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“There is intelligence out there that if TRIA [Terrorism Risk Insurance Act of 2002] goes away, most companies will take coverage away. In fact, many terrorism [insurance] endorsements were issued from the start with the condition of TRIA so that the trigger for coverage is only if TRIA is still enforced.” --Kathleen Dufraine, vice president of insurance financial operations at Wachovia Securities.

Servicers Brace for Stormy Summer
New Loan Structures Create Complexities for Servicers

REIT Fundamentals Strong--For Now
Initial Response Suggests More Electronic Data Flow

Morris, Smith & Feyh, Inc. Place $20.9M with AIG

CampusMBA Announces New Awards
CREF 2006 Registration Now Open

No Slowdown for CRE Volume, MBA Says

Commercial Servicers Eye Change

Insurance companies and commercial servicers are preparing for the Terrorism Risk Insurance Act of 2002 (TRIA) to sunset at year’s end, even as the Mortgage Bankers Association and other trade groups work with Congress to extend its provisions. Also looming on the horizon: a busy predicted hurricane season that threatens to equal or even exceed last year’s performance.
 
Kathleen Dufraine, vice president of insurance financial operations at Wachovia Securities, Charlotte, N.C., said commercial interests face tough battles this year on both fronts. Industry support for TRIA, which provides a federal backstop for terrorism insurance, is under threat from consumer groups and from the Congressional Budget Office.

“The opposition basically feels that the insurance industry can afford this exposure. I simply ask how,” Dufraine said this week here at the 2005 MBA Commercial Real Estate/Multifamily Finance Asset Administration & Technology Conference. “Currently, there is roughly $50 billion in the P&C [property and casualty] sector. Risk modelers out there have come up with figures like $182 billion. This simple math just tells you that this insurance number is a little short.”

Under TRIA, the federal government supplements insurance company claims on property and casualty loss over a certain percentage. After September 11, 2001, without TRIA, commercial property owners faced policies with terrorism exclusions or exorbitant fees to purchase terrorism insurance. Commercial servicers insisted on terrorism insurance in policy renewals and some loans moved to special servicers without the proper insurance. Meanwhile, ratings agencies threatened to lower ratings on commercial mortgage backed securities (CMBS) pools without terrorism insurance.

“There is intelligence out there that if TRIA goes away, most companies will take coverage away,” Dufraine said. “In fact, many terrorism [insurance] endorsements were issued from the start with the condition of TRIA so that the trigger for coverage is only if TRIA is still enforced.”

While some companies issue new endorsements with sunset clauses, other companies are writing short term policies that will expire at the end of 2005, Dufraine said.

MBA supports legislation that would extend TRIA through December 2007. MBA is a member of the Coalition to Insure Against Terrorism (CIAT), which seeks a long term solution to the issue after TRIA’s extension.

S. 467, the Terrorism Insurance Backstop Extension Act of 2005, was introduced in February by Sens. Christopher Dodd, D-Conn., and Robert Bennett, R-Utah. The bill would reauthorize and extend the federal terrorism reinsurance program provided by TRIA. In March, H.R. 1153 was introduced by Reps. Tom Capuano, D-Mass.; Steve Israel, D-N.Y.; Barney Frank, D-Mass.; Paul Kanjorski, D-Pa.; and Joseph Crowley, D-N.Y. That bill also proposes to extend TRIA.

The U.S. Chamber of Commerce, the insurance community, the commercial real estate and lending communities, and Federal Reserve Chairman Alan Greenspan all support a TRIA extension. “There are [many] people that do believe that TRIA should be extended,” Dufraine said.

Rays of hope lie in the standard fire policy, Dufraine said. Most terrorist acts involve fire and contract language states that fire will always have coverage “regardless of the proximate cause of the damage,” she said. “We can also feel somewhat comfortable that some states will not allow for exclusionary language.”

The bottom line, however, is that without the capacity to handle exposure for acts of terrorism, “our market will dry up significantly and we will be back to where we were pre-TRIA,” Dufraine said.

TRIA’s language said the Treasury Department must submit a market survey on TRIA to Congress no later than June 30. Congress is waiting on the survey before making a determination as to TRIA’s extension and a possible long term solution to terrorism insurance in the property and casualty sector.

