Defease With Ease® Doubles Defeasances

In 2014, Commercial Defeasance, LLC defeased over 500 commercial real estate loans – double the number of transactions it closed in 2012. The company’s smallest transaction of the year was a $330,000 defeasance for a New York co-operative, while the largest was the defeasance of a $755,000,000 loan secured by the biggest shopping mall in America.
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According to a review of the “Top Defeased Loans of 2014,” Commercial Defeasance advised on nine of the largest, including the Mall of America in Minnesota, the Loews Miami Beach Hotel in Florida, and Herald Center in New York.
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How Does an Increase in Interest Rates Affect CRE?

Lately, there has been a lot of chatter about rising interest rates and their potential impact on the commercial real estate market.
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Respondents of the CNBC Fed Survey forecasted that the Federal Reserve could raise rates during the summer of 2015. This will be the first time interest rates have increased in eight years.

Will an interest rate hike come down to a simple policy change?

On December 17, the Federal Reserve met to determine whether or not they would make changes to a policy statement about keeping short term borrowing rates low for a “considerable time.” However, even a minor change to a Fed policy statement had the potential to stifle the economy’s positive momentum. Ultimately, the Federal Reserve chose its words very carefully and only replaced a reference to borrowing costs remaining low for a “considerable time” with a pledge to be “patient” on the timing of a rate increase. Federal Reserve Chairman Janet Yellen also said that policy makers are likely to hold key rates near zero for at least the first quarter of 2015.
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CRE Prospects Bright for 2015

According to a recent article in the Wall Street Journal, “prospects for commercial real estate appear promising for next year, with broad rent increases as well as tighter vacancy rates in most major sectors.” These insights are based on the Q3 forecast from the National Association of Realtors.

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The report identified the positive trajectory of the U.S. Gross Domestic Product as a contributor to the forward momentum of the commercial real estate markets. According to the report, “with commercial real estate fundamentals and investment prices on a solid upward trend, lending conditions eased as financing sources broadened in 2014.”

The National Association of Realtors evaluated all commercial real estate categories and found the apartment-rental market to be the only segment where vacancies are expected to increase to 4.3% in the fourth quarter of next year. They also said that vacancy rates below 5% are considered a “landlord’s market,” which means owners can charge a higher rent due to demand.

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Refinancing – Will it be possible in 2015?

Pull up a few recent headlines and you’ll notice that a number of commercial real estate owners are refinancing their properties.

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  • $500 million refinancing of International Place in Boston
  • – $30 million refinancing of an apartment building in Newark
  • – $7.7 million refinancing of Tuscaloosa student housing

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Commercial Defeasance Facilitates $150M Defeasance for Loews Hotels

Commercial Defeasance, LLC (Defease with Ease®) just announced the simultaneous defeasance of $150 million of CMBS loans for a luxury resort in Miami, Florida owned by Loews Hotels. The defeasance, a substitution of government securities for the real estate collateral securing the loan, was structured as a New York-style defeasance and combined loans in three different securitizations into one transaction.

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Commercial Defeasance managed the entire defeasance process, including structuring the $150 million securities portfolio and coordinating approvals with two major statistical rating agencies: Moody’s and Fitch Ratings. Throughout this process, the Defease with Ease® team guaranteed full transparency and a timely closing. Deutsche Bank refinanced the loans through their CMBS program.

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Retail Years Away from Recovery

Several recent industry articles indicated that the demand for retail space remains weak. Many experts believe that this is due to a slow recovery in retail sales and competition from e-commerce. Even the improving labor market has yet to translate into any meaningful increase in retail sales growth.

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According to recent data, for the second consecutive quarter, the national vacancy rate for neighborhood and community shopping centers registered at 10.3%. This represents a decline of just 20 bps over the past 12 months.

In an article in nreionline.com, experts reported that regional mall vacancy remained at 7.9% for the fourth consecutive quarter with growth in the 0.4 -0.5% range. Malls began their recovery sooner than neighborhood and community centers but have stalled faster. Much of the vacancy compression has come from low-hanging fruit, as the best spaces in the best malls have already been leased. The malls that have vacant space tend to be inferior and in locations where the population is also struggling. The challenge this poses for the overall mall sub-sector is that any further meaningful vacancy reductions will need to be attributable to new tenants in these inferior malls.

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Risk Retention Rules Raise Rates!

Many CMBS borrowers with loans maturing from 2016 to 2018 are waiting to refinance until they have some indication that market interest rates are about to rise. Such a strategy is challenging enough to execute without the introduction of new variables that impact interest rates on new loans. However, the Dodd-Frank Wall Street Reform and Consumer Protection Act does just that.

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Last week, U.S. regulators approved final rules regarding the retention of risk in asset-backed securitizations, including CMBS. Initially, the rules required loan originators to retain 5% of the market value of the loans they securitize. However, the rule was revised to allow B-piece bond buyers to satisfy the 5% risk retention requirement on a lender’s behalf, provided the B-piece buyer holds those bonds for a minimum of five years. Moreover, to get to 5% of the market value of the bonds in a CMBS securitization, experts are projecting that B-piece buyers will be asked to buy lower yielding bonds higher up in the capital stack.

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Self-Storage Defeasance Explodes!

Acquisitions of privately owned self-storage facilities by investors and publicly traded self-storage REITs are at an all-time high.
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According to recent data compiled by Fairview Real Estate Solutions, there are approximately 52,150 facilities in the self-storage industry. Low inventory of properties listed for sale over the past two years has pressured capitalization rates downward to near record lows. Coupled with income growth and lower overall rates, self-storage property values have been increasing. That appreciation has made privately owned self-storage facilities attractive to publicly traded self-storage REITs, such as Public Storage, Inc., which obtained a $700 million loan in late-2013 to fund acquisitions and development activities. Many analysts believe such infusions of capital have set the tone for 2014 and early 2015.
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Low Rates Boost REITs

According to a report by CNBC’s Diana Olick, “the one sector that is outperforming the market this year is real estate investment trusts.”
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As interest rates hover near recent lows, and investors search for anything with yield, commercial real estate is finding its footing yet again, outperforming the broader U.S. stock market.

Stock exchange-listed U.S. equity real estate investment trusts were up 16.25 percent, with a dividend yield of 3.52 percent, in the first half of 2014, according to the National Association of Real Estate Investment Trusts (NAREIT). These results compare to the S&P 500 index first-half 2014 total return of 7.14 percent and a dividend yield of 2 percent.
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All Defeasance Portfolios Are Not Created Equal!

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Last week, we closed a defeasance in connection with the refinancing of a loan secured by a New York City hotel.  Wells Fargo serviced the loan and Fitch Ratings reviewed the defeasance. We structured the transaction as a New York-style defeasance to save on mortgage recording taxes.  Most of what we do to save the borrower money occurs in the spotlight where everyone on the transaction can see it.  However, we saved the borrower a lot more money behind the scenes in the securities portfolio that served as the defeasance collateral.
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