Chicago Mercantile Exchange To Introduce Commercial Real Estate Futures

The Chicago Mercantile Exchange, which recently announced plans to merge with the Chicago Board of Trade, plans to introduce a futures product based on commercial real estate indexes.

Mary Haffenberg, associate director of product communications at the Chicago Mercantile Exchange, said investors will be able to trade commercial real estate futures and options in the first quarter of 2007.

The futures contracts are based on indexes that track recorded property sales. ‘The indexes were put together by Global Real Analytics,’ she said. Founded in 1980 as Liquidity Financial Group, Global Real Analytics LLC is based in San Francisco.

Haffenberg noted that while many commodity futures contracts expire on a monthly basis, in the case of these commercial real estate futures, the actual contracts will expire on a quarterly basis.

The associate director of product communications at the Chicago Mercantile Exchange said the creation of these commercial real estate futures comes as a result of requests made by customers.

‘It was based on customer demand,’ she said, adding that these products likely will be ideal for investors like pension funds who want exposure to the commercial real estate market through futures and options.

A banker with a Wall Street firm who declined to be named said he was unsure if the new futures products will help bring down borrowing costs for developers or anyone looking to borrow for a commercial property purchase.

However, the banker said, ‘It will help people manage their risk [and] allow more people to get exposed to the business.’

The banker also predicted that the exchange's commercial real estate futures likely will attract institutional investors.

‘They [the futures] can be used in situations where people need to hedge or mitigate risk,’ commented Andreas Pericli, founder of Washington, D.C.-based hedge fund Euclid Financial Group. ‘If you own property, you can use the futures as a way to immunize your wealth or protect your wealth.’

For example, Pericli said, a lender or a pension fund that owns commercial real estate may buy these futures to hedge some of their risk. ‘It is very difficult to liquidate commercial real estate, but you can hedge your risk a lot easier if there is a tradeable security,’ the executive said.

This is not the Chicago Mercantile Exchange's first foray into real estate. Earlier this year, the exchange introduced futures for residential housing. These futures are based on indexes tracking 10 markets developed by Robert Schiller and Karl Case.

In the case of the commercial property futures, the futures contracts are based on Global Real Analytics' indexes, which track recorded property sales.

According to the exchange, 10 quarterly cash-settled contracts based on property type and geography will be available. The listings include a composite index, indexes on property types consisting of retail, office, apartments and warehouse properties, and five U.S. regional indexes covering Desert Mountain West, Mid-Atlantic South, Northeast, Midwest and Pacific West. CMI


Will Develop Affordable Units

KDF Communities, a Newport Beach, Calif.-based affordable housing developer, has acquired four properties totaling 691 multifamily units in the city of San Jose for a total of $74.6 million – bringing its San Jose portfolio to 1,165 multifamily units.

According to KDF, the company plans to invest $13.2 million into the properties as part of a rehabilitation effort to convert them into affordable housing. The buildings will undergo a series of major interior and exterior improvements.

‘These properties were in disrepair and in need of extensive work, which is why KDF is performing such significant rehabilitation,’ says Ray Harper, KDF Communities' principal. ‘For us, it's critical to invest the necessary money, labor and time to upgrade and enhance the buildings to provide quality affordable housing options to hardworking San Jose residents.’

The four acquisitions include Orchard Glenn, a 288-unit, two-story affordable multifamily community; Casa Real, a 180-unit, two-story community; Regency, a 143-unit, two-story complex; and Lexington, an 80-unit, two-story property.

‘San Jose is one of the most expensive areas to live in the country. With the constant need for more affordable housing, increasing our supply is a top priority for the city,’ comments Leslye Krutko, San Jose's director of housing.

Launches New CMBS Division

RBC Capital Markets, an international corporate and investment bank, has launched its Real Estate Mortgage Capital business, which will initially focus on providing fixed- and floating-rate commercial mortgage-backed securities loans and later offer collateralized debt obligation loans in the U.S.

‘Our goal is to provide our clients with strategic expertise backed by capital and full distribution for debt and equity for all types of real estate,’ says Mike Coster, head of RBC Capital Markets' real estate investment banking group. ‘By adding CMBS capabilities, bringing on additional senior bankers and restructuring our equity research platform, we can now provide a full product suite to our public and private real estate operator clients throughout North America.’

As Coster mentions, the company has appointed several employees to manage the new division. Among them are Dan Smith, a 20-year industry veteran who will head the group, and Dan LePage, who will oversee the business' real estate balance sheet lending program. The firm has also hired Kevin Stahl and Bryan Maher for the real estate investment banking group.

The Real Estate Mortgage Capital division is based in New York and the metro Dallas area, with offices expanding to Chicago, Phoenix, and Newport Beach, Calif. More offices are expected to open as the platform grows, the company says.



WHAT: The deal involves the acquisition and restoration of an existing 26-unit apartment building. The borrower has extensive renovation plans for the property and will use low-income housing tax credits (LIHTC) to complete the repairs. All 26 units will be occupied in compliance with LIHTC requirements.

WHO: Love Funding Corp., a national mortgage banking firm, closed the loan on behalf of Cook Property Group.

$$$: $1,634,800.

TERMS: The 35-year loan carries an interest rate of 5.95%.

Love Funding: (314) 512-7955.


WHAT: This property consists of 43 unsold cooperative apartments.

WHO: Houlihan-Parnes/iCap Realty Advisors LLC, a real estate investment company headquartered in White Plains, N.Y., arranged this first-mortgage financing and placed the loan with a Florida-based commercial bank.

$$$: $3.3 million.

TERMS: This 12-year loan on a 30-year amortization schedule has a fixed interest rate of 6.25% for seven years.

Houlihan-Parnes/iCap Realty Advisors: (914) 694-6070.


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