June also marks the beginning of the Atlantic hurricane season, through November 30. Tropical Storm Risk (TSR), led by the Benfield Hazard Research Centre at University College London, gave a “76 percent probability” in February of an above-normal Atlantic hurricane season with eight hurricanes for the Atlantic basin as a whole and four intense hurricanes. The National Hurricane Center goes further, predicting 13 total storms and four major hurricanes.

TSR claims the upsurge in hurricane activity will continue in Florida from last summer’s four hurricanes that hit the state. “A borrower cannot bind coverage during hurricane season so they better have it before June first because the underwriters are probably not going to give it to them after that,” Dufraine said. “Those were very challenging times [in 2004] so be aware. Coverage is not bound when a hurricane is facing landfall.”

Dufraine said a busy hurricane season could spur a “tremendous drain on cash,” especially in Florida. Deductibles in Florida are percentage deductibles and many properties were hit with percentage deductibles in the last storm season.

Dufraine said the deductibles for hurricanes in Florida will remain per occurrence. “Two storms, two deductibles,” she said. “Some deductibles may even be higher on this renewal period. Check in with borrowers to make sure that the coverage is adequate and their deductibles are within their reach. Pray you don’t have a lot of properties in Florida because I think it’s going to get hit again pretty bad this year.”

Bernie Brown, president of Insurance Advisors LLC, Stamford, Conn., said reinsurance companies in Bermuda that raised capital after September 11 are more aggressive on windstorm pricing and property insurance because of percentage deductibles. Single-family homes were also hit harder than commercial real estate last year in Florida. Brown noted that most reinsurance companies are smaller than primary insurance companies and mindful of exposure. “Pricing is not as bad as one would, otherwise, intuitively think,” Brown said.

Brown said one of the biggest flaws in TRIA is that the federal government did not back up the reinsurance industry as well as the primary insurance industry. “It would create more capacity for reinsurers and they would learn more about [terrorism insurance], start pricing it and add more capacity in the event of TRIA expiration,” Brown said.
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New Loan Structures Create Complexities for Servicers
MBA (5/12/2005) Murray, Michael

CHICAGO—A borrower’s dream can be a servicer’s nightmare in commercial mortgage-backed securities (CMBS) and portfolio loans. A/B loan structures and mezzanine loans are bringing more communication and loan document complexities for servicers.

“Why has loan documentation gotten to where it is today? I think you all will agree the answer is that it is because of the loans themselves,” said Faye Friedman, director at Teachers Insurance & Annuity Association of America (TIAA), speaking at the 2005 Mortgage Bankers Association Commercial Real Estate/Multifamily Finance Asset Administration & Technology Conference.

“Because of the competition out there, so many dollars are chasing borrowers that [lenders] have to be more creative,” said Doris Hughes, manager of mortgage servicing at Guardian Life Insurance Co. of America, New York. "Borrowers are willing to leverage as much as they can and we, of course, want as much security as we can get.”  

Whole loans include 1031 exchanges, reverse 1031 exchanges, tenants-in-common (TIC) loans, A-B loan structures and mezzanine pieces that can require lock boxes and waterfalls. “By enhancing the yield, the assumption is that there is greater risk associated [with it],” said Kathleen Frost, regional director at GEMSA Loan Services, LP, Houston. “With the compressed cap and discount rates, [the industry] is pushing the envelope for putting down as many dollars as we can.”

“We’re seeing a lot of movement out there and it is hard to keep up from the servicing perspective,” Hughes said. “In my particular situation, if [I] do not have the documentation that pretty much spells out what [the borrower] can and cannot do, and what they have to prove in order to get life [company loans], it’s pretty difficult to service and many times we’re not getting documentation as quickly as we would like.”

Deborah Schiavo, managing director at Bear, Stearns & Co. Inc., New York, and chair of MBA's Loan Origination Committee, said documentation needs to improve in the CMBS market. The A/B and Pari Passu loan structures require intercreditor agreements while the Loan Participation structure uses a participation agreement between the first mortgage lender, or senior participant, and the junior participant.

“We start with looking at the total loan and figuring out all these pieces,” Schiavo said. “It sounds pretty simple but it actually requires sitting down and finding out what are all the different pieces, who are the different parties and where are the documents. At that point, everybody needs to be communicated with.”

