Sponsored by:

“We have seen profits. That’s why we convert and, quite frankly, I’ve never seen anything like it.” --Steven Patterson, president and CEO of ZOM, Inc., an Orlando, Fla. developer, in reference to the "mania" surrounding condo conversions.

Condo Conversions Earn High Dividends
Commercial Briefs

Property Growth Slow and Steady
CMBS Defaults Show Minimal Gain, Fitch Conduit Study Says

GMACCM Educates International Staff Via CampusMBA

Tremont Funds $23.3M in Illinois, Virginia Multifamily

TRIA Extension, REMIC Reform Highlight MBA's Commercial Legislative Agenda

What Does 2005 Hold for Commercial Industry?
PropertyLink Forecasts 'Four Food Groups' for 2005
Earn CMB at 2005 CREF/Multifamily Housing Convention

Tax Reform Agenda Could Put REMICs on Front Burner

Patterson said the condo conversion “mania” does not exist in tertiary markets unless it is for vacation or beachfront properties. He said condo conversion is a “litigious game” with a high likelihood of involvement in litigation, based on tenant complaints.

Rick Showalter, president of Real Estate Consulting Services, Vienna, Va., said developers can avoid litigation by following one key rule: “Get in, get out and if there is a problem, fix it,” he said. “You just follow the Golden Rule.”

Marta Borsanyi, founder and principal of The Concord Group, Newport Beach, Calif., said “location, location, location” has become “timing, timing, timing” in condominium conversions. “There is never negative growth in housing," she said. "Housing is really a utility. We all need a roof over our head.”

Borsanyi said developers need to determine the depth of market demand expectations and, if no condo conversion comps are available in the market, they would translate rentals and net operating income from the apartments. The Concord Group’s demographics show that baby boomers and echo boomers would be the target audience for condominiums between 2003 and 2010, as 66 percent of couples would be in homes without children and 32 percent of the population would be single.

“Minimize the risk by better understanding the market,” Borsanyi said. “It’s not your father’s condo conversion.”

William Friedman, CEO of Tarragon Realty Investors, Inc., New York, said “there’s a tremendous supply of willing lenders” to provide capital for condominium conversions, particularly foreign capital.

William Donges, chief operating officer at Lane Co., Atlanta, said investor appetite runs high among the Dutch, Germans and wealthy Atlantans in the Atlanta market. The financing includes the traditional mortgage layered with mezzanine debt. “We’re getting into these deals with very little equity and, if it works well, there are good returns, especially for the mezzanine lender,” he said.

Analysts say economic deficit and the value of the dollar concerns foreign investors as any meaningful movement of the dollar tends to slow down capital, but Patterson said the demand is still there for U.S. property.

“There’s not a lot of positive sentiment but they need to be here,” Patterson said. “They need returns [300 basis points above European real estate] to diversify and they need U.S. real estate.”

As for condominium conversions compared with rentals, Donges anecdotally said a first-time homebuyer was not able to lease an apartment but did receive an adjustable rate mortgage with no money down on a condo conversion property.

“I've told my acquisition guys to go play golf,” Donges said. “I cannot compete with the condo converters.”
(Back To Top)

Commercial Briefs
MBA (1/27/2005) Murray, Michael

The Commercial Mortgage Securities Association (CMSA), released an “exposure draft” of the CMSA European Investor Reporting Package for the United Kingdom only (CMSA E-IRP). The CMSA E-IRP includes standard reporting formats for a smooth transfer of information from the servicer to the cash manager and from the cash manager to the investor, or user of the data.

CMSA-Europe said it will accept questions, comments and suggested changes and enhancements from all CMBS market participants until February 23, to ensure the final version best accommodates the needs of UK CMBS market participants. It will release the final version of the CMSA E-IRP to the market after reviewing the comments. CMSA-Europe said it will continue to review and revise the CMSA E-IRP and focus on other jurisdictions.
*****
The team from Banc of America Securities held off Credit Suisse First Boston’s Jay Habermann and RBC Capital Management’s Jay Leupp to capture the portfolio portion of Real Estate Portfolio magazine’s 2004 Stock Challenge. Contestants managed a portfolio containing five individual real estate stocks and predicted the year-end values of the two leading REIT indexes. Matthew Bechard, the editor in chief of Real Estate Portfolio, said the six participants exceeded a 30.4 percent return of the NAREIT Composite REIT Index.

