I've been asked by 3-4 people to do a Q&A on CRE lending. If the questions keep coming I will keep answering them.
As a background, I have spent most of my career dealing with capital markets, with acquisition, asset management duties as well. My most current position is with a Lender, we work on large structured transactions with sponsor's like Brookfield, Blackstone, REITs, et. al. I started my career with a large national brokerage on the debt and equity side. I'd love to help anyone with a more thorough understanding of the debt markets and how pricing and structure is decided behind the scenes. What differentiates products on the risk spectrum, how pricing plays into this, and overall how so many different lenders can price and structure the same deal differently. I can answer other questions as well, pertaining to debt and equity.
@AndyLouis to help promote and see if enough people want this.
Have you done any work structuring synthetic leases? Any high level thoughts on them? What has been the most complex transaction you’ve worked on and now did you get it done?
Mr. C.R.E. Shervin,
1. Kind of a loaded question, but what resources would you recommend touching on or reading to gain a comprehensive understanding (from an introductory perspective) of how DCM/ECM and RE capital markets commingle? How did you personally go about learning this when you were first starting?
2. Where should I start and what should one focus on in order to learn how real estate securitization works?
3. Feel free to skip this one if you want, but just wanted you to please elaborate on what you meant at the end by "(1)What differentiates products on the risk spectrum, (2)how pricing plays into this, and overall (3)how so many different lenders can price and structure the same deal differently".
Thanks in advance boss!
What are the strengths and weaknesses of various sources of CRE debt (Bank, CMBS, LifeCo, Debt Fund, Mortgage REIT, CRE CLO, Fannie/Freddie, etc.)?
great question, answers frothcoming.
what are typical borrower/guarantor covenants?
great question, there are several main ones such as debt yield covenants and net worth and liquidity covenants. But more answer will be forethcoming in podcast and Q&A
I'd love to hear whatever you have to say on the space and discuss a full deal top to bottom if possible. Would also love to hear how you'd evaluate names in the space now/what leading indicators you'd monitor for the health of the CRE space, and the trade off of higher rates increasing interest income vs the downward pressure on loan volumes and credit quality
What's your approach on identifying and structuring around risks, when screening/sizing and closing deals? Does that approach change once a loan is closed? What about when a loan is a year or two into the term and something like COVID happens or there's a big change in the biz plan that might lead you to restructure the loan?
Can you speak to the experience that comes with working at a debt / equity placement shop? Specifically:
1) Deal exposure
2) Problem-solving abilities
3) Relationship building
4) Production
Bump for interest.
How do lenders size to a DSCR and debt yield requirement? For construction loans right now (I’m in development), we keep hearing lenders are now sizing to a 9-10% DY. What math are lenders using to back into this debt yield? Also, where does the 1.25x DSCR number come from (number I see most often)?
I work in construction lending at a bank. We are sizing loans to roughly the requirements you listed. The way we do this is by underwriting the sponsors business plan and applying our assumptions to derive the NOI of the project. Then we size the loan to back into say a 10% debt yield.
Having our underwritten NOI will also help us back into a loan size based on our DSCR requirements which for example could be a 1.25x coverage on an amortizing basis
Got it, thank you. My question is, how are lenders coming up with this 10% debt yield figure. What is the math behind this?
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