Pooling and Servicing Agreements (PSAs), roughly 100 pages at one time, now total nearly 450 pages. “Those intercreditor agreements are so important,” said Janine Stallings, assistant vice president at Pacific Life Insurance Co., Newport Beach, Calif. “They have to be reviewed in concert with the PSA.”

In the CMBS sector, good communication between the primary, master and special servicers becomes more critical as the structure grows more complex. In portfolio lending, strong communication between borrower and servicer is most important. “Communication is key,” said Jason Rozes, senior associate at Dechert, LLP , Philadelphia. In portfolio lending, one servicer services an entire mezzanine loan. Rozes said the mezzanine loan in CMBS requires two different servicers: one for the first mortgage and the other for the mezzanine piece.   

“It’s the master [servicers], the special [servicers], the ratings agencies and a cast of thousands times three,” said Janice Smith, managing director at Bank of America, Charlotte, N.C. “There is the added complexity of not really receiving [participations and b-notes], especially when the notes are traded [almost like bonds], it is very difficult to keep up with that speed. From a servicer’s perspective, to stay out of ‘dirt’ and closings, it is very difficult to keep up with who the participants are at any given time and then to know who to go to for these approvals. Meanwhile, the borrower is saying it was a really simple request [and asking] what’s taking so long. There are a lot of challenges.”  

Portfolio servicers can enter into the loan process prior to closing but must work closely with the borrower to communicate their needs. At the same time, the servicer walks a fine line between fulfilling the requirements and keeping the borrower satisfied. “It’s happening all across the industry,” Friedman said. “The truth is nothing fits perfectly. Everything has an edge or a hair.”

Frost said some territories, for example, easily issue certificates of occupancy while others do not and the servicer needs to determine a reasonable response from borrowers “by talking in the beginning” and by understanding their situation. “Because I’m sure they need to produce something, they need to have something for their auditors, for their insurance companies, for every aspect of their business, to make sure that that tenant had every right to have been there and start their business,” Frost said. “The intent is to get the money out the door so the lender can fund the loan.”  

Potential loan defaults within more complex structures cause concern among servicers, particularly in CMBS. Hughes said “Luckily, because of zero delinquencies and our environment, we haven’t had a problem.”

“I’m sure [default] is going to happen,” Schiavo said of CMBS loans in complex structures. “I hate to say it is never going to happen but it is probably going to and it’s going to be at just working through it.”

“Getting the information from the lead servicer about the appraisal, the property performance financial statements [and] the inspections, I think the communication and information flow is going to be real important,” Schiavo added.

“If the communications lines were already established, it would be much easier,” Smith said. “It’s very difficult because it’s moving so fast. The industry is moving very quickly and to retool and handle some of these structures is very difficult.”
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Moody's, New York, said U.S. REITs and REOCs benefited in the past year from low and falling interest rates, and strengthening cap rates on property sales. However, Michael Magerman, senior vice president at Realpoint Research, GMAC Institutional Advisors LLC, Horsham, Pa., and co-author of Realpoint’s REIT News Update said that in 2003 and 2004, price movement seemed had “little connection to fundamentals in the commercial real estate markets.”

“Improvement in market conditions had become evident across many important U.S. metro areas by last year’s first quarter, especially in the office, industrial and apartment sectors,” Magerman said. “Also, commercial properties have sold at very high prices in recent months, even in markets where vacancies remain high and rents soft.”

Moody’s expects U.S. REITs and REOCs to sustain their moderate leverage with stable-to-improving interest coverage and sound liquidity, but the ratings agency warns that some companies could face challenges if the “frothy” real estate investment and capital markets experience a correction.

"The top questions facing the industry are whether commercial real estate has peaked as regards to cap rates, and whether REIT stock prices and debt finance terms turn more hostile," said Philip Kibel, senior vice president with Moody's and author of a Moody's report, U.S. REIT and REOC Industry Outlook. “A strong performance by most REIT stocks, and a welcoming capital markets, helped many REITs turn in surprisingly good performances during the stressed 2001-2004 period."

The Bloomberg REIT Index increased by nearly 25 percent in 2004, but fell by 8.2 percent in the first quarter this year. The index jumped by 5.3 percent in April. Titus said real estate fundamentals were “in command” from June to mid-August of last year with minor dips in July and November. From mid-May through the end of 2004, REITs rose continued to rise with brief dips in July and November.