Realty Stock Review’s Barry Vinocur came closest to predicting the year-end value of the NAREIT Equity REIT Index and the Morgan Stanley REIT Index with a forecast of 5,412.36 and 650.25, respectively. The NAREIT Index closed 2004 at 6,064.98, while the Morgan Stanley Index finished the year at 769.52.
(Back To Top)

“In many respects, the slow to moderate growth forecast for 2005 is nearly ideal for real estate,” said Robert Bach, national director of market analysis for Grubb & Ellis.  “In many ways it will be just like the porridge in Goldilocks, not too hot and not too cold.”

North American office leasing markets improved toward the end of 2004 and, although few cities reported healthy rental increases, office markets stabilized in most cities, the report said.

“For many, this was the first significant improvement in four years,” Bach said.

North American vacancy inventories reached levels which will take time to absorb before sustained rental growth is possible and from an investment perspective, capitalization rates could soften as interest rates rise, the report said.

“The Federal Reserve will continue to gradually raise rates over the course of 2005 in order to tighten monetary policy,” Bach said. “This is not expected to significantly curb the level of investment activity domestically due to the availability of ready capital within the marketplace.”

The report also said moderate economic growth expected in 2005 will drive apartment vacancies lower and absorption higher.

“Rental rates also are likely to creep higher thanks to stronger demand for apartments,” Bach said. “The strengthening leasing market combined with still-low but slowly rising interest rates should continue to attract investors to the apartment market. Cap rates should remain stable or rise only modestly as the improving leasing market and net operating incomes outweigh interest rate creep.”

The report said the 20-to-34 age category, which generates the most demand for apartments, will expand by 7.2 percent during the present decade and by another 6.4 percent from 2010 to 2020, compared to a loss of 10.2 percent during the 1990s.

The aging baby boom generation will generate additional demand, the report said, and analysts expect some “empty nesters” to jettison their suburban “McMansions” in favor of smaller flats in the city, closer to dining, shopping and entertainment attractions.

“As for lease terms, apartments typically have one-year leases, compared with five years or more for office, industrial and retail space, which means that rental income will respond more quickly to improving conditions for apartments than for other property types,” Bach said.

The report said the propensity for spending in the United States should continue to hold tenants in retail space and investors in demand for shopping centers.

“Americans like to shop—too much, say some economists who contend that households will need to cut their spending and save more, particularly as the giant baby boom generation rolls into retirement,” Bach said.

Industrial buildings past their prime, however, will have a hard time attracting tenants or buyers unless they have some reuse potential such as big-box retail, inner-city residential or industrial redevelopment, the report said.

Bach said investors like industrial real estate because it avoids the development extremes of the office market, requires fewer tenant improvement dollars and can generate long-term net leases to single tenants with good credit.

“This perceived stability has led to ferocious competition for acquisitions, and a number of creative portfolio transactions have been put together in order to meet investor demand,” Bach said. “Deal sizes are generally shrinking as one investor after another concludes that they will have to roll up their sleeves and pursue smaller properties.”
(Back To Top)

CMBS Defaults Show Minimal Gain, Fitch Conduit Study Says
MBA (1/27/2005) Murray, Michael

The cumulative default rate on collateral of commercial mortgage-backed securities (CMBS) loans grew by 62 basis points, the smallest gain ever for a Conduit Loan Default Study produced by Fitch Ratings. The newly issued 2005 Conduit Loan Default Study featured 336 more CMBS defaulted loans with an overall default total of $10.8 billion.

As of year-end 2004, 1,651 of the total 35,663 CMBS loans experienced a default, or 4.6 percent of the cumulative issuance since 1993. There were 153 fewer loan defaults than in 2003, resulting in a $600 million decline in the year-over-year default balance. The $2.7 billion in 2004 newly issued collateral added 2,866 new loans to the study.

The 1995, 1996, and 1997 vintages, however, exceeded Fitch’s expected cumulative vintage default rate, and the ratings agency believes the 2000 vintage could exceed the 10 percent threshold “by the time it experiences 10 years of seasoning,” said Mary O’Rourke, senior director at Fitch Ratings. The CMBS 2000 vintage collateral has a 6 percent default rate.

“Despite the strong performance statistics, some vintages have exceeded Fitch's estimated cumulative 10 percent vintage-default rate and bear watching,” O’Rourke said.

Fitch said aggressive underwriting during peak market conditions account for much of the collateral in the 1995 to 1997 transactions was aggressively underwritten during peak and the ratings agency said it is observing the performance of the 2001 vintage with caution, as well.

The multifamily sector experienced an increase in the amount of defaults in 2004 as the dollar amount of multifamily loan defaults rose by 43 percent over the previous year. Fitch said multifamily collateral had a marked decline in its numbers, from 2003 to 2004, noting that federally chartered agencies became aggressive players in purchasing these loans over the past 18 months. Fitch added 28 new transactions to the 2005 study.

