17 Investors Bank 19Astoria Federal Savings Bank 13 Capital One 18

Flushing Savings Bank 12 JPMorgan Chase 17People’s United Bank 11 M&T 15Ridgewood Savings Bank 11 Aetna 13Sovereign Bank 8 Maspeth Federal Savings & Loan 11

ZIP CODE JAN 2013 ZIP CODE FEB 2013

11238 23 A 11226 16

10023 15 B 11211 1411226 11 C 10019 1211206 11 D 11385 1211237 10 E 11237 1211221 10 F 10028 1111211 10 G 11422 11

Data courtesy of

After a busy end of the year and a subsequent drop-off as 2013 kicked off, refinaces and purchases both rose, though only slightly, from January to February 2013.

Williamsburg, Brooklyn, remained hot, but parts of Brooklyn south of the park—like Ditmas Park—saw the most financing activity during February 2013.

In line with data pegging Brooklyn as the most active of the boroughs, sales in the borough accounted for 83 of the 204 sales that were recorded and on the books as of press time. Sales rose slightly in most boroughs, but were down in the Bronx.

Queens Office: Aetna provided a $17.8 million first mortgage for Ivy Realty’s Cross Island Plaza, a 240,000-square foot office building in Jamaica, Queens. Tenants include the U.S. Citizenship and Immigration Services.

Signature Bank provided a number of loans over the course of February 2013, which brought it to the top of our leaderboards for banks. Among them was a $35 million loan to HK Organization to refinance its 99 Gold Street loft conversion. That loan closed on February 28, 2013, according to public records.

F

B

C

A

D

E

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Untitled-16 1 3/21/13 10:57:42 AM

12

The M.O. Columnists / April 2013

How do you know when the commercial real estate financing market has gotten out of control and become irrationally exuberant?

If you’re a mezzanine lender, you look for three things. First, have non-real-estate players such as hedge funds started to come into the mezzanine debt market? Second, has the deluge of new players caused a substantial drop in pricing? And third, are other funding sources offering to finance mezzanine lenders on very favorable terms?

In mid-2007, Terra Capital Partners, led by Bruce Batkin, noticed all three red flags waving in gale-force winds, and Terra sold its entire portfolio of nearly 100 mezzanine loans. Then Terra sat on the sidelines for two years.

Terra decided that the market had hit bottom in 2009 and started lending again. Today, first mortgage lenders want to lend again, but it’s very much not like 2007 all over again. Proceeds are down, conservatism is up, and many borrowers find themselves with a gap between the equity they’re willing to risk in a deal and the first mortgage financing they’re able to find, even with traditional mortgage lenders—both portfolio and securitized—all looking for solid places to put money.

That’s the gap that mezzanine lenders like Terra

fill. Terra does it with its own equity capital, raised through a series of funds. Over the course of several conversations, Mr. Batkin told me that leverage isn’t readily available for mezzanine lenders, but his deals already have enough inherent leverage in them based on their subordinate positions.

Each mezzanine loan is different, often involving real estate with a “story”—a turnaround, a portfolio assemblage, a new hotel in a pioneering location, a busted condo complex or, increasingly, financing the discounted payoff of a senior mortgage loan. A deal could involve an earn-out or other types of additional advances, potentially giving a borrower a technique to monetize short-term project success without needing to refinance conservative, simple, low-cost senior financing.

Because Terra’s loans are typically complicated, requiring bespoke deal terms, Mr. Batkin said that Terra doesn’t engage outside servicers. The firm also never sells its loans, the one huge exception being that single transaction in 2007 when it sold its entire portfolio.

From a senior lender’s perspective, the existence of a mezzanine lender like Terra adds complexity to the capital stack, but it also produces significant benefits, not at all limited to the possibility

Joshua Stein

Stein’s Law

Mezzanine Lending, Post-Crash

of future mezzanine loan advances and the immediate obvious benefit of helping a borrower close a deal that otherwise might not have happened. If the property gets into trouble and the borrower doesn’t want to or can’t reinvest in it the mezzanine lender might. The mezzanine lender focuses an extra pair of eyes on the borrower, a strong dose of real estate expertise that may well help if the going gets rough.

A mezzanine loan carries a much higher risk than a mortgage loan, because it’s structurally subordinate to the mortgage loan. The mezzanine lender must, at least in theory, stand ready to pay off the mortgage loan if the project gets into trouble and the mezzanine lender thinks there’s still enough value in the underlying asset to support the mezzanine credit. In practice, it never works out that way, Mr. Batkin told me. Instead of facing a foreclosure on the senior loan, the mezzanine lender will always figure out how to negotiate with the senior lender, avoid acceleration or maturity of the senior loan, and live to fight another day—often minus the borrower.

According to Mr. Batkin, in underwriting a mezzanine loan, Terra will essentially reappraise the underlying property based on its own underwriting criteria. Terra then typically asks whether it would be comfortable owning the property based on a purchase price equal to the mezzanine loan plus the underlying mortgage loan. How does the total amount of those two loans compare with the conservative valuation of the property at the time? And, looking ahead to maturity of the mortgage loan, how much will the scheduled amortization on that loan reduce Terra’s exposure and implied potential purchase price for the property?

Mr. Batkin said that Terra tries to focus on sub-debt loans between $3 million and $15 million. In today’s market, he sees senior loans generally at anywhere from 60 percent to 75 percent of value. Terra’s mezzanine financing will bring the debt stack to between 65 percent and 85 percent of value, with an average of 75 percent across the portfolio. In 2007, he said, the equivalent figure for mezzanine lending in the market as a whole was about 85 percent.

Mr. Batkin and I will continue our conversation about mezzanine financing, with an emphasis on how Terra structured a half-dozen specific mezzanine loans for six wildly different projects, at a luncheon program sponsored by the Mortgage Bankers Association of New York, on Thursday April 18, 2013.

Joshua Stein is the sole principal of Joshua Stein PLLC. The views expressed here are his own. He can be reached at [email protected].

TMO.0413.CS3.Columnists.indd 12 3/21/13 5:41:38 PM

13

April 2013 / The M.O. Columnists

CMBS issuers are on a roll. The best January on record has propelled first-quarter 2013 volume past $20 billion, a milestone that

has otherwise eluded the market for more than five years. Few issuers expect a slowdown in activity over the next year. Both for fusion deals and single-asset transactions, securitization has become an increasingly more competitive option as spreads have narrowed. The single-asset market has leapfrogged the recovery in multi-borrower deals and is on track to surpass its previous peak. After years of middling progress, the CMBS market overall is reasserting itself as investors’ tolerance for risk-taking recovers.

