Sponsored by:

"While it is true that many of the local office markets are still suffering high vacancy and a decrease in rent levels, it seems that the prices of good real estate properties in Tokyo CBD have started to rise. CMBS notes backed by these good properties are actively purchased by Japanese financial institutions. I expect a slight increase in Japanese CMBS issuance this year." --Masaaki Kudo, senior director at Fitch Ratings in Tokyo.

MBA, Coalition Urge Support of Brownfields Bills
CBA Completes First CMBS Issuance

Cap Rates Onward and Upward, RERC Says

Japan CMBS 'Pretty Good Bet' Despite Recession

CW Capital Funds 75 Broad for $156.7M

SEC Discusses ABS Rule Tuesday, March 1

MBA Asks for Industry Comment on Mold White Paper Draft

Evers Replaces McPherson at OCC

Bills Take Aim at TRIA Extension, Brownfields Cleanup

MBA Surveys CREF Convention Attendees

The letters, sent this week by The Brownfields Cleanup and Re-Investment Coalition, of which MBA is a member, urges support of S. 398, introduced by Sens. Rick Santorum, R-Pa., and Evan Bayh, D-Ind., and H.R. 877, introduced in the House by Reps. Jerry Weller, R-Ill., Nancy Johnson, R-Conn., and Xavier Becerra, D-Calif.

The identical bills would make permanent Internal Revenue Code Section 198, which allowed the expensing of brownfields clean up costs but sunsets at the end of 2005 (The law expired at the end of 2003 but Congress extended it to 2005 last year). It would also broaden the definition of “hazardous substances” in Section 198 so it covers petroleum contamination; and repeal the provision in the law that recaptures the expense deduction as taxable income when the property is sold.

The coalition said the costs of brownfields clean up–upwards of $500,000 to $1 million–can be a significant obstacle to re-development projects. But the coalition noted that the bills would enable such sites to bring additional tax revenues of nearly $2 billion annually and could create up to 550,000 jobs.

“Numerous brownfields are located in prime business locations near critical infrastructure, including transportation, and close to a productive workforce, the coalition letter noted. “Putting these sites back into productive use will generate good paying jobs and affordable housing in areas where they are most needed.”

The U.S. Conference of Mayors and the Government Accounting Office estimate that more than 400,000 brownfields sites exist across the country. “In every state in the country there are brownfields–areas blighted by run down, abandoned or under-utilized properties,” the coalition said. “We all have seen them—the shut down manufacturing facilities, abandoned warehouses and gas stations. On these properties once stood vibrant and productive enterprises, but changing times and events have drained their vitality and they are now in desperate need of revitalization and redevelopment. Before they can be re-developed, however, environmental contamination must be cleaned up. How this cost is treated for tax purposes should not be another obstacle—but it is.” 

Communities need to put abandoned, polluted sites back into productive use, the coalition wrote. “Restoring and revitalizing these properties will drive economic growth, help provide affordable housing and successfully balance the development needs of communities with the goal of a clean, livable environment.”

Coalition members include MBA; the American Institute of Architects; the American Resort Development Association; the Appraisal Institute; Building Owners and Managers Association International; the International Council of Shopping Centers; the National Association of Industrial and Office Properties; the National Association of Real Estate Investment Trusts; the National Association of Realtors; the National Apartment Association; the National Multi Housing Council; The Associated General Contractors of America; and The Real Estate Roundtable.
(Back To Top)

CBA Completes First CMBS Issuance
MBA (2/24/2005) Murray, Michael

CBA Commercial, LLC (CBAC), Stamford, Conn., completed its first capital markets offering with a commercial mortgage-backed securities (CMBS) issuance of $102 million in a securitization that includes 265 commercial, mixed-use and multifamily mortgage loans. The average principal balance of the loans at origination was nearly $387,000. Standard & Poor's Ratings Services, Moody's Investors Service, Inc. and Fitch Ratings assigned ratings to various certificates.

RBS Greenwich Capital, Greenwich, Conn., was the initial purchaser of the certificates. Midland Loan Services, Inc., Overland Park, Kan., is the servicer and special servicer. The company said that CBA Small Balance Commercial Mortgage Pass-Through Certificates, Series 2004-1, were only offered to qualified institutional buyers under Rule 144A.
(Back To Top)

“This looks like it could be the sign that we’ve been waiting for,” said Ken Riggs, CEO of RERC and publisher of the winter 2005 RERC Real Estate Report titled “Capitalization Rates…Nowhere to Go but Up .”

