Archive for October, 2007
Commerical Loan Assumptions – The Hard Truth…
Posted by: | CommentsHowdy from Cedar Crest, NM….
I was shocked to see snow on the ground this morning….I am not ready for snow. The summer was way too short for me this year. I am usually up for the winter…but I am gnashing my teeth having to deal with the cold.
Anyway….The Grassland Team just closed on a shopping center that we have worked on for a long time. There were times that we felt the deal was going to die. There were a lot of reasons…but I want to share with you a few key learning points regarding commercial loan assumptions.
The assumption process brought back a memory to me regarding the word ASSUME…….
In the 1976 movie The Bad News Bears, the coach (Walter Matthau) points out the folly of assumptions. He writes “ASSUME” on the chalkboard, then adds slashes
“ASS/U/ME” while saying, “When you ASSUME—it could make an ASS out of U and ME!” Ohhhhh….how true this is….
Just in case you are wondering…..Assumable Commercial loans have the following attributes….
1) Prepayment penalties. Assumable loans give the owner a way to sell his/her property by allowing the potential buyer to assume the existing loan and not have to pay penalties for paying the loan off early. It is a selling point for the lender to convince the buyer to get the loan….”No worries…it is assumable.”
2) The party assuming the loan will have to QUALIFY….so….it is never a slam dunk and usually requires more to qualify…which I will explain below.
In early 2007 we (Grassland Investments) were under contract to
purchase a 54,000 sqft shopping center in El Paso, TX. What was really
attractive about the deal was a low down payment and the ability to
assume the existing loan at a low interest rate.
If you notice…especially if you are getting deals from brokers and agents, tag lines for some deals say “Hey…it has an assumable loan at a low rate.” The buyer’s perspective is “I can walk into an existing loan and tada!…..I am the new owner of a great property at a low rate”….right? Well….let me explain a few things to you based on my experience regarding loan assumptions.
1) There is no incentive by the current lender to let anyone assume the loan especially if the loan is in good standing (performing). This is something that I found out the hard way. The hard truth was explained to me by friend and lender, Brandon Haddon of Omni Credit. I told Brandon that the lender was taking it’s sweet time and really being slow to help us get the deal done. Brandon’s response was “If the lender has a performing note…why in the world will the lender be in any rush to help a potential buyer assume a loan?” Brandon was right. The truth of the matter is, the lender is in a great position and really does not care about your closing date or anything for that matter. The lender has already loaned the money. The loan is getting paid. What is the rush?
2) When assuming a loan, make sure you have a clause in the contract stating that the purchase contract is subject to the lender following through on the assumption and that the closing date depends on the lender’s approval of the assumption. This was not a problem with our deal since our seller was very understanding of what we were facing. BUT, I can see where in other deals the assumption process can kill a deal. The last thing you, the buyer, wants to deal with is defaulting on the financing deadline because of the lender. Yes…there is the “financing contingency” BUT….you want to be specific when it comes to dealing with an assumption.
3) Be prepared to jump though hoops. Here is where I would like to quote my friend Tom B. “You are not paranoid if you’re right.” I may be totally wrong here….and a tad bit paranoid…..but I have never had to provide so much information, and fight so many frivolous request before with any loan I have done. There was a point where our attorney, Michel Powlen of the Schinner law group (www.schinner.com) had to get involved to debate ridiculous requirements. It was to the point where we felt the lender was trying to use a heavy hand to convince us to walk away. Paranoid?
4) Prepare you investors. Our biggest concern with the timing of the assumption was our investors. Although our investors hung in there for the wait….holding on to our investor’s money while we were waiting on the lender was nerve racking. When we were finished raising the funds for the shopping center, we were told that we were weeks away from closing. Weeks turned into months. Fortunately, our investor held strong and we did not lose a single investor. Here is where the lesson of the word ASSUME played a big role. There is a story on how we were able to keep our investors in the deal but I will save that for another blog.
I am sure not all commercial loan assumptions are difficult….BUT….next time, I will not be swayed by the words “assumable” as a positive attribute of a property. A loan that is assumable will not keep me from looking at the deal but at least I will be prepared for what is in store.
Until next time……rob
Rob’s Blog – What To Call It? Credit, Confidence Or Confusion Crisis? By Mark Heschmeyer
Posted by: | Comments
What
To Call it? Credit, Confidence or Confusion
Crisis?