Higher CMBS volume is welcome news for underserved segments of the market. But an abrupt resurgence in activity, however long in coming, carries dangers of its own. Feeding an increasingly esurient deal pipeline will require that conduit lenders cede ground on the relative conservatism of their underwriting. Rising expectations for issuance implies a larger number of qualified borrowers. But it also implies that the scope of conduit activity will broaden to capture a wider range of lending opportunities. In some segments of the market, that process is well under way. Even with more information at their disposal, investors are only marginally better equipped to

gauge the attendant risks.While life companies have garnered attention

for the rapid growth in their market share and the visibility of their largest loans, national, regional and community banks are still the mainstays of property finance. Bank lenders account for the majority of commercial real estate mortgage lending, but they cannot serve the market by

themselves. Where the viability of CMBS as a competitive alternative depends largely on the bond market, banks’ capacity for growth is tempered by the size of their capital base and an uncertain regulatory outlook.

Notwithstanding their constraints, improvements in bank lending have been increasingly widespread. As default rates on legacy balance sheets have fallen, reflecting dilution as well as troubled debt restructurings, more

banks have re-engaged. Banks’ net exposure jumped more than $20 billion in the fourth quarter of 2013, indicating that a majority of institutions with significant exposure to commercial real estate increased and expanded their balance sheets.

The bisection of old and new is not as clean on the balance sheet as it has been for securitization. Across the board, default rates on legacy loans are significantly lower for banks that increased their net lending in the fourth quarter. That correlation

Sam Chandan

Qualifying a CMBS Rebound: What an Explosion of New Deals Implies for Credit Quality

reflects a more navigable supervisory relationship for less encumbered banks. It also captures the fact that investment conditions are very likely stronger in markets where distress levels are declining.

More stable bond markets have been crucial to the improving CMBS outlook. If exogenous shocks from sovereigns or corporate bonds force spreads wider, CMBS activity could falter again. But with a positive baseline projection, a more diverse group of potential B-piece buyers has emerged at the bottom of the stack. With that bulwark strengthened, why believe that credit quality might deteriorate?

Market participants have focused their attention on regulatory initiatives such as risk retention, but meaningful self-regulation and offsets to incentive conflicts remain works in progress. The industry’s advocates have emphasized the conservatism of underwriting in post-crisis issuance. While laudable, this cyclical focus on risk is not a substitute for structural measures that will ensure the long-term health and sustainability of CMBS.

Many of the structural weaknesses of the CMBS market—including conflicts in the incentives of the various parties facilitating each issue—have yet to be fully addressed. In the interim, the absence of structural corrections of weaknesses that range from rating agency compensation to the potential for special-servicer conflicts of interest means that the current bias in favor of conservative underwriting is giving way to inefficient risk-taking as the level of activity normalizes.

Rising competition from the conduit can ultimately undermine loan quality among its competitors, including the regulated banks. CMBS may be underwritten more carefully now than a few years ago, but this cyclical focus on risk is not a substitute for measures that will ensure the long-term health and sustainability of the industry. The structural assessment of CMBS that addresses the range of incentive conflicts with practical and implementable remedies is incomplete. In the best case, industry-led efforts will intensify, limiting or precluding inflexible regulatory regimes and encouraging rather than impeding robust securitization activity. In the worst case, inattentiveness to incentive conflicts will allow the current bias toward conservative underwriting to cede to undue risk-taking later in the cycle. In the immediate future, demand for new issuance will then be taken as evidence of sufficient lessons learned and the cycle will threaten to repeat itself again.

Sam Chandan, Ph.D., is president and chief economist of Chandan Economics and an adjunct professor at the Wharton School. The views expressed here are his own. He can be reached at [email protected].

The Basis Point

TMO.0413.CS3.Columnists.indd 13 3/21/13 5:41:53 PM

Arbor Commercial Mortgage has appoint-ed Todd Hirsch exec-utive vice president, head of CMBS finance and distribution. Mr. Hirsch will be respon-sible for overseeing Ar-bor’s growing national CMBS origination and

syndication platforms.“Todd has a long tenure and impressive track

record of success in the commercial real estate finance industry across the world markets, with expansive and deep expertise that spans from asset management to originations to the distri-bution of debt and equity products,” said Ivan Kaufman, chairman and chief executive offi-cer of Arbor Commercial Mortgage. “His strong industry knowledge and notable skill will sup-port our dynamic and growing company to help us serve the demands of the industry while pro-viding our clients with the most comprehensive platform of products available in the market.”

Prior to joining the company, Mr. Hirsch served as a managing director and head of the European finance group at Credit Suisse. He re-ports to Mr. Kaufman.

Brickman, a real es-tate private equity firm, has named Steve Klein chief investment offi-cer. Mr. Klein will work with company princi-pals Bruce Brickman and Kathy Corton as well as the senior exec-utive team. His respon-

sibilities will include sourcing and evaluating opportunities in major cities in the United States and residential opportunities in New York.

“Steve has vast experience acquiring and op-erating commercial office properties in key mar-kets throughout the United States,” said Mr. Brickman. “He will be an integral part of the team as we continue to expand our investments nationwide.”

Mr. Klein was previously a co-founder and managing partner at JOSS Realty Partners, a private real estate investment management firm in New York.

Cantor Commercial Real Estate is expand-ing into investment management and has hired Chris Milner to head up those efforts.

As head of investment management, Mr. Milner

will report to Anthony Orso, CCRE’s CEO.“Chris will help us find investment partners to

help build real estate lending capabilities,” Mr. Orso explained. “Under the new investment man-agement platform, CCRE will form a series of joint ventures capitalized by CCRE and a partner. The joint venture would initially focus on originating floating-rate loans on transitional properties.”

Mr. Milner worked at BlackRock for 14 years; he was responsible for managing the global com-

mercial real estate debt portfolio across all BlackRock’s accounts. He also held several se-nior positions at PNC Real Estate Capital Markets.

“During my tenure at BlackRock and PNC, I was able to learn a great deal from some of the very best minds in in-

vestment management and commercial real es-tate lending,” Mr. Milner said. “I hope to further contribute to the growth of CCRE and build on the firm’s successes and world-class commercial real estate platform.”

Walker & Dunlop has named Stephen Theobald as executive vice president, chief fi-nancial officer and treasurer. He comes on board effective April 1, 2013.

Mr. Theobald joins from Hampton Roads Bankshares, where he was executive vice presi-dent and chief financial officer.