Two property types with going-in and terminal cap rates continue to drop, based on RERC’s research. Retail power centers fell to 8.1 percent and 8.6 percent, respectively, and central business district (CBD) office dipped to 8.0 percent and 8.5 percent, respectively. Going-in cap rates for industrial warehouse properties, regional malls, apartments, and hotels increased 10 to 20 basis points in the last quarter.

Terminal cap rates for industrial warehouse, industrial research and development (R&D), regional malls, neighborhood and community retail centers, apartments and hotels also increased by 10 to 20 basis points.

“The fact that capitalization rates have leveled off seems to indicate that prices have peaked and will begin to even out to a more sustainable level,” Riggs said. “The current sellers’ market looks like it may be about to end, at least for several property types. Investors need to remain focused on overall performance as we enter a new era of increasing capitalization rates.”

Institutional respondents reported required pre-tax yield rates continuing flat or downward for most property types, except for hotels, which increased 30 basis points over fourth quarter. One survey respondent bluntly stated that "stupid money is back,” and another respondent said he has never seen "a worse overflow of capital."

RERC said the increase in capital flows in commercial real estate is a secular trend relative to the attractiveness of the asset class.
 
On a national level, the apartment sector, least volatile among the property types, had the lowest required returns among all property types at 9.2 percent. Hotels had the highest expected returns at 12.6 percent, followed by industrial R&D at 10.5 percent and suburban office at 10.2 percent.
(Back To Top)

Reports from Japan, however, say the country slipped into another recession after revised numbers showed two quarters of negative growth. In December, export growth, the primary driver in Japan's economy, slowed to 8.8 percent from 13.4 percent the previous month, according to figures from Economy.com. The Website said the primary indicator of concern is deflation, and it shows the core consumer price index (CPI) falling by .3 percent in January and the overall Tokyo CPI falling .5 percent after a reversal of previous fresh food prices.

"Though we have noted on several occasions the fact that data in 2005 seems more upbeat than it was late last year, we are still surprised that so many people have written off the three straight negative quarters as an irrelevance," Economy.com said in the Asian Wall Street Journal.

Charlie Manger, partner at Manger PLLC , Seattle, Wash., who has been working with financial institutions in Japan for the past 20 years, said Japan showed some growth but the country is still in a 12-to-14 year recession. “That’s old news,” Manger said.

“It started looking promising,” Manger said, in reference to Japan’s economy earlier this year. “Their economy is still linked very much to selling to the U.S. Our economy is going to impact their economy.”

The number of Moody's-rated CMBS deals increased to 51 from 32 last year, although the issuance size of each transaction fell slightly from 2003, based on the ratings agency report. Moody’s said the growth was attributed to "active use of securitization as a fund-raising tool along with active trading in Japan's real-estate market.” The report said Japanese CMBS performed steadily and neither Moody's-rated CMBS deals nor the underlying collateral mortgage loans suffered defaults or losses since closing.

Nihon Keizai Shinbun, a Japanese business newspaper, reported that the decline in office rents seems to have stopped while occupancy levels appear to have rebounded.

"While it is true that many of the local office markets are still suffering high vacancy and a decrease in rent levels, it seems that the prices of good real estate properties in Tokyo CBD have started to rise," said Masaaki Kudo, senior director at Fitch Ratings in Tokyo. "CMBS notes backed by these good properties are actively purchased by Japanese financial institutions. I expect a slight increase in Japanese CMBS issuance this year."

Manger said Japan’s economy relies on trading with the U.S. and China. Trade continues to take on more of an impact with China and the U.S., with a weaker dollar compared to the Yen, remains a strong purchaser of Japan goods.

Eight to 10 years ago, Japanese banks invited U.S. investors to bid on CMBS portfolios for sale. Those sales spun off to other buyers as U.S. investors moved to Japan and purchased distressed assets through opportunity funds. But the assets were difficult to access, work protocol was complicated and processes were mismatched, Manger said.

Despite soft demand, the Japanese government and private sector still use construction to keep the economy moving. The Ministry of Land, Infrastructure and Transport said major Japanese construction companies in December rose 1.4 percent from the previous year and the value of orders for the month totaled $10.59 billion.

Long-term players in the Japanese market, however, transfer tenants to new properties and leave the old properties vacant rather than replacing the properties with tenants. “They just shuffle people around in their own buildings. That’s a fantasy world the Japanese live in,” Manger said.

Manger worked with Japan’s financial institutions to create a due diligence process that included duration of leases, rent rolls, environmental services and using the fact finding process to implement pricing. He said CMBS investors are careful to perform due diligence and determine properties with a strong tenant base.

