PERSON OF THE WEEK: Neil Siman Assesses The Current Commercial Mortgage Lending Environment

eek, MortgageOrb spoke with Neil Siman, a partner at BlueWater Funding, which originates, funds and services commercial mortgages throughout the Mid-Atlantic region. In addition to remarking on national and regional lending trends, Siman offers advice on asset-based financing, an option that many borrowers may be considering these days. [b]Q:[/b] Within your lending region of the Mid-Atlantic states, what important trends have you observed recently in the commercial real estate market? How might patterns for certain property types in this region differ from trends seen elsewhere? [b]Neil Siman:[/b] There are many trends that we have observed in the commercial real estate market, but the most significant and noticeable of these trends all seem to revolve around financing. The lack of availability of debt and the increased costs of debt and equity have led to a snowball effect affecting both activity in the market and value when it comes to real estate investors seeking financing for purchase of new assets or the refinance of current assets. In addition, the almost complete disappearance of the CMBS market – along with the stringent underwriting guidelines by traditional lenders – has left real estate investors with the inability to access conventional lower-interest debt in a timely fashion. This limitation has hindered their abilities to capitalize on real estate opportunities with few financing options available. The most attainable option is generally private lending, which comes with higher costs of capital. We believe that the patterns mentioned above are affecting the fundamentals of real estate across the nation, but to different extents. While cap rates have increased and values have been significantly affected nationwide, properties in the Mid-Atlantic region have been performing better than in some other areas due to the supply and demand of space, especially in Washington, D.C., where much of the market is supported by the government and private contractors. [b]Q:[/b] Have you noted a significant uptick in deals with distressed properties or other distress situations lately? What form do these distress opportunities typically take right now? [b]Siman:[/b] Yes, we have seen significant increase in financing opportunities for distressed properties. These financing opportunities are mostly for properties with higher vacancy rates compared to the market. We have also recently seen an uptick in deals and the financing associated with the purchase of distressed debt. [b]Q:[/b] In what situations is asset-based lending a good choice for a borrower these days? Under what circumstances would it be inappropriate or ill-advised? [b]Siman:[/b] Asset-based lending is a good choice for a borrower when speed, flexibility, less red tape and short-term capital are needed. In this market today, asset-based lending has become necessity for borrowers because of financing constraints from more traditional lenders. Whether it's a real estate acquisition or a refinancing of an existing loan, borrowers can often use asset-based loans to get capital in a timely manner and with much more comfort and certainty of an actual closing than with traditional financing. Weighing the cost of the asset-based loan against the cost of missing the investment opportunity or the cost of the existing loans that are not repaid is the best way to determine the appropriateness of these types of loans. Should an investment opportunity yield financial gain – and such gain is not realizable without the asset-based lender – then using this type of financing is a great idea to thwart the opportunity cost of missing it. Contrarily, we tend to turn borrowers away and would advise borrowers not to seek an asset-based loan if the cost of the capital exceeded the benefits of using it. Moreover, it is ill advised to use to these types of loans for any debt consolidation or for a cash