“Steve brings with him over two decades of audit, regulatory and executive leadership expe-rience in the financial services industry,” Walk-er & Dunlop chairman and CEO Willy Walker said. Mr. Walker went on to say that Mr. Theobald’s finance and accounting back-ground will be an asset as the company con-tinues to expand and diversify its lending.

Walker & Dunlop closed on its $234 mil-lion purchase of CW-Capital toward the end of 2012, dramatically boosting its lending capabilities.

Outgoing CFO and treasurer Deborah Wil-son announced that she was stepping down in December 2012. A company spokesperson told The Mortgage Observer that she’s simply retir-ing and doesn’t have any immediate plans.

First Finance Net-work has hired Tim Buss as senior vice president of business development to expand its business develop-ment division. Mr. Buss’s responsibilities will include business development, creat-

ing client-focused solutions and assisting in the marketing of specific loans secured by commer-cial real estate.

“We are thrilled to have an executive of Tim’s caliber on our team,” noted Bliss Morris, found-er and chief executive officer of FFN. “His market knowledge and deep real estate expertise speaks for itself as he has been a top executive for more than two decades with a number of high-profile companies.”

Mr. Buss previously served as senior vice pres-ident at NAI Global and NAI Hiffman, where he worked with commercial lenders and special ser-vicers to resolve distressed loan issues.

The Financial Accounting Standards Board has appointed six new members to its investors technical advisory committee. The board will welcome Frederick Cannon, Wallace Enman, Brian Foran, Jonathan Nus, Kevin Shea and David Trainer.

The board will also welcome Alexander Corl, who has been appointed to its emerging issues task force, and Larry Probus, who has been appointed to the not-for-profit advisory committee.

“On behalf of the FASB, I am pleased to wel-come our new members to the emerging is-sues task force, the investors technical advisory committee and the not-for-profit advisory com-mittee,” stated Susan Cosper, chairman of the emerging issues task force and the FASB’s tech-nical director. “We look forward to the insights they will bring to their respective roles in advis-ing the FASB.”

“The members of the emerging issues task force, investors technical advisory committee, and not-for-profit advisory committee provide invalu-able input to the deliberations of the FASB,” said FASB Chairman Leslie Seidman. “We welcome their newest members, and thank them for shar-ing their time and expertise to help us address fi-nancial reporting issues of importance.”

14

Work Force / April 2013 Hirings, promotions, defections and appointments

Changed jobs recently? Heard of a move?

Email [email protected] to be featured in Work Force.

Todd Hirsch

Steve Klein

Tim Buss

Stephen Theobald

Chris Milner

TMO.0413.WorkForceCS3.indd 14 3/21/13 5:55:07 PM

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16

Power Profile / April 2013

FANNIE MAE

Jeffery HaywardThe head of multifamily at Fannie Mae on the future of lending for the asset class and his trajectory at the agency.

W hen on the road, Jeffery Hayward often carries a personally customized guide, with the addresses of all

the multifamily buildings that Fannie Mae has financed in the area. Then the head of the government-sponsored enterprise’s Multifamily Mortgage Business drives from building to building.

“I want to see what we are financing,” Mr. Hayward told The Mortgage Observer recently,

during a series of meetings in his Washington, D.C. office. “I have actually walked a lot of the properties that we financed—I know what they look like, I have seen the tenants.”

When describing Mr. Hayward colleagues often mention his affable nature and his ability to put people at ease, even through tough times. His energy and his ability to listen, several people said, were pivotal in reenergizing the division. In fact, the first year under his leadership, which began in January 2012, Fannie Mae had its third highest year for loan acquisitions for financing to the multifamily market.

After 26 years at the GSE, spent both in the single family and in the multifamily business, Mr. Hayward speaks about working at Fannie Mae in almost mythical terms—referencing its mission to bring liquidity to the market and, more broadly, to solve the nation’s housing problems.

“When you ask people here what really gets them excited, it is knowing that you are helping the country and families to have decent rental housing,” he said. “It might sound corny, but this really is how people feel.”

When Mr. Hayward took over from

by Alessia Pirolo

TMO.0413.CS3.POWERPROFILE.indd 16 3/21/13 6:12:16 PM

17photo by Matthew Rakola


18

Power Profile / April 2013

Kenneth Bacon, who retired after having run the multifamily division since 2005, he found a business in good shape and in rebound after the recession, he said. In 2012, for instance, Fannie Mae provided financing for almost 560,000 units of multifamily housing, for a total volume of $33.8 billion. This was up from 423,000 units and $24.4 billion in financing the year previous.

“As a single entity we probably bought or acquired more multifamily mortgages than any single lender in the United States and we did it safe and sound, meeting our debt coverage standards and meeting our LTV standards,” he said.

Approximately 98 percent of the loans, for a volume of $33.1 billion, were delivered through mortgage-backed security executions. Enhancing the securitization program was one of the main goals that Mr. Hayward had set.

“Last year we kept enhancing a program we call GeMS [Guaranteed Multifamily Structures],” he said. “We expanded the appetite of the investors and brought in more private capital.”

Launched in 2010, the GeMS program involves the creation of structured multifamily securities created from MBS collateral. These structures, which look much like CMBS, attract larger institutional investors. The issuance of GeMS increased from $6 billion in 2011 to $10 billion in 2012. On March 14, 2013, Fannie Mae priced a $904.3 million multifamily DUS REMIC under its Fannie Mae GeMS program, the third so far this year. So far in 2013, total GeMS issuances have been $3.2 billion. Kimberly Johnson, senior vice president of Multifamily Capital Markets, estimated that GeMS issuances will reach approximately $12 billion by year’s end.

Being able to create these structures “has attracted hedge funds and other valuable players, so we are getting a lot of secondary trading and a lot of better liquidity,” Ms. Johnson said. “We started the GeMS program in 2010 before Jeff ’s time, but we’ve seen a real increase in issuance and he has been a very big supporter of the

GeMS program.”For 25 years, the DUS program has granted

approved lenders the ability to underwrite, close and sell loans on multifamily properties to Fannie Mae, retaining a risk position in the mortgages. In 2012, Fannie Mae’s DUS lenders delivered 98 percent of the company’s multifamily loan acquisitions. “It’s terrific to be part of a program like DUS where it’s almost like you are in a band together—a band that has been playing successfully for 25 years—where you all play the same tune, you all know the notes and it’s a perfect pitch every time it comes out,” Mr.

Hayward said. The program’s 25th anniversary will be celebrated at a conference with the DUS lenders in May. Mr. Hayward had his own silver anniversary with Fannie Mae last year.