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Greeting from Cedar Crest, NM…..it is great to be off the road for a while. I would be okay if I did not have to travel again this year. I hope that is the case!
Anyway….I have received a lot of emails regarding what is happening to…or in our economy….So I thought I would dig around and see what the "experts" in the industry are prognosticating. Needless to say…opinions vary.
Now…I have been doing business with a friend from Omni Credit by the name of Brandon Haddon (bh@omnicredit.com). Brandon is a commercial lender and has saved me on a few deals….He financed a mobile home park that now one else would finance. Brandon has also given me advice on deals I was working on. Most of all, Brandon is a philosopher…that is his passion. Brandon’s philosophy regarding business pours through in the way he deals with his clients and it is a big step up from most lenders.
I asked Brandon to write something about his view of the economy. His reply was…"I cannot top Sam Zell." So Brandon emailed me this article written by Mark Heschmeyer quoting Sam Zell and others….
Looking
for Signs the Worst May Be Over, Investors Seem Content To Wait it
Out
While investor
enthusiasm sent capital markets soaring after the Federal Reserve Board cut the
federal funds rate last week by 50 basis points to 4.75%, the full impact of the
dramatic action is still not at all clear. The latest numbers this week on home
building, real estate sales and business indices continued to show worsening
conditions. But, adding to the uncertainty, those numbers tally events and
opinions prior to the rate cut.
All of which has prompted a lot of
discussion about just what the markets are dealing with: a real credit crunch?
Investor uncertainty? Or a lack of confidence?
In a wide-ranging lecture
at Wharton School of Business at the University of Pennsylvania, Sam Zell, the
master real estate investor (and current media tycoon) who built a fortune on
real estate cycles, said he believes the current turmoil in financial markets is
more an emotional reaction to yet another period of excess rather than a true
credit collapse.
Zell said markets currently are spooked by problems
with US subprime lending. However, they still have capital to deploy, unlike during
other real estate busts when financing could not be arranged at any price.
"We’re not really in a quote ‘credit crunch.’ I think what we are in is
a ‘confidence crunch,’" said Zell, who funds the Samuel Zell and Robert Lurie Real Estate Center at
Wharton. "I would argue the excess liquidity that existed eight weeks ago still
exists today. It has a different risk premium on it, but the actual amount of
liquidity has not changed."
Zell said the slump should come as no
surprise. "Over the last three years, people were flippant. They bought anything
they wanted and were proud that they didn’t do due diligence. I think they have
all been chagrined and are scared out of their minds."
Zell predicted
that markets would stabilize soon, although they will become more risk averse
and less leveraged than in recent years. Zell added that going forward it would
not be possible to replicate the Blackstone deal earlier this year that bought
out his Equity Office Properties for $39 billion in the largest leveraged buyout
in history.
David Doupe, West Coast managing director for Jones Lang
LaSalle’s Capital Markets Group, who has also seen a few real estate cycles,
agrees that the market dislocation is likely temporary barring a recession, but
will probably blunt the blistering escalation in values of a few months ago in
core assets and will probably weaken pricing of value add or development-heavy
projects.
“I’ve been in the business 30 years, and I believe there’s
going to be a period here of bid-ask spread — where sellers and buyers are not
going to be agreeing on pricing — but I think that’s going to be fairly short
term in duration,” Doupe said. “Our view is the credit crunch will probably go
away, meaning there will be available credit within two or three months, four at
the outside.
“I’ve been in New York this week meeting investment
bankers on this very topic, and the general prognosis is that the debt market
will re-price itself and become active again, albeit at a higher cost of
capital.”
Brian Catalde, a homebuilder from El Segundo, CA and president of the
National Association of Home Builders, seemed to agree that money is sitting out
there just waiting to be invested.
"Builders are expressing concern that
home buyers are getting spooked by the many headlines they are seeing on
mortgage market issues and their continuing effects on the housing market and
home prices," Catalde said. "Indications are that consumers are trying to time
the bottom of the market before making their purchase, which historically can be
a very tricky thing to do and is typically not an advisable strategy. The bottom
line is, with the inventory situation what it is and the selection of units and
deals to be had, now is a very good time to buy a home."
Clearly,
though, NAHB members aren’t confident about homebuyers buying into that message
about now being a good time to buy.