The lodging industry improved the most last year, showing substantial gains in 2004 after almost three full years of steadily declining performance. Retail loan defaults dropped by more than half in 2004 from 2003, and the office sector remained at an earlier stage of recovery. “There was only a slight decline in the number of office loans that defaulted in 2004 compared to 2003,” O’Rourke said.
(Back To Top)

“MBA really is international – all the way to Hyderabad, India,” said Michael Lipson, executive vice president at GMACCM, following the graduation of the class.

GMACCM acquired a $60 billion servicing portfolio and a small facility in Hyderabad when the company purchased three business units, including CapMark Services, from LendLease Corp . almost two years ago. The GMACCM employees in Hyderabad, and GMACCM staff in Canada, Europe and Asia, focus on loan assets and servicing loans.

The staff in Hyderabad has a basic educational background with a BCom or MCom, the equivalent to a finance degree in the U.S. While 73 percent of staff completed an MBA, eight percent completed a post-graduate diploma and six percent have a CA or ICWA degree, equivalent to a CPA in the U.S.

““The CampusMBA online courses enhance the skills of the staff, and a very high number come through training,” said Kamal Narang , assistant vice president and general manager in the Hyderabad office.

"GMAC[CM] employees in Japan, Ireland, and other places use CampusMBA’s print-based distance learning courses to continue their education and stay abreast of current industry topics,” said Dan Thoms , vice president of MBA education and business development. “We are also assisting companies in India with training their employees and helping them to achieve recognition for their professional development.”

The various timetables around the globe provide GMACCM clients with nearly 24-hour service. Ireland is five hours ahead of the U.S. eastern time zone and India ten and a half hours ahead of the U.S. eastern standard time. Lipson said the global staff of 80 provide more timely service around the world and provide faster turnaround in financial and property analysis.

“It extends the work day for us,” said Karen Bellezza, senior vice president and managing director at GMACCM. “We run about 20 hours a day, six days a week. Imaging allows us to get documents around the globe while other people are asleep.”

The GMACCM global framework is part of an “integrated workflow” in which all of the loans are on one common platform. The technology is the same in all of parts of the world for GMACCM which makes it easier to move work to different location if volume dictates it, Bellezza said.

“All documents are online and accessible to all service locations,” Bellezza noted. “The system directs work to particular areas based on the servicing.”

GMACCM supplemented CampusMBA’s online courses with its own “Servicing University” which includes systems training specific to GMACCM and “soft skills” training, such as training on the phone. CampusMBA, available in the U.S. and around the globe, included an Introduction to Mortgage Banking and Commercial Real Estate Services for GMACCM.

“The idea is for people to understand their jobs and the overall picture,” Lipson said. “That will make them more informative to their clients.”
(Back To Top)

The Chicago office of Tremont Realty Capital structured a $16.8 million permanent loan for the refinance of Lioncrest Apartments, a 270-unit, Class B multifamily asset in the southeast suburbs of Chicago. Tony Kolomayets, a senior director with Tremont, arranged the two-year, 100 percent recourse loan, which provided for roughly 80 percent loan-to-value. The property was 90 percent occupied at the time of closing. 

“The short term, LIBOR based rate loan, allowed the borrower to recapitalize the asset and pull out some equity for further acquisitions,” Kolomayets said. “This was accomplished and still left options open for the long run.”

Tremont’s New York office provided mezzanine financing for the acquisition of Emerald Point Apartments, an 863-unit apartment property located three miles from oceanfront in Virginia Beach, Va. John Raggio, a managing director with Tremont’s New York office, arranged the $6.5 million mezzanine loan, which was subordinate to a $52 million senior commercial mortgage-backed securities financing provided by Merrill Lynch.

The 10-year, non-recourse loan was funded through the Tremont-GRE Mezzanine Loan Program, which provided 90 percent of the purchase price at a blended cost of capital of 6.08 percent. The property was 95 percent occupied at the time of closing with a lower economic occupancy.

“In addition to becoming very familiar with the local apartment market, we also got comfortable with the sponsor’s plan to increase revenues,” Raggio said.

GMAC acted as the mortgage broker in this transaction. Property amenities include two pools, tennis courts and a fitness center.
(Back To Top)

The Terrorism Risk Insurance Act (TRIA) provides federal reimbursement to insurance carriers for most U.S. commercial/multifamily losses caused by federally certified foreign terrorist attacks which cause aggregate damages to all policyholders of at least $5 million.