Originally from Philadelphia, and a graduate of nearby Widener University, Mr. Hayward worked at Germantown Savings Bank before joining Fannie Mae in 1987. Zach Oppenheimer, currently senior vice president of Customer Engagement at the agency, interviewed him at the time. From the start, he said that he recognized Mr. Hayward’s leadership qualities.

“He is very direct and very honest,” Mr. Oppenheimer said. “One of the attributes I found appealing when I interviewed him for his first job at Fannie Mae is his candor, his honesty. He

is very straight, very direct.” And then: “He also has a good sense of humor.”

Mr. Oppenheimer added that moving from the single family division to the multifamily division, as Mr. Hayward has done in his career, is relatively rare, but that it can be very useful to learn all facets of the business. Hired as a senior MBS representative, Mr. Hayward initially planned to become a Wall Street trader. He quickly changed his mind and Fannie Mae became part of his life. In the 1990s he took roles such as vice president for Quality Control and Operations and vice president for Risk Management—

moving between offices in Philadelphia, Washington D.C. and Chicago. Between 2004 and 2010, he served as a senior vice president of Community Lending, the predecessor of the current multifamily division.

From 2010 to 2012, he was senior vice president of the National Servicing Organization, which at the time had to deal with 1.1 million delinquent loans.

“I generally like the challenges of leadership,” he said. “What I like the most is an opportunity to work with people to achieve a set of goals.”

Challenges certainly still abound at Fannie Mae, which together with the other GSE, Freddie Mac, has been under conservatorship and run by the Federal Housing

Finance Agency since September 2008. The GSEs have been pivotal in keeping the multifamily market alive during the crisis, providing up to 87 percent of the multifamily mortgages in 2009, from their historical average of approximately 40 percent. The trend shows that the market is slowly returning to normal. According to the most recent data from Real Capital Analytics, in the first half of 2012, GSEs accounted for 64 percent of all multifamily mortgage originations, down from 68 percent in 2011.

This share of the market could decrease further, following Edward DeMarco, the acting Director of FHFA’s, announcement that in 2013 Fannie Mae and Freddie Mac will have to shrink by 10 percent their business in the loan

“When you ask people here

what really gets them excited, it is knowing that you are helping the country and families to have

decent rental housing,” he said. “It might sound corny, but this

really is how people feel.”

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market for multifamily homes. New York Attorney General Eric Schneiderman and Massachusetts

Attorney General Martha Coakley are currently leading a nine state coalition calling for President Barack Obama to replace Mr. DeMarco, saying that such policies are an “obstacle to progress” for homeowners and the overall economic recovery.

However, many players in the business pointed out that banks, insurance and CMBS were already expanding their share of multifamily originations.

“I don’t think it has any impact,” said Alan Wiener, head of Wells Fargo Multifamily Capital, which in 2012 was the second largest DUS producer after Walker & Dunlop and closed deals such as the $450 million loan on Manhattan Plaza, a 1,689-unit affordable housing property at 400 West 43rd Street. The GSEs, Mr. Wiener said “are needed both in the single and multifamily side for consistency and liquidity. I think they have a segment of the market that is anywhere from 30 to 40 percent, and it’s important to the economy, particularly with the expanding number of rentals that the country needs, to have continue liquidity in the marketplace.”

Grace Huebscher, president and chief executive officer of Beech Street Capital, pointed out that the market was already going in the direction of a natural reduction of volume from Fannie Mae and Freddie Mac. On the other hand, she defined as “naïve” the idea that the market could do without the agencies, which, she said, are particularly important for “large and sophisticated transactions.” She added that they also provide liquidity in secondary and tertiary markets. Beech Street Capital, the third largest DUS producer, in 2012 closed deals such as the $70 million refinancing of The Gotham, an apartment building at 255 Warren Street in Jersey City, N.J., and the $42.5 million acquisition loan for Ventura Colony Apartments at 875 Weber Circle in Ventura, Calif.

On the other hand, Sam Chandan, president and chief economist at Chandan Economics, pointed out that there might be some risks. “There is a danger that we will see lending withdraw from smaller secondary markets that are already underserved and not from the markets that are flush with lenders,” he said. This could be avoided, he argued, with a different mandate for the agencies. “Although they are instruments of policy, they land in competition with banks and life companies. They can make an enormous contribution in supporting multifamily outcome if their mandate is narrowed to those segments of the markets that are underserved.”

Mr. Hayward doesn’t seem to see much risk. Fannie Mae’s mission, he pointed out, remains clear. “The charter of the company says that you have to provide liquidity to the market place. In any place where there is liquidity needed you need to be there,” he said. “And so just by carrying out the function that we were intended to carry out we are going to be providing financing in tertiary and secondary markets.”

The reduction of Fannie Mae’s multifamily financing footprint, he said, can be achieved “through how you price and how you set credit standards.”

A passionate fan of every sport, with a special love of baseball—as evidenced by a personalized baseball jersey that hangs on the wall of his office—Mr. Hayward recognizes the importance of team work.

“The biggest thing that I would like to happen in 2013 is that I want to make sure that this is still a great place to work, that we keep our staff excited about the work they do, and they understand that they are vital to the marketplace,” he said. “I want to make sure that I personally do everything I can do to live up to the standard of the company.” ph

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20

Feature / April 2013

by Damian Ghigliotty

The Wild

WestCommercial Real Estate Lenders Vie for a Share

of the Garden State’s Multifamily Harvest

The Garden State has become fertile ground for developers, and commercial real estate lenders both large and small are looking to get in on the action, while

others are looking to retain and expand the market share they already have.

Competition among lenders is quickly growing as more people look to rent in New Jersey, the most urbanized state in the country, 94.7 percent of whose population is centered in urban areas, according to 2010 figures from the U.S. Census Bureau. That abundance of multifamily properties just west of the Hudson River coincides with university expansions, new retail and office properties and other large real estate projects throughout the state.

Brian Whitmer, a senior director in investment sales for the New York tristate area at Cushman

& Wakefield, works out of northern New Jersey and went through the pipeline of multifamily developments he sees in the works there. Of the 22,968 units he found in the pipeline in northern New Jersey, 59 percent, or 13,538 units, are in the Gold Coast—areas along the Hudson River like Jersey City, Hoboken and Weehawken.

“Over the last two years there has been an unprecedented number,” Mr. Whitmer said of development of multifamily properties in the area. He added that several factors are driving it, chief among them improving employment conditions that have driven up occupancy, but also people looking for an alternative to Manhattan and Brooklyn rents.