"REITs followed the broader market higher in the first quarter of 2004, but also fell sharply along with the market even as real estate fundamentals continued to recover," Titus said.

Moody’s expects all REIT property sectors, including apartment, office, industrial, retail, lodging and heathcare, to remain stable. Bloomberg’s research presented increases in April for apartment, office and industrial REIT indexes and in the overall Bloomberg REIT index. Moody's said an increasingly healthy performance or a potential adverse shift in business models or balance sheets could shift credit ratings on REITs into a different direction but, for the short term, the agency said credit ratings of most REITs are unlikely to change.

Moody’s noted that falling vacancies, rising employment, and a limited supply of new office space support the stable outlook for the office REITs. Collier's International, a Boston-based commercial real estate manager, said office occupancy is at a record level, its highest level since the fourth quarter of 2000.

"If we had not built anything in the past three years, vacancies would be at their lowest level," said Ross Moore, research director at Collier's International.

Realpoint said office REITs lagged the overall industry last year but stayed in line with real estate fundamentals. “Though improvement has been noted in many office markets throughout the U.S., it has been a gradual process,” Magerman said. “Most office REITs have yet to report a quarter with year-over-year same property NOI [net operating income] improvement during the current recovery. The prospects for NOI gains in the near term are not good. Most office REITs are experiencing rent declines of 10 percent to 20 percent when signing new leases or renewals this year.”

Moody's expects most multifamily REITs to push harder for higher rents in 2005 and 2006. The Moody’s report said multifamily experienced improving cash flows and waning tenant concessions following several years in which the sector's fundamentals were adversely affected by soft employment figures and a tenant drift to home ownership. Meanwhile, the ratings agency expects retail REITs to have sound balance sheets through its subsector leadership in regional mall REITs and continued consumer spending to support retail property values and rents.

“It appeared that apartment and retail REIT stocks, which had reaped the largest share of 2004’s price appreciation, were punished more during the first quarter of 2005,” Magerman said. “The same two property sectors had the strongest price recoveries in April. Retail fundamentals have been much more even over the same time period."

Though retail portfolio performance weakened somewhat during 2003 and 2004, the report said almost all same property NOI changes remained positive, and occupancy remained strong. "They went downhill in retail but they never went negative," Magerman said.

Moody’s retail concerns include rising interest rates and energy prices that could challenge the sector later in 2005 with consumer spending constraints. Deloitte Research's Leading Index of Consumer Spending monthly report said, despite employment growth, real wages declines continue and the effects of a rising tax burden are slowing the pace of consumer spending growth. Moving into the summer months, consumer spending growth will primarily depend on the strength of the housing market, Deloitte Research said. "Home sales rebounded sharply in the most recent month, but surprisingly, we have not seen a corresponding up tick in sales of home-related goods," said Carl Steidtmann, chief economist of Deloitte Research and author of the monthly index. "As we're seeing more lower to middle income households enter the housing market, there is less disposable income to furnish their new homes."

Magerman said he does not believe housing will have an effect on consumer spending growth as soon as this summer. "I'm not sure I agree it will be felt that soon," he said. "It takes awhile to determine where the house prices are going. I agree with the general sentiment, I just don't think it will be that soon."

Moody's said higher operating expenses and a rise in leveraged consolidation among retailers and REITs could also cause rating downgrade pressures. The growing reliance of many firms on growth generated through joint ventures, real estate fund structures, international investments, and merchant building and development businesses also causes concern for Moody’s. "The ultimate effects of these structures on REITs' transparency, strategic complexity, true leverage, liquidity and earnings stability can be negative," said John Kriz, managing director of real estate finance at Moody’s. "Firms that have increased their earnings by way of strategies such as real estate funds and joint ventures may find the costs outweighing the benefits."
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Initial Response Suggests More Electronic Data Flow
MBA (5/12/2005) Murray, Michael

CHICAGO—Initial responses from the Mortgage Bankers Association’s Commercial Technology Survey suggest that electronic flow of information is increasing, but a lack of universal standards keep systems from fulfilling their potential.