Concerns about the substantial and
growing inventory of new homes for sale and the effects that deepening mortgage
market problems are having on buyer demand caused builder confidence to decline
for a seventh consecutive month in September, according to the NAHB/Wells Fargo
Housing Market Index, released this week. The index dropped two points to 20,
tying its record low reached in January of 1991.
Builder confidence in
the current rental apartment and condo market also dipped amid concerns that an
excess supply in the for-sale market is creating a shadow inventory of available
rentals, according to NAHB.
Housing starts fell 2.6 percent in August to
a seasonally adjusted annual rate of 1.331 million units as the downswing in the
housing market continued, according to figures released this week by the
Commerce Department. Starts were down 19.1 percent from a year earlier, falling
to the lowest level in 12 years.
(Incidentally, the National Association
of Realtors last December had forecast 1.51 million housing starts this year,
down from 1.81 million in 2006).
"We believe that the Federal Reserve
Board made the right move [last week] in lowering the interest rate," said Pat
V. Combs, president of the NAR and vice president of Coldwell Banker-AJS-Schmidt
in Grand Rapids, MI. "Making borrowing more affordable will make money more
available and this could go a long way in helping turn around the sluggish
housing market."
"The housing market has been correcting itself and
restoring affordability. With interest rates on many conventional loans still at
near historic lows and today’s rate cut possibly making loans even more
affordable, we believe the housing market will begin to recover over the coming
year," Combs said.
NAR senior economist, Lawrence Yun, seem to suggest,
however, that the credit crunch is real.
"The unusual disruptions in the
mortgage market, including a significant rise in jumbo loan rates, resulted in a
fairly high number of postponed or cancelled sales, with many buyers having to
search for other financing when loan commitments fell through," Yun said. "Lower
sales contributed to a buildup of unsold inventory."
Yun expects similar
results for home sales in September.
"Once we get through these
disruptions, we’ll get a better sense of where the actual market is in late fall
as conditions begin to normalize," he said.
Combs said, though, that the
good news is that the mortgage picture is improving.
"Mortgage interest
rates have been declining and loan availability is improving," she said.
"Movements to enhance the FHA loan program and to raise the limits for
conventional financing could provide additional relief, and it looks like the
worse of the mortgage availability problem is behind us. The abundant choice of
homes is permitting buyers to better negotiate price and terms. There are good
opportunities in the market now, especially for first-time buyers."
The
latest home price numbers show that those opportunities might be even better if
buyers wait, since house prices are continuing to fall, according to data
through July released this week by Standard & Poor’s for its
S&P/Case-Shiller Home Price Indices.
"The decline in home prices
clearly continued into the summer months," says Robert J. Shiller, chief
economist at MacroMarkets LLC. "The year-over-year decline reported for the
10-city composite is the lowest since July 1991. The lowest annual decline in
this index, which dates back to January 1987, was -6.3%, which was reported in
April 1991. The further deceleration in prices is still apparent across the
majority of regions, with 16 of the 20 metro areas showing a drop in their
annual growth rate from what was reported in June."
While five of the
metro areas – Atlanta, Charlotte, Dallas, Portland and Seattle are still
registering positive annual returns, all five have shown deceleration in their
rates of growth during the past year. Both Atlanta and Dallas are getting closer
to joining 15 other metro areas in registering a year-over-year decline in home
prices.
The latest numbers from homebuilders aren’t encouraging. Lennar
Corp posted a record quarterly loss this week weighed down by charges and
write-offs in a deteriorating housing market, and said it will cut more jobs in
the fourth quarter.
Lennar posted a third-quarter loss of $513.9
million. Revenue fell 44 percent to $2.34 billion. New orders fell 48 percent.
The Federal Reserve Board this week gave indications that their work in
giving a boost to the economy may not be done.
Speaking for the first
time since the Fed cut its benchmark federal funds rate last week Charles
Plosser, president of the Federal Reserve Bank of Philadelphia President said
the central bank already anticipates weaker economic growth in coming months.
"It is important to understand that the economy is expected to grow more
slowly in coming months, despite last week’s decision to reduce rates," Plosser
said. "Therefore, I will not be surprised to see weaker statistics making
headlines."
Well…Put that in your pipe and smoke it!
I will continue to post other articles on the economy as things progress……Until next week…..rob