“Right now multifamily in New Jersey is an extremely hot property,” said Russell Murawski, first senior vice president at Valley National Bank, which has been lending for multifamily and other commercial real estate projects in New Jersey for

TMO.0413.CS3.Feature2.indd 20 3/21/13 5:45:41 PM

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April 2013 / Feature

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over 20 years. “Younger couples in the state

look at their ability to buy a house, particularly in central to northern New Jersey where prices remain steep, and very often they realize that No. 1, they may not be able to afford it, and No. 2, owning real estate now isn’t the same as it was 15 to 20 years ago, when there was a guaranteed appreciation,” Mr. Murawski told The Mortgage Observer.

“All of the bankers know that this is a very strong market, and they’re all sharpening their pencils,” said Mr. Murawski. “We compete with the smaller community banks, and we also compete with the big banks—the M&Ts, the Chases and the Investors—on a consistent basis.”

Valley National’s commercial real estate department oversaw about $1.5 billion in assets for New Jersey as of December 31, 2012, roughly half of its total volume for New York and New Jersey combined. About one-third of the bank’s New Jersey portfolio is made up of multifamily loans.

“There are a lot of prime areas throughout the

state,” Mr. Murawski said. “We’re starting to see growth in Newark, Jersey City, Carteret and other places near the port. Our major footprint has always been northern New Jersey, and we’re continuing to see strength in that region, especially in Essex and Morris Counties.”

The Wayne, N.J.-based bank closed on a large mall acquisition in western New Jersey and a townhouse project in Morris County in January 2013, among other transactions. Valley National declined to give the names of those properties, due to client confidentiality. Mr. Murawski said

the bank plans to increase its lending for multifamily developments in the state by at least 10 percent this year.

“We brought in a couple of new people that have contacts outside of the contacts we’ve been working with historically,” he said. “In addition to that, we will continue to ramp up an aggressive sales culture, understanding that we’ve got competition and we need to be there first.”

Mr. Murawski said the bank would remain competitive on interest rates while focusing on the need to build lasting relationships with its present and future clients. “We’ve grown from a small local community bank into a fairly large institution, but we try to keep the principles of a community bank, where we know our customers, know their accountants and lawyers and everyone that’s involved,” he said. “We try to stay with the more local developers, owners, operators and managers, and we try not to get out of our own market.”

Thomas Didio, a senior managing director at mortgage brokerage HFF, said that as the

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24


growth in the number of lenders focusing on multifamily outpaces the rate at which new developments get completed, banks and mortgage brokers are being forced to compete for those deals by offering the best incentives to borrowers.

“It all comes down to price and terms,” said Mr. Didio, who co-heads the firm’s New Jersey office in Florham Park. “You’re seeing a lot of lenders compressing rates for loan terms of five to 10 years, offering open periods for prepayment and reappraising properties to lend more proceeds. The majority are structuring loans to give borrowers maximum flexibility in order to win business.”

Last year, HFF arranged financing for 67 deals in New Jersey worth $2 billion—with $800 million of that in multifamily. In December 2012, Mr. Didio and his team closed a $72 million refinancing deal for The Vanguard at The Shipyard, a 196-unit multifamily property on the corner of Hudson and 14th Streets in Hoboken. They also closed a $53 million refinancing deal for The Sheffield at Englewood South, a luxury apartment complex on both the north and south sides of Route 4 in Englewood.

“It was a new project with full amenities—structured parking, pool, workout facility, concierge—and 97 percent leased,” Mr. Didio said. “That deal was a horse race between three life insurance companies and Freddie Mac. One of the life insurance companies won the business, because they were able to give a 12-year deal with four years of interest-only.”

Two additional lenders vying for a stake of New Jersey’s multifamily market—M&T Bank and Investors Bank—said they plan to compete by providing the best client relationship services, as opposed to lowering interest rates to attract new borrowers. For Investors, that approach is relatively new, said Kevin Cummings, the bank’s president and chief executive officer.

“We’ve been working very hard to become a bank that serves its customers on a relationship basis first and foremost,” Mr. Cummings told The Mortgage Observer. “That’s the kind of reputation we want to build going forward. We hired a chief culture officer in April 2012 to help us in that transition.”

Investors, which entered the New Jersey commercial real estate market in 2005, has since established lending relationships with some of the largest developers buying and refinancing properties in the state, Mr. Cummings said. The bank’s roster of clients with multifamily and other commercial real estate holdings in New Jersey

include The Woodmont Company, Roseland Property, Hartz Mountain Industries, Jack Morris and SJP Properties.

“In 2008 and 2009, when we started to really ratchet up our real estate lending in New Jersey, a lot of the national and local players were pulling back on the market,” said Mr. Cummings, who also highlighted the growing potential of New Jersey’s urban centers on the Gold Coast. “It was like the Red Sea was parting, and it was a great opening for us.”

Investors closed a $42 million multifamily deal in Hasbrouck Heights, N.J., and two $20 million deals in Newark last year. In January 2013, the bank’s real estate team provided a $44 million student-housing loan for Rutgers University’s 12-story New Brunswick campus at 290 George Street.

“Those are the type of loans a bank our size can do,” Mr. Cummings pointed out. “Yet we’re small enough that our clients can have conversations with

our chief lending officer, our chief operating officer and myself.”

The Short Hills, N.J.-based bank oversaw a commercial real estate portfolio valued at $5.4 billion as of December 31, 2012, with $1.8 billion of that for commercial real estate in the Garden State. Drilling down even further, about $900 million of the bank’s New Jersey book is made up of multifamily loans.

Mr. Cummings said he would like to see the bank grow its New Jersey multifamily real estate portfolio by 8 to 10 percent in 2013.

“Multifamily is a hot asset class right now, and it’s one where, even though the margins are narrowing due to competitive pressures on the interest rates for these loans, it can be a very profitable business if you properly manage that interest rate risk,” he said.

One of the fastest-growing lenders in the New Jersey commercial real estate market is M&T Bank. In August 2012, M&T announced its plans to acquire New Jersey-based Hudson City Savings Bank and its 135 branches, 97 of them in New Jersey, for $3.7

billion. The acquisition is expected to close in the second quarter of 2013 and will more than triple M&T’s New York-area market share.

“With that acquisition, we’re going to build out an entire commercial bank on top of Hudson City’s thrift platform,” said Gino Martocci, M&T’s metro area executive.

M&T’s real estate team oversaw a $7 billion portfolio of loans in the tristate area as of December 2012, with “low- to mid-nine-figure commitments in New Jersey over the last three years,” Mr. Martocci said. “We’d like to double or triple that number in the next few years,” he added. “We plan to have a multibillion-dollar loan portfolio in New Jersey between commercial real estate, business banking and commercial and industrial lending. We’d also like to grow our client base from 40 or so to more than 400.”