“With traction, assets will rise nicely,” Manger said. “REITs [real estate investment trusts] and CMBS have been a darling of the [Japanese] market. Banks, large real estate firms and owners of assets are bundling single assets to get out of them and recapitalize the market. There is still room in the market to be good at CMBS now.”

Economy.com said November numbers on business investment were "startlingly good, up 15 percent" year-over-year although December's numbers dropped slightly by 1.1 percent from the previous year.

"Really, the jury is still out on this one," Economy.com said. "Theoretically, one would expect that weak exports and a flat consumer sector would curtail business investment. Further, Japanese investment has been very high for a very long time, suggesting that the need for further investment must be eroding. The November figures might represent the death throes of the capital replacement cycle, we just need more data to be sure."

Moody’s forecasts refinancing levels on maturing CMBS/non-recourse loans originated five years ago and active trading of real estate properties as the main drivers for Japan’s CMBS loans in 2005. The ratings agency also forecasts the proliferation of various new asset types, including apartment loan securitizations originated by financial institutions in cooperation with housing manufacturers, and resecuritizations of CMBS.

Manger said CMBS produces income and positive results for CMBS shareholders compared to alternative investment vehicles within Japan’s stock market and corporate securities.

“It could be a blend of [securitized] performing and non-performing loans [securitized],” Manger said. As for now, the government continues to “talk up” the economy and show hope. “People are betting that Japan will sort through [the recession] to become stronger in the international economy to lift their domestic economy,” Manger said. “That’s a pretty good bet.”
(Back To Top)

Analysts consider 75 Broad as one of three premiere telecom buildings in New York City. It has a high-tech infrastructure and its downtown location positions the property to compete as a traditional office facility.

A diverse tenant base of approximately 48 office, retail, and telecom tenants currently occupies the property. The property's largest tenants include AT&T, Internap Network Services and Board of Education. All three tenants are on long-term leases.
(Back To Top)

The SEC ABS rule affects all real estate, mortgage-backed securities in public transactions. If you are a servicer, the SEC ABS rule will affect your disclosure, reporting and annual accounting practices. If you are a lender, the SEC ABS rule will impact your registration, disclosure and reporting requirements.

On January 7, 2005, the SEC issued a final rule to codify requirements for the registration, disclosure and reporting for ABS, by definition including commercial and residential mortgage-backed securities (CMBS and RMBS).

The final rule represents an effort by the SEC to codify twenty years of fragmented guidance and to clarify which transaction parties should handle various aspects of ABS securitizations, including clarifying and formalizing transaction participants' responsibilities for disclosing and reporting information regarding security collateral to investors. The rule is significant to MBA members who are involved in the rapidly expanding ABS sector.

The final SEC ABS Rule can be found at: http://www.sec.gov/rules/final/33-8518fr.pdf.

The SEC issued the proposed rule last May. MBA consulted with numerous MBA members representing single family, multifamily and commercial lenders, and submitted comments on the proposed SEC ABS rule on July 12. On September 23, MBA members and staff met with SEC staff to discuss recommendations in MBA’s comment letter. When the final rule was published in the Federal Register on January 7, it reflected many of the recommendations made by MBA.

For a detailed discussion on the MBA’s recommendations and the SEC ABS final rule, please review the MBA Issue Paper.

The SEC staff requested MBA to submit a list of questions to the SEC prior to the conference call. MBA worked with representative members, in both the residential and commercial business, to gather the most pertinent outstanding issues and questions. MBA submitted a list of questions and awaits SEC staff confirmation that they will respond to the questions asked on the call.

The call format provides a forum for MBA members to hear the comments of the SEC. The SEC discuss the rule, but will be unable to make comments on the call. Given the anticipated large participation of MBA members on the call, it will not be possible to open the call to all for questions.

Conference call information:
Date: Tuesday, March 1, 2:00 p.m., Eastern.
Dial in Number: 720-239-6092

We encourage large offices to gather together and call in on one phone line - we only have 125 lines for the call and we are inviting both commercial and residential members to participate.

If you have follow up questions from the call or comments, please contact Katie Schwarting at (202) 557-2742 or kschwarting@mortgagebankers.org.
(Back To Top)

The comment period for the white paper, Mold: Steps Toward Clarity, extends from now through Wednesday, March 23.

The Mold Working Group's goal to develop a resource guide on the effects of mold and water damage on commercial real estate led to this paper. The white paper draft is a source of basic guidance and education that addresses the lending and servicing industries, rather than a standard for lenders and servicers.