That, according to industry experts speaking here last week at the 2005 MBA Commercial Real Estate/Multifamily Finance Asset Administration & Technology Conference.

The survey included qualitative questions in addition to quantitative questions on how different loan parties exchange data. The survey asked commercial real estate industry participants to describe one area where the interchange of data is working well and one area in which it is working poorly.

“Electronic flow of information is improving the data delivery speeds as well as the processing times and efficiencies,” said Alan Wallace, vice president and investor reporting manager at the Irving, Texas office of Washington Mutual Bank, Seattle.

But initial respondents also noted a lack of universal standards for receiving and transmitting data, Wallace said. “It appears that various systems do not interact well with each other. They don’t lend themselves well with talking to each other as well as data extraction, automation transmission and the re-keying of data.”

Ernst & Young’s Joseph Rubin once described “points of pain” in the commercial real estate origination process including numerous amounts of re-keying data on a typical commercial loan. “Each one of those re-inputs just lends itself to some kind of error,” Wallace said. Initial servicer responses show problems in the exchange third party reports, and borrower financials and rentals in a format to “readily upload and bring [the data file] into the systems,” he said.

Choices in the survey for the type of format on an electronic exchange include XML, data files, PDF files or TIF files, Microsoft Word and standardized reporting methods, such as investor specific reporting methods. Hard copy/paper and telephone/fax are also responses provided in the survey.

Most respondents said efficiency gains, such as uploaded data and ease of data dissemination and sharing of documents, are two ways technology is changing the business process for companies. “There are mixed results in hard copy reductions,” Wallace said. “Often, data or documents are delivered electronically and they are followed up with hard copies.”

Paperless loans, electronic signatures and implementation of data transmission standards are a few examples of the next “great technology breakthrough,” respondents said. “MISMO [Mortgage Industry Standards Maintenance Organization] is working on their initiatives to get a more standardized template with XML and trying to make sure data transferring does not need to be manipulated,” Wallace said.

Based on initial response, document imaging, primarily on the servicing side, appears to have taken root in the commercial industry. “[Imaging] is also being used in the due diligence processes for securitizations and access to various restricted websites for originators as well as depositors as they are doing their due diligence,” Wallace said.

Wallace said he had limited success with optical character recognition (OCR) software, and initial respondents said in the survey that many uploaded PDF documents, such as servicing agreements, are non-searchable. “If it is searchable, it just makes it that much easier for everyone,” Wallace said.

MBA extended the deadline for survey responses from mid-April to ensure that there is a broad statistical sample in the survey and because there were a number of responses still in the pipeline. Those responses already received represent nearly one-third of all the loans serviced in the industry. “We would like to have more information from a broader range of participation,” said Charles Tu at the University of San Diego Burnham-Moores Center for Real Estate.

The names of participating companies will be confidential, Tu said. Any company interested in finding out more about the survey can contact Tu at tuc@sandiego.edu.

The full report on the survey will be available this summer.
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The property was nearly 98 percent leased at the time of funding with many of the residents being either semi-retired or retired. The 80 percent loan-to-value (LTV) transaction has a rate of 5.4 percent and was negotiated and placed by Jeffrey Morris on behalf of Vermilion Housing Corp.

The first transaction placed was a $13 million first mortgage loan on Village at Edson Creek Apartments. The 238-unit, ranch style, apartment complex, located in Vermilion, Ohio, was built on a 39.53 acre site allowing for density to be roughly six units per acre. Improvements on the property took place from 2000 to 2005 and included forty-one single-story ranch buildings and a clubhouse. The unit mix consists of 102 one-bed/one-bath units, 120 two-bedroom/two bath units, as well as 16 three-bedroom/two bath units. All units in the complex have attached garages and many of the units have lofts and enclosed patios. 

The second deal was a $7.9 million first mortgage loan on a multi-tenant office building in Columbus. RiversEdge Corporate Center, located on a 9.367-acre site, improved to a 124,646 rentable square foot “Class B” office complex.

The complex includes five one-, two- and three-story buildings (wings) interconnected with corridors. Originally constructed in 1959 as a motel with an addition in 1964, the current owner acquired the vacant property in 1988 and in 1989 began a major renovation to convert the property into an office complex.