MBA strongly supported TRIA’s enactment in 2002 and worked closely with federal officials to ensure that program regulations reflected the needs of the real estate finance industry. In 2004, MBA and its partners in the Coalition to Insure Against Terrorism (CIAT) spearheaded a significant victory to extend the “make available” provision in TRIA through December 2005. Treasury Secretary John Snow extended the provision, which required insurers to provide terrorism coverage for commercial and multifamily real estate.

TRIA will expire on December 31 unless Congress extends it. There is widespread consensus in the business community — including in the commercial/multifamily real estate, insurance and reinsurance sectors — that the private market is not yet capable of supplying adequate and reasonably-priced terrorism insurance coverage. Reports say carriers are developing endorsements excluding terrorism from the list of insured perils for commercial and multifamily real estate if TRIA expires at the close of 2005.

MBA supports the extension of TRIA or adoption of a comparable program to ensure an adequate supply of terrorism insurance coverage for the commercial and multifamily real estate markets. While there is broad industry and Congressional support for MBA’s position, some question whether TRIA represents appropriate public policy. A Congressional Budget Office (CBO) report issued in early January recommended other policy options, such as retrofitting, as alternatives to federal terrorism insurance. MBA and other industry observers said the CBO report ignores the lack of a model for terrorism risk, and retrofitting will not prevent catastrophic damages.

“MBA will continue to make TRIA extension a top priority for 2005,” said Erick Gustafson, MBA’s Vice President of Government Affairs.  “Continuation of the program is critical for the smooth functioning of the markets for real estate capital.” MBA’s committee meetings on February 6, during the CREF/Multifamily Housing Convention & Expo, will discuss in depth the Capitol Hill outlook for TRIA extension.

MBA also continues to play a key advocacy role in the modernization of REMICs, the legal vehicles used to issue CMBS. Congress created REMICs in 1986 to remove obstacles toward issuing multi-class securities collateralized by interests in real estate mortgages.

A REMIC election avoids double taxation of income from pooled mortgages, as long as it meets certain tests, such as the requirement that pools of loans subject to a REMIC election remain static.

Current REMIC rules often prevent property owners from undertaking many common real estate management activities, including renovations, tenant expansions, building additions, sale of excess land, or loan collateral additions or substitutions. Changes to the rules would make the REMIC vehicle more useful to borrowers, while continuing to safeguard the repayment of CMBS investors.

“Since borrowers inevitably encounter situations where changes to the loan terms or the underlying property are both necessary and benefit the property owner, investor and the community, the REMIC rules need to be updated to permit commercial and multifamily real estate borrowers to more effectively manage their properties” said Gail Davis Cardwell, MBA's Senior Vice President of the Commercial Real Estate/Multifamily Group.

In 2004, MBA spearheaded creation of an industry coalition that developed a REMIC modernization proposal. The coalition proposal led to the 2004 introduction of federal legislation, S. 2422, introduced by Senators Gordon Smith, R-Ore., and Kent Conrad, D-N.D., and H.R. 4113, introduced by Congressmen Mark Foley, R-Fla., and Earl Pomeroy, D-N.D., to modernize the REMIC rules. While the legislation did not pass Congress in 2004, it attracted bipartisan support and was praised as “sound public policy” by Rep. Bill Thomas, R-Calif., chairman of the House Ways and Means Committee. The legislation will be reintroduced in early 2005.

“We made excellent progress on the REMIC front during 2004,” Gustafson said. “The bill won bipartisan support because it grows the real estate economy and improves the options open to commercial and multifamily real estate borrowers. MBA and our coalition are hitting the ground running on REMIC reform for 2005.”

MBA’s committee meetings will also update commercial and multifamily members on MBA’s 2005 plans for REMIC advocacy at the CREF Convention in San Diego on February 6.
(Back To Top)

The Mortgage Bankers Association’s (MBA) Doug Duncan, senior vice president of research and business development and chief economist, will provide a forecast on commercial macroeconomic trends at MBA's Commercial Real Estate Finance/Multifamily Convention and Expo in San Diego Feb. 6-9. Duncan is responsible for providing economic and policy analysis services in the areas of real estate finance, legislative and regulatory proposals and industry trends for MBA and its members.

Joining Duncan will be  Anthony Pierson, managing director of portfolio management with Cornerstone Real Estate Advisors LLC, Hartford, Conn. They will discuss his view on regional and commercial real estate trends. Pierson is responsible for overseeing Cornerstone's Portfolio Management Group.

Join MBA at the 2005 Commercial Real Estate Finance/Multifamily Housing Convention & Expo February 6-9 at the Manchester Grand Hyatt in San Diego. More than 4,000 individuals from the industry will gather in San Diego to learn important information, strategies and new value-added products, and to network.