Last year, the bank closed a $39 million deal with Hillier Properties for the 153-unit senior multifamily apartment building Copperwood at 300 Bunn Drive in Princeton. The property is under construction with an expected completion date in mid-2014.

“Right now we’re putting many of the bank’s resources into the New Jersey market in order to develop our business out there,” said Mr. Martocci. “We’ve been operating out of a relatively small commercial real estate office in New Jersey for about five years. We’re about to go from that office in Saddle

Brook and our commercial and industrial lending office in Princeton to 97 branches and offices in the state by the second quarter of this year.”

Due to M&T’s strong focus on relationship banking, Mr. Martocci said he and his team are ready to “finance anything our clients do that makes sense for them and for us,” whether it’s multifamily, retail, industrial or office space. Multifamily will be a focal point for the bank’s New Jersey team, he said, though it will likely constitute a quarter to a third of its business.

M&T’s competitors in the state include Wells Fargo, Valley National, Investors Bank and PNC Financial Services Group, said Mr. Martocci. PNC, which oversaw $305 billion in total assets and $186 billion in total loans as of December 2012, declined to speak about its commercial real estate operations in New Jersey.

Outside of the banking arena, the commercial mortgage brokerage firms are locked in competition as well.

“We’ve been very successful in the multifamily business,” said Israel Schubert, a managing

The Sheffield at Englewood South


New York 212 925 6692Palm Beach Gardens 561 622 7022Austin 512 327 0101Newport Beach 949 706 3001www.missioncap.com

Mission Capital Advisor’s Debt and Equity Advisory team has raised more than $8 billion of capital for real estate owners and developers nationwide during their careers. Mission Capital is one of the leading capital markets advisory firms in the country, having completed more than $55 billion of financing, loan sale and Fannie Mae / Freddie Mac transactions since 2002. Contact Jordan Ray, Jason Cohen, Ari Hirt or David Tobin at 212-925-6692 or email [email protected] to discuss your debt and equity financing needs.

FROM DEBT & EQUITY CAPITAL ADVISORY...

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TO CRE, C&I AND SINGLE FAMILY LOAN PORTFOLIO SALES

Exclusive Financial Advisor to M&I Bank on the Sale of 23 Portfolios of Performing

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Sub-Performing and Non-Performing Mortgages Secured by C&I, Office/ Warehouse, Industrial/Warehouse,

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Non-Performing Commercial Mortgage Secured by a Retail

Property in Omaha, NE

$4,279,000,000Unpaid Principal Balance

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The Gem Hotel Hotel Renovation Upscale Boutique HostelBoutique Hotel Portfolio

Acquisition of Fractured Residential Condominium Units & Rental Apartments

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Acquisition & Completion of a Rental Apartment

Building

$130,000,000Construction Debt and JV Equity

$27,000,000First Mortgage & Mezzanine Refinancing

$15,700,000Non-Recourse Renovation Financing

$12,050,000Non-Recourse Acquisition & Renovation Loan

$19,750,000Acquisition & Renovation Loan

$100,000,000Debt and JV Equity

$16,500,000First Mortgage Refinancing

$19,500,000JV Equity & Non-Recourse

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Liquidity-Ad_Ideas_2.indd 1 2/25/13 11:28 AMUntitled-8 1 3/20/13 11:22:41 AM

26


director who heads Meridian Capital Group’s New Jersey office in Iselin. Last year the firm relocated its 35-member mortgage team there to a newly built-out 10,500-square-foot office space due to a rapidly growing volume of transactions.

Meridian, one of New York’s leading commercial mortgage firms, arranged financing for 331 deals in New Jersey last year valued at $1.6 billion, up from 181 deals valued at $600 million in 2010. Over those two years, Meridian’s multifamily origination volume for the state nearly tripled, rising from $450 million to $1.2 billion.

Last year, the firm arranged $50 million in permanent financing for the recently constructed Harrison Station luxury multifamily building located at 300 Somerset Street in Harrison, N.J., as well as a $32.9 million loan for the 93-unit Berkshire at The Shipyard multifamily property located at 1401 Hudson Street in Hoboken.

“We’re always looking to grow our lending, and we’re geared up for it,” said Mr. Schubert. “We have a keen understanding of this market. We know

who the players are, we know what they need, and we know how to get it.”

The rise in competition among banks and mortgage firms vying for the lion’s share of New Jersey’s multifamily market has led to more losses for many of the players involved, said Mr. Cummings of Investors Bank, who added that the bank had lost out on deals in recent years due to increased competition.

“We are currently renegotiating with one of our largest multifamily borrowers, who is looking to refinance an existing $30 million loan,” Mr. Cummings said. “The thing that is holding him up is the contractual prepayment fee. He has an offer from a conduit with Freddie Mac at a reduced 10-year rate.”

Freddie Mac is the “the 800-pound gorilla” in the room, said Mr. Didio of HFF. “They are a challenge for everybody. They can do the biggest loans, they are very

competitive, and all they do is multifamily, so they know how to underwrite and they know operating expenses. They probably know operating expenses better than some of the owners do.”

Mr. Murawski of Valley National noted the breadth of competition in New Jersey among lenders—including Freddie Mac—without seeing a need to get too specific. “Every transaction we look at,” he said, “has more than one bank involved.”

Harrison Station, 300 Somerset Street in Harrison, N.J.


The Stoler Report-New York’s Business Report

Building New York-New York Life Stories

Tuesday: 2:00 AM, 11:00 PM Wednesday: 8:30 AM, 2:30 PM, 10:30 PM Friday: 5:30 AM Saturday: 12 Midnight Sunday: 10:30 AM Airing on CUNY TV in New York City

Monday: 10:30 AM, 4:30 PM. 10:30 PM Wednesday: 5:30 AM Thursday: 11:30 PM Saturday: 12 Noon Sunday: 12:30 AM & 6:00 PM Airing on CUNY TV Building New York-New York Life Stories Airs around the United States on Tuesday evenings at 9 PM, 12 Midnight on JLTV-Direct TV-Channel 366 Channel 120 in New York City & Northern NJ NJ & Philadelphia, 288 Available on the Internet: www.thestolerreport.com www.stolerreport.com www.michaelstolertelevision.com www.michaelstoler.com www.cuny.tv www.buildingnynylifestories.com www.youtube.com www.itunes.com www.newyorkbusinessreportwithmichaelstoler.com

Michael Stoler, 646-442-0717 [email protected] [email protected] [email protected]

The Stoler Report-New York’s Business Report

Building New York: New York Life Stories

Untitled-19 1 3/21/13 12:37:26 PM

28

Culture / April 2013

Tune In, and

Out» We undoubtedly travel less than you do. But

recent jaunts to the Commercial Real Estate Finance Council's January Conference in Miami Beach, Fla., and the Mortgage Bankers Association's CREF/Multifamily Housing Convention & Expo in San Diego made it abundantly clear that air travel is one noisey proposition.