RiversEdge Corporate Center opened in 1990, capitalizing on its location adjacent to the Grandview/Upper Arlington area of Columbus and its close proximity to downtown.

There are more than 70 tenants in the complex with corporate suites in a portion of the building. Major tenants include University Orthopedics, The U.S. Corps of Engineers, The Better Business Bureau, and HR Gray & Associates . At the time of commitment and loan closing, the property was 90 percent occupied, which is its historical occupancy as an office complex. The 72 percent LTV transaction was negotiated and placed by Robert Smith on behalf of RiversEdge Corporate Center LLC at a rate of 5.74 percent with a small premium for a six month forward commitment to allow the owner to pay off the existing debt when it was open at par.
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Awards will be given in two categories, to recognize both the best overall program and the outstanding individual dedicated to professional education. Each category will also be divided based on company size: companies with more than 1,000 employees and those with fewer than 1,000. One winner and one honorable mention will be selected from each of the four segments. In total, eight entries receive award recognition.
 
The two categories for the CTE Awards are as follows:
 
The Best Overall Corporate Training Program Award recognizes the corporate training program that exemplifies innovation and effectiveness. To be considered for this honor, the training program should reflect a blended learning approach through various modalities. Award selection is based on the following:

• Program development and organization history;
• Organization and employee acceptance;
• Obstacles overcome while implementing the program;
• Creativity and innovation in program delivery, marketing, and assessment; and
• Beneficial impact to your organization and the mortgage banking industry.

The Education Advocate of the Year Award recognizes an industry professional who facilitates, advocates, and promotes education within the industry, his or her company and the community. Award selection is based on:

• A statement describing why the nominee deserves this award;
• Beneficial impact on training within the nominee's company;
• Obstacles and/or challenges overcome;
• Outstanding accomplishments or innovative projects completed during the past year; and
• Other achievements, honors, or awards earned.

To enter a company or to nominate a colleague, visit www.campusmba.org/cte to download the CTE Award Application. All award entries are due June 7.
 
Nominations will be reviewed by a selection committee comprised of representatives of MBA's Residential Education Committee, MBA's Commercial Real Estate Finance Board of Governors (COMBOG) Education Committee and representatives of training departments and education organizations outside of the real estate finance industry.
 
Award presentations will take place at CampusMBA's Training Management Roundtable in Washington, D.C., July 19-20. All winners will be notified on or around June 30.

There is a $100 fee ($150 for nonmembers) required with all applications. CampusMBA contributes all money collected from application fees to the Path to Diversity Scholarship fund.

To learn more, download the brochure or the application visit www.campusmba.org/cte, or contact Krista Sabol at (202) 557-2794 or ksabol@mortgagebankers.org. For more information on CampusMBA, visit www.campusmba.org or call (800) 348-8653.
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CREF 2006 Registration Now Open
MBA (5/12/2005) Rawak, Melissa

Registration is now open for the Mortgage Bankers Association’s CREF/Multifamily Housing Convention & Expo 2006: Prosperity in an Evolving Market, February 5-8, 2006 at the Walt Disney World Swan and Dolphin in Orlando, Fla.

CREF is the largest annual gathering of commercial real estate finance professionals and provides endless opportunities for building new relationships and connecting with industry experts.

Network with colleagues and attend educational sessions led by industry experts. This convention helps ensure your future success, discover new products and services, learn about new technology and business practices and exchange ideas with industry leaders. Register today to ensure housing early.

Click here to download registration form or call (800) 793-6222, Monday-Friday, 9:00 a.m.-5:00 p.m. EDT.

To visit the CREF/Multifamily Housing Convention Web site, go to http://events.mortgagebankers.org/cref2006/default.html.
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“So far, the signs are showing [volume] will continue. Over the last few years, that set of volume has just increased every quarter. Our hunch is that we are going to see more of that [record volume] this first quarter going forward,” Woodwell said here at the 2005 MBA Commercial Real Estate/Multifamily Finance Asset Administration & Technology Conference.

MBA forecasts one-year Treasuries at 4 percent and 10-year Treasuries at 5 percent by the end of the year. Real gross domestic product growth has exceeded productivity, which is fueling job growth, Woodwell said. He said inflation remains well below past indicators.