For more information on the 2005 Commercial Real Estate Finance/Multifamily Housing Convention & Expo visit, http://events.mortgagebankers.org/cref2005/default.html.
(Back To Top)

PropertyLink Forecasts 'Four Food Groups' for 2005
MBA (1/27/2005) Murray, Michael

Click any state on the 2005 Commercial/Multifamily PropertyLink map (top right) and receive instant data from the 2005 Grubb and Ellis Global Property Forecast. The forecasts focus on multifamily, office, retail and industrial properties and investment potential within various regions around the country.
(Back To Top)

Earn CMB at 2005 CREF/Multifamily Housing Convention
MBA (1/27/2005) Sabol, Krista

If you have been in the industry for more than ten years, chances are you are well on your way, if not ready, to advance to the testing phase for the Certified Mortgage Banker (CMB) designation. If you meet the CMB requirements and act immediately, there’s a chance that you can complete the testing phase in time to graduate at MBA’s 2005 Commercial Real Estate Finance (CREF)/Multifamily Housing Convention in San Diego. If you can’t graduate with this year’s class, what about next year’s?

Teri Inglés, CMB, earned her Commercial CMB at MBA’s 2004 CREF/Multifamily Housing Convention in Orlando.

Inglés, senior vice president with First Housing, Tampa, has been a leader in the development of new lines of business, in keeping with First Housing’s affordable housing initiatives. In her ten-year tenure at First Housing, Ingles originated and closed the first RHS Section 538 insured construction/permanent loan, spearheaded the organization to a premier Participating Administrative Entity (PAE) for the OMHAR/HUD Market-to-Market program, and built a team of skilled and highly successful participants performing MAP underwriting for FHA insured loans, both within the affordable and market rate arenas.

Inglés graduated with a BA from Florida Atlantic University and has twenty-five years of experience in all aspects of real estate financing. She is also an active member of MBA's FHA Insurance Subcommittee.

Join industry leaders like Teri Inglés, CMB in reaching the pinnacle of mortgage banking excellence – earning the Certified Mortgage Banker.

Contact Jennifer Ridings at (202) 557-2763 or jridings@mortgagebankers.org, or Alicia Willey at (202) 557-2766 or awilley@mortgagebankers.org, today to get started on your CMB.
(Back To Top)

The tax reform summary notes that an inefficient code “penalizes hard work, discourages savings and investment and hinders the international competitiveness of American companies,” while a “simpler, fairer” tax code strengthens the U.S. in a competitive global marketplace by promoting and encouraging long-run economic growth, job creation, “work effort, saving and investment.”

The Mortgage Bankers Association said renovation of commercial properties plays a large role to spur economic growth and employment as well as enhance the value of commercial property. Modernized REMIC rules would make it possible to modify collateral securing commercial mortgages held in REMICs for commercial mortgage securitization. The current law is nearly 20 years old, and it hinders the ability for owners to renovate or expand on the property after securitization.

"MBA is optimistic that discussions concerning tax reform that reduces administrative burdens will serve as a platform to advance REMIC modernization legislation," said Gail Davis Cardwell, MBA’s senior vice president of the commercial/multifamily group.

REMIC modernization bills, H.R. 4113 and S. 2422, were filed amendments to HR 4250 the JOBS Act by Sens. Kent Conrad, D-N.D., and Gordon Smith, R-Ore., in November as a Senate amendment to a “discussion draft” by conference chairman Bill Thomas, R-Calif. Although the amendment was not included in November, Thomas, chairman of the House Ways and Means Committee called the proposal "good policy" in November and stated that he would find a better place or another tax bill to move it forward..

“That type of validation from the chairman of the Ways and Means Committee is rare and bodes very well for the future of our proposal,” said Kurt Pfotenhauer, MBA's senior vice president of government affairs.

The Joint Committee on Taxation determined that the REMIC Modernization Act would have reduced revenue by only $11 million over the next 10 years. Underlying collateral enhancements to commercial mortgage-backed securities (CMBS) pools, however, would also secure CMBS as stronger investment vehicles for the bondholders.

Smith and Conrad introduced the REMIC Modernization Act of 2004, S. 2422 in May, as the Senate companion bill to H.R. 4113, introduced in early April by Reps. Mark Foley, R-Fla., and Earl Pomeroy, D-N.D. Foley said he was pleased with the progress made in the last session of Congress in November and that he looked forward to working with Thomas toward “complete consideration” of the bill.

“The Mortgage Bankers Association has done an impressive job of educating Congress on the need for these modernizations to REMIC law,” Foley said.
(Back To Top)