Our research suggests that screaming children—whether yours or someone else's—overlaid on the hum of a jet engine can create a persistent din. Not to mention a splitting headache.

Enter noise-canceling headphones. By sampling the ambient noise (better them than you) through an external microphone and producing a corresponding anti-noise signal, the gadgets effectively “cancel” that sound out. It can mean a quieter flight, train ride or—since the ones we have chosen all feature inline mics—phone call.

The Bose QuietComfort headphones were introduced back in 2009. The company's latest version includes an inline remote and mic cable, producing what Bose claims are its quietest headphones ever. Harman Kardon’s NC headphones use what the company calls the “proprietary HARMAN closed-loop, active digital noise-canceling technology,” which, we’re told, was developed for luxury cars. Even if their battery runs out of juice, they’ll still work when connected via a bypass cable. Audio Technica’s offering, the ATH-ANC9 QuietPoint headphones, reduce environmental noise by up to 95 percent. They feature “Tri-Level Cancellation” for airplane, study and office. And the Monster Inspiration headphones also offer continuous play, even with a dead battery, as well as high-definition sound and optional interchangeable headbands.

Happy and quiet travels await when you put these headphones on and take off.

Clockwise from top: Bose QuietComfort 15 ($299.95); Harman Kardon NC ($299); Audio-Technica ATH-ANC9 ($349.95); Monster Inspiration ($329.95).

TMO.0413.CS3.CULTURE.indd 28 3/21/13 5:44:06 PM

UPCOMING MORTGAGE OBSERVER ISSUES:

MAY Construction Financing

4/18 4/22 4/30

JUNERetail Lending

5/16 5/20 5/28

OCTOBER Office Lending

9/12 9/16 9/24

SEPTEMBERHotel Lending

8/15 8/19 8/27

NOVEMBERTwenty on the Rise

10/17 10/21 10/29

DECMEBERPrivate Banking

11/14 11/18 11/26

Issue Reservations Materials Issue Date Issue Reservations Materials Issue Date

JULY - AUGUST Top Mezzanine Lenders

6/13 6/17 6/25

The Mortgage Observer

The Mortgage Observer is a monthly glossy magazine inserted

into 12,000 copies of The Commercial Observer. With profiles

of industry giants, mortgage charts tracking the most active

lenders, and contributions from columnists Joshua Stein and

Sam Chandon, The Mortgage Observer is your go-to source

for the most comprehensive coverage of the Commercial real

estate finance industry.

The Insider’s Guide to the Commercial Real Estate Financial Industry

The Mortgage Observer is a monthly glossy magazine inserted

into 12,000 copies of The Commercial Observer. With profiles

state Financial Industry

CMBS ISSUE ON WAY FOR 1515 BROADWAY

DAVID TWARDOCK’S POST-PMCC GAME PLAN

JOSHUA STEIN GIVES AN UPDATE FROM THE TRENCHES

TMO.0313.CS3.COVER.indd 1 2/28/13 6:01:17 PM

Mortgage Observer WeeklyCompanion to The Mortgage Observer, providing industry

updates and news to 12,000 real estate insiders. Mortgage

Observer Weekly is a new weekly PDF newsletter emailed

directly to industry players every Friday morning.

To receive Mortgage Observer Weekly, please visit

commercialobserver.com/mortgage-observer-weekly-signup

For advertising information please contactBarbara Ginsburg Shapiro, Associate Publisher, at 212-407-9383, [email protected].

Untitled-14 1 3/21/13 10:37:46 AM

30

Q&A / March 2013

By Carl GainesThe Mortgage Observer: How did you get your start in the industry?

Steve Kohn: My first job in real estate was with Reliance Development Group, which was a subsidiary of Reliance Insurance in Philadelphia. The president of Reliance Development Group was a gentleman named Henry Lambert, who still is very active in real estate here in New York City. He hired me, and I actually worked for his other business—he had a food business called Pasta & Cheese. I worked for the summers at Pasta & Cheese, and then when I graduated college, I knew that he had a big job in real estate.

What were you doing for him?I was working on a development project in Center

City, Philadelphia, which was just under construction when I started there.

And Sonnenblick Goldman?I joined Sonnenblick Goldman in 1996. I was a

managing director, and I became president in 2000.

Once Cushman & Wakefield acquired the remaining interest, were you hired into your current position?

Well, I was already with the company, so they bought the company and I came with it. I wasn’t really hired again. I was president at Sonnenblick Goldman and became president of Cushman & Wakefield Sonnenblick Goldman—just kind of a continuation, but with different ownership.

What types of deals are you working on the most now? Are you doing lots of refinancings? I know that you worked on 71 Smith Street and 100 Church Street ...

... and 1 Court Square in Long Island City. Yeah they’re all different, so our group, what we do is actually what our name is. We raise debt and equity financing. And when I say equity financing, that’s

really arranging joint ventures between investors and owner-operators and developers who require equity capital. Or it could also be a joint venture between two large investors, and we arrange debt financing, which could be either acquisition loans, construction loans, refinancing permanent loans, mezzanine loans, etc. So it’s arranging all types of financing. And I also work very closely with the investment sales team here in New York on New York investment sales.

When you arranged $230 million for 100 Church Street last summer, you said it was one of the most competitive deals you had worked on recently. And now?

They’re all competitive now. That was a little earlier. Right now the debt market is so liquid and flush with cash and demand for mortgages that right now almost everything that we’re working on is very competitive. Lenders—whether CMBS lenders or life insurance companies or U.S. and offshore banks—it’s a very competitive lending environment right now. And the loan sizes have gotten larger, too.

Is the equity side equal to the debt side in terms of the time you spend working on each?

Yes I would say it’s probably about equal. It varies year to year.

What’s your outlook for the rest of the year? Clearly I’m very optimistic about New York. I

think there are still parts of the country that are lagging—some of the secondary and tertiary markets. But most of the major markets, which would be Boston, New York, D.C.—well, D.C.’s a little flat right now, for obvious reasons—San Francisco and L.A. and Seattle—which kind of goes in and out of that top five markets—I’m very optimistic [about]. We see corporate earnings have been pretty strong; it looks like we’ll have low interest rates for at least another year or two based on everything you read. There hasn’t been much new construction to create supply problems, so I’m fairly positive. We obviously would like to see more jobs created beyond New York.