“It is not inflation, it is inflation ‘expectations,’” Woodwell said. “What is really driving much of this is not what we are seeing in these measures but what people are really thinking about down the road…which is why the job numbers don’t matter quite as much as the difference between the job numbers and what people think the job numbers are going to be.”

Woodwell said most vacancy rates in soft markets have peaked and are beginning to move downward. “We’re at the top of the curve in three of four real estate groups and on our way down,” he said.

With few investment alternatives, most investors find commercial real estate particularly attractive because of the low capitalization rates. “Investors all over are trying to figure out where they can get good, decent returns that meet their underwriting criteria and given the competitive nature of the market, it’s tough,” Woodwell said.

Also, an abundance of information makes commercial real estate on the real estate investment trust (REIT) side and CMBS sector a more accepted investment for a more generic investor, Woodwell said. “The more information there is and the more we know about it, the tighter the spreads will be and the more accepted it becomes.”

Low delinquency rates promote strong commercial property markets, despite more interest-only and adjustable rate mortgage loans. Although the homeownership rate supplanted the development rate for multifamily in the past couple of years, demographics and condo conversions appear to be picking up as well.

“On the apartment side, condo conversions are the driver in a whole bunch of markets. Half of the apartment sales are driven by this very different economic model,” Woodwell said. “In other places, there are very different perceptions about what is going to happen in the local economy.”

Woodwell said commercial/multifamily real estate loans have the lowest delinquency rates within commercial bank portfolios. “Across other investor groups, those FDIC delinquency rates on the commercial side were 1.18 percent, multifamily are .5 percent. The CMBS 60-plus day delinquency rate is .88 percent, the life companies at 60-plus are .08 percent, Fannie Mae at .1 percent, and Freddie Mac at .06 percent—all low delinquency rates,” Woodwell said.
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Stacey Berger, executive vice president in the Bethesda, Md. office of Midland Loan Services, Overland Park, Kan., said incremental change begins at a departmental level with continuous improvement.

“Change becomes more significant through a divisional level with operations improvement, such as a formal, one-time project,” Berger said here at the 2005 Mortgage Bankers Association Commercial Real Estate/Multifamily Finance Asset Administration & Technology Conference. “From an enterprise level, reengineering can lead to a major breakthrough in change.”

“X-Engineering,” Berger said, describes change beyond the scope of the company. For example, a borrower electronically sending financial statements to Midland would be X-Engineering. Under the concept, a 5 to 10 percent improvement in process costs and efficiency take place on a departmental level, 10 to 20 percent improvement takes place on a divisional level and 20 percent or more in profit and cost improvement takes place on an enterprise and beyond level, he said. 

“If you can’t quantify where you want to be in the end, you should not change [the process] just to change it,” Berger said.

Tim Mueller, executive managing director at MortgageRamp, Atlanta, said outsourcing provides more control of business rather than less, because of service deliveries. The client can leverage more tasks, acquire less risk, hit a new market and still view completed work through management software. “Some of it is scale and the number of people,” he said.

For John Shaw, managing director at CIGNA Realty Investors, Hartford, Conn., change meant outsourcing more of the high-volume functions while keeping high-touch processes in-house. “We engineer the cost and, in the end, it ends up costing less,” he said.

Joseph Beggins, CEO of GEMSA Loan Services LP, Houston, said he improves business processes through a “Six Sigma” approach to measure improvement. Beggins said the approach builds new products and processes and fixes existing processes.

The approach includes a definition of project goals, measurement of current performance and determination of customer needs and analysis of root causes for defects as well as analyzing process options to meet customer needs. To fix existing processes, Six Sigma means eliminating defects and controlling future process performance. To build a new process, it translates to a design method that meets customer demand with verification of the process.

“The adoption of technology change is not so bad for a lot of our [staff] because we are working on it everyday,” Beggins said. “Real change is driven by the people in your business.”

Leadership can help promote the change but there still needs to be acceptance from the top to the bottom of an organization. “It is very difficult to get people to buy into change,” Berger said. “They are naturally reluctant to change and they have to buy into the benefits for them individually and for the organization.”

Beggins said his formula for faster change is to multiply the quality of an idea by the acceptance of the idea. The product is an accelerated rate of change. “Most ideas for change are good,” he said. “Acceptance of the idea accelerates change.”
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