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Navigating Today's Lending Market

Navigating Today's Lending Market. Tom Detienne David Woida Investors Community Bank NorthMarq Capital 860 N. Rapids Road 325 N. Corporate Drive, # 180 Manitowoc, WI Brookfield, WI (920) 686-5626 (262) 923-1991 tdetienne@investorscommunitybank.com dwoida@northmarq.com. Agenda.

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Navigating Today's Lending Market

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  1. Navigating Today's Lending Market Tom Detienne David Woida Investors Community Bank NorthMarq Capital 860 N. Rapids Road 325 N. Corporate Drive, # 180 Manitowoc, WI Brookfield, WI (920) 686-5626 (262) 923-1991 tdetienne@investorscommunitybank.comdwoida@northmarq.com

  2. Agenda • Industry Summary • Recent CMBS Market Slowdown • Where are Rates? • Underwriting Changes • Examples • Q & A

  3. Industry Summary • Expanded options for CRE finance • Conventional Banks / Portfolio Lenders • Conduit Lenders (CMBS) • Insurance Companies • GSE’s (Fannie Mae and Freddie Mac) • Private Money Lenders • Mezzanine • Credit Tenant Lease (CTL) • Equity

  4. Key Differences Between Lenders • Banks – Portfolio Lender, flexible terms, good $’s, shorter terms, typically recourse • Conduits – Securitized Lender, little flexibility, aggressive terms • GSE’s (Freddie & Fannie) – Could be either portfolio or securitized, flexible terms, attractive rates • Life Companies – Portfolio Lender, very flexible, conservative terms • Private Money – Portfolio Lender, flexible and attractive terms, very selective on deals

  5. Holders of Commercial and Multifamily Mortgage Loans • Record Levels of Just Over $3.0 Trillion of CRE Debt Outstanding in 2007!

  6. CMBS Spreads • 1998 – Russian Bond Crisis CMBS spreads jump from 150 to 300 basis points • Current Spreads - widened to all-time highs

  7. What’s Going On in the CMBS Market? • Loss of Investor Confidence - Results in billions of dollars in Commercial Mortgages being held on books waiting for Investors • Risk Adjustment – Increased spreads of over 100 basis points • 200-250 bps over 10-year Treasury • 130-180 bps over 10-year Swap Spread • Current Market Rate Re-established at 6.35%-6.85% (Fixed 10-year Loans) • Borrower Impact – Underwriting Standards have tightened • Debt Cover Ratios remain at benchmark 1.20 • Interest-Only periods reduced or eliminated • Ultimate impact = lower loan proceeds in today’s market • Competition - CMBS spread increases have made Portfolio Lenders (Life Companies, Fannie Mae & Freddie Mac) more competitive

  8. Federal Reserve • Not a Bailout: The Fed is in a position to defend a cut in the fed funds rate based on weak economic data as opposed to lowering the federal funds to address the liquidity and credit problems

  9. Yield Curve Source: Federal Reserve

  10. How Did We Get Into This Mess? • A Combination of factors… • The Fixed Income Market has driven a majority of the spread widening • Unlike in the past, the CMBS Market itself has contributed to the recent risk adjustment

  11. Corporate Bond Spreads Source: Federal Reserve Commercial Real Estate Impact: Life Companies primarily set interest rates based on corporate bond yields, therefore mortgage spreads for this sector have seen increases in the range of 30-60 basis points

  12. CMBS Outlook • Improved Long-Term Outlook • Commercial Real Estate Fundamentals Remain Solid • Rental growth still being seen in many markets • Higher cost of building helps to moderate supply • Job growth remains stable • Companies strong balance sheets • CMBS Community Responded Proactively to the Situation • Significantly more conservative loan underwriting • Result is lower supply in the fourth quarter • Current Spreads offer tremendous value – increasing future demand for Commercial Mortgage Backed Securities

  13. Capitalization Rates * 7 to 10-yr fixed rate conduit loans for properties 5 mil+

  14. Where are Spreads Today • September 2006 • Indexed to LIBOR Swaps vs. Treasuries

  15. How Does All This Affect Underwriting • Cash flow (Debt Service Coverage) • Leverage (Loan-to-value) • Interest only periods • Reserves / Escrows • Costs of issuance • Personal guarantees • Prepayment penalties • Assumptions

  16. EXAMPLES / Q&A

  17. Sources • MBA Website • Federal Reserve • Real Capital Analytics • REIS

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