So you want to work in CRE Debt? Here are the options...

I'm currently taking a class thru NYU (RE Capital Markets) that has both blown my mind/gotten me particularly interested in debt. While I work in agency lending, I was completely unaware of both the complexity and career paths available within this part of the the industry (our last class covered subordinated debt and mezz lending).

Below are some types of positions I'd like to eventually venture to and am curious about the outlook of each:

  • analyst at debt fund/mortgage reit

  • origination at a CMBS shop

  • debt placement analyst

  • special servicer (could be particularly interested with downturn looming...)

Appreciate any input- thanks!

 

Would you consider $50-60k base + percentage of fees from team a reasonable offer from the major brokerage shops (CB, East, JLL)?

What kind of comp structure do you have?

 

Like you said it's largely circumstantial. The below isn't REIT specific but hopefully you'll still glean something useful from it.

All the life company borrowing I've dealt with has been through agency. These are usually high quality assets and experienced borrowers. You typically get really good pricing and its non-recourse. The non-recourse is usually the main distinction between what you're able to get from your commercial bank balance sheet lender. Pricing will also vary by market classification with the agencies and pricing really falls off below standard market. But you can get 80% leverage through the agencies with a 1.20 to 1.25 dscr in top and standard markets.

CMBS with risk retention (from what I've seen) is putting constraints on leverage. I'm seeing 65% maybe 70% ltv but the asset can be ugly and so can the borrower. It depends on the asset type too. Not a lot of love for hospitality lately, or multi family. There's seems to be a lot of interest in overnight care ALF type assets.

Like I said hope this helps.

 
4thandDollarSigns:

(I'm excluding more mezz pieces or less traditional Prudential type money, etc.)

You do realize Pru is a life co, right?

4thandDollarSigns:

I get size, asset class, leverage, etc. are all factors but I'm looking for specifics about what characteristics differentiate the options

A big distinction in the debt sources you've listed above is unsecured versus secured financing. A dedicated REIT guy could better answer your question but to get you started, think about 1) pricing, 2) term, and 3) covenants, or to frame it another way, 1) economics, 2) your current maturity ladder, and 3) the level of flexibility you want. Look up REIT bond spreads and credit ratings. Look up some mortgage broker websites for the secured stuff and see what kind of terms they advertise. You'll choose debt based on A) what you're optimizing for, as limited by B) different debt sources' willingness/desire to finance you and your property.

 

spencerassess IRRelevant

Fair point. To narrow things down, could you focus on my 4th bullet: When is each type typically used? (i.e. small vs institutional deals, core vs value add, multifamily vs office, etc.). I often see people glance over an OM/model and make comments like "yeah, this is definitely a bank loan deal" or "this has CMBS written all over it" and don't understand why/how they're reaching these conclusions so quickly.

 
Best Response

I'll chime in on a few things, but this is still terrifically broad, and I still recommend you do this the old fashioned way (Google) (yes, that's irony).

Let's say there are stable deals and value-add deals, and that there are small (~$30mm) deals for a total of six types in this illustration.

For starters - CMBS doesn't like volatility, doesn't really do future funding, and doesn't really do complication with regard to the structuring in any way. The lender (or, really, the "servicer") has approval rights over most large leasing decisions or capital expenditure decisions, and often times there's even a lockbox for the rent whereby the bank needs to "release" the funds to you. Of course, this can be a headache if the property needs work or if there's major rollover during the term of the loan. Why would you, as a sponsor, put yourself through this? Because, for one, you get better terms. Lower interest, longer (or no) amortization, etc. Secondly - and perhaps more importantly - CMBS loans are almost always non-recourse to the sponsor, which means that if things go bad at the property, you always have the option to just give the keys over to the lender and walk away, and they have no right to go after you personally. So of the six property types here, CMBS are most common for stable deals, and typically they're "medium" sized, as defined above, though it's not uncommon for there to be a few loans that are larger and a few that are smaller.

Why would you get a "balance sheet" loan instead of a CMBS loan? 1) Flexibility, as mentioned above. 2) You're doing some value add stuff, or your property isn't yet stabilized. 3) You'll need (or you want) more funding down the road when X happens. 4) You don't mind the personal guaranty 5) Your property doesn't warrant a loan of $2mm or more.

For stable "core" properties, like NYC office buildings, the structuring gets more complicated. For starters, a lot of these are unlevered for a variety of reasons. Those that do have leverage, the funding comes from a variety of sources - insurance companies, high net worth families, several banks, several CMBS loans side-by-side ("pari passu").

That's all I've got for now - but that should get you started. (I still recommend you google all of these things.)

www.assessre.com
 

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