What do the secondary and tertiary markets need? A robust CMBS market?

Well that certainly helps, but at the end of the day, you still need job growth, job retention. Some of those markets will have it, for example like Austin, Texas, which is performing very well. Other markets may not have the type of industry that’s growing right now, and it’s going to be a little slow for a while. What happens is that they start to attract capital, as the primary markets get so expensive. Sometimes those markets have to wait until that happens.

What makes the services that you provide on the debt side different?

I’m not sure that it’s different. There are many good firms out there. We’re certainly one of the top firms, in my belief. I think what makes us different than some is that having the ability to draw on some of the other groups within Cushman & Wakefield gives us tremendous advantage.

You work with all different lenders? Life insurance companies, banks—both domestic

and offshore—conduits, finance companies, mortgage REITs. We’re kind of indifferent as to where the debt gets placed. We just want to get the best terms we can get for our clients. There are some firms that represent lenders, but we don’t do that, because we feel that’s a bit of a conflict.

Any of those lenders pulling ahead?CMBS is definitely growing more rapidly than

the others. Banks seem to be in more of a 50 percent range of the market, and then the balance seems to be split between CMBS and the life companies. That’s where you see some movement.

Steve Kohn

Steve Kohn President, Cushman & Wakefield Equity, Debt & Structured Finance GroupThe Mortgage Observer met with Steve Kohn, head of one of three service lines under the capital markets department at Cushman & Wakefield. Mr. Kohn shared his outlook for 2013 and details about the types of deals his growing group is busy working on.

TMO.0413.CS3.Q+A.indd 30 3/21/13 5:52:41 PM

Register by April 30th to save $150 off the on-site price.

For more information visit www.icscrecon.org

May 19 – 22, 2013Las Vegas Convention CenterLas Vegas, NV

By the Numbers

31,000+Attendees

1,000+Exhibitors Educational Sessions

And if that isn’t enough…

more reasons you must be at RECon21

Bruegger’s Enterprises, Inc. l Cabela’s Inc. l Carlson Rezidor Hotel Group l Choice Hotels International, Inc. l Corner Bakery Cafe l Dessange International Inc. representing Fantastic Sams, Camille Albane Paris & Dessange

Paris l Fazoli’s Restaurants l Genghis Grill Franchise Concepts, LP l International Franchise Association l Java

Detour l The Joint l Menchie’s Group, Inc. l QuikTrip Corporation l Retrofitness LLC l Salvation Army l Save-A-Lot

Food Stores l Sprint l Starbucks Coffee Company l Twin Peaks Restaurants l The Vitamin Shoppe l Wave Loch, LLC

Visit the New Retailer Square

Stop by the South Hall Lower Level to meet with these 21 retailers.

20+

By the Numbers

Untitled-1 1 3/20/13 4:59 PMUntitled-13 1 3/21/13 10:13:11 AM

4The New York Real Estate Institute is hosting

its second annual fi nance expo. There will be over 1,500 professionals from within the industry present, so you’ll be the only one in the o� ce if you don’t attend.

Second Annual NYC Finance Expo, New York City Bar Association, 42nd West 44th Street, 8am to 5pm. Visit www.nycfi nanceexpo.com for more information.

10-12It’s never easy complying with new rules. Join the

American Bankers Association at this conference, billed as “the only real estate lending conference designed by bankers,” to discuss the changes that are to come as the Dodd-Frank reform rules roll out over the next few weeks.

American Bankers Association Real Estate Lending Conference, Hyatt Regency New Orleans, New Orleans, La. Contact Gloria Pritchard-Becker at [email protected] for more information.

14-17Feeling insecure? It’s time to check out the

Mortgage Bankers Association’s Technology in Mortgage Banking Conference & Expo. You’ll get a jump on updating your digital life and

get a grasp on IT security best practices and Consumer Financial Protection Bureau rule implementations.

MBA’s National Technology in Mortgage Banking Conference & Expo 2013, The Westin Diplomat, Hollywood, Fla. Visit events.mortgage-bankers.com/tech2013/ for more information.

18Atlanta-based law fi rm Morris, Manning &

Martin plays host to this Commercial Real Estate Finance Council after-work seminar. The program starts at 5:30 p.m., so if you leave in the morning

you might be able to miss the whole day of work. Panelists include executives from HFF, Regions Bank and ING Investment Management.

CRE Finance Council: Borrower 2.0 – Lender Perspective on Borrower Profi les and Issues in Today’s Market, The City Club of Buckhead, Atlanta Financial Center, 3343 Peachtree Road, Suite 1850, Atlanta, Ga., 5:30pm to 7pm.

Bridge the gap between mezzanine and bridge lending in commercial real estate and expand your waistline at the same time at the Mortgage Bankers Association of New York’s extended bu� et lunch discussion. Joshua Stein moderates.

Mortgage Bankers Association of New York, Bridging the Gap: Mezzanine Financing, Club 101, 101 Park Avenue. 11:30am to 2pm. Visit www.mbany.org for more information.

24Head to the nation’s capital to join the Urban

Land Institute and principal instructor Robert Rajewski, director of fi nance at Continental Realty Corporation, for an intensive program on issues related to multifamily housing development and investment.

Urban Land Institute: Multifamily Housing Development and Investment, ULI Headquarters, 1025 Thomas Je� erson Street NW, Suite 500 West, Washington, D.C. Contact David Mulvihill at (202) 624-7122 or [email protected] for more information.

32

The Sked / April 2013

The Sked: April

ARCA

ID/U

IG V

IA G

ETTY

IMAG

ES; J

ARD

ENBE

RG/F

LICK

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The New York Real Estate Institute is hosting its second annual fi nance expo. There will be over 1,500 professionals from within the industry

TMO.0413.CS3.TheSked.indd 32 3/21/13 5:54:10 PM

Register today www.crefc.org

A NNU A L C ONF E RE N C E 2013C R E F I N A N C E C O U N C I L

J U N E 1 0 - 1 2 N E W Y O R K M A R R I O T T M A R Q U I S

Untitled-14 1 3/21/13 10:35:40 AM

ONE FIRM

$141,000,000 Debt

Multifamily New York

$54,000,000 Refinance

Office Washington, DC

$37,000,000 Acquisition & Renovation

Hotel Toronto

$65,000,000 Debt

Retail Condominium New York

$60,000,000 Acquisition & Renovation

Hotel Tampa

$55,000,000 Refinance

Hotel New York

WWW.ACKMANZIFF.COM

Untitled-11 1 3/20/13 3:33:59 PM

the mortgage observer april 2013

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