There are numerous sources for information on mold. However, some of that information could lead to misinformation, and cause confusion as to its legitimacy. MBA's Working Group reviewed and processed some of the most reliable and respected information resources for commercial real estate on the effects of mold, and the paper addresses mold myths, reviews current market practices, looks at industry impact and offers tangible solutions.

With the completion of the draft, MBA is soliciting industry wide feedback on the content and themes covered in the paper. Any and all comments and suggestions for changes are welcome.

The white paper draft can be found at Mold: Steps Toward Clarity or http://www.mortgagebankers.org/documents/NewsLink/Letters/022405mold.pdf.

Comments must be received by close of business on Wednesday, March 23. Comments received after March 23 will not be considered. MBA anticipates release of the completed paper as early as May 2005.

Questions and comments can be directed to Katie Schwarting, MBA's director at commercial real estate/multifamily finance, (202) 557-2742 or kschwarting@mortgagebankers.org.
(Back To Top)

The TRIA bill, S. 467, introduced by Senate Banking Financial Institutions Subcommittee Chairman Robert Bennett, R-Utah, and Sen. Christopher Dodd, D-Conn., would extend TRIA provisions by two years, through 2007. The bill would also call for establishment of a public/private partnership/commission to recommend a long term solution to the terrorism risk problem. Twelve senators from both parties signed on as co-sponsors.

TRIA requires the Treasury Department to report to Congress by June 30 on the effectiveness of the backstop program and the insurance industry's capacity to offer terrorism coverage if it is not renewed. The Mortgage Bankers Association and the Coalition to Insure Against Terrorism (CIAT), of which MBA is a member, have long argued that TRIA must be extended to insure an adequate supply of insurance.

Dodd and Bennett introduced the bill following comments by Federal Reserve Chairman Alan Greenspan, who told the House Financial Services Committee last week that he “had yet to be convinced” that the private market would adequately provide terrorism insurance. “While I think you can get some semblance of terrorism insurance, I have not been persuaded that this market works terribly well,” Greenspan said.

"This law is working as it was intended: to provide some measure of insurance for American workers and American companies against the risk of terrorism," Dodd said in a statement. "It needs and deserves to be extended.”

CIAT spokesman Martin DePoy said the coalition welcomed the bill’s introduction, calling it the first step in the debate to ensure that coverage would be available next year.

“We are grateful to Senators Dodd and Bennett for their leadership on the issue, and we look forward to working with them and other members of Congress as they begin efforts to identify a long-term solution to the insurance challenge presented by acts of terrorism, whether through conventional or unconventional means,” DePoy said. “A growing number of lawmakers in both the House and Senate recognize that a terrorism insurance backstop is an essential tool in preserving America’s economic security.”

Senate Banking Committee Chairman Richard Shelby, R-Ala., indicated that he would hold hearings on extension of TRIA. The first hearing will take place on March 3. Last year, Shelby did not move a similar bill out of the committee.

Meanwhile, two brownfields bills have been introduced. S. 398, introduced by Sens. Rick Santorum, R-Pa., and Evan Bayh, D-Ind., would make permanent Internal Revenue Code Section 198, which allowed the expensing of brownfields clean up costs but sunsets at the end of 2005 (The law expired at the end of 2003 but Congress extended it to 2005 last year). It would also broaden the definition of “hazardous substances” in Section 198 so it covers petroleum contamination; and repeal the provision in the law that recaptures the expense deduction as taxable income when the property is sold.

The U.S. Conference of Mayors and the Government Accounting Office estimate that there are more than 400,000 brownfields sites across the country.  Many of these properties are languishing on municipal land rolls awaiting private sector buyers.  According to a recent U.S. Conference of Mayors survey of 187 large and small cities throughout the nation, redevelopment of their existing brownfields would bring additional tax revenues of approximately $2 billion annually and could create up to 550,000 jobs.

Reps. Jerry Weller, R-Ill., Nancy Johnson, R-Conn., and Xavier Becerra, D-Calif., introduced H.R. 877 last week. the bill is identical to S. 398.

MBA has “strongly supported legislation and programs that support states and localities in cleaning up polluted industrial sites,” said MBA Chairman Michael Petrie, CMB.
(Back To Top)

Please visit the following links from the convention and your responses to our post-convention survey would be greatly appreciated.

CREF Convention 2005 Attendee List 

CREF Convention 2005 Survey 

Official 2005 CREF Convention Photos

Candid Shots from CREF 2005

Session Recordings from CREF 2005

MBA deeply appreciates the continuing support from our member companies and we look forward to providing an even better convention experience in Orlando next February.
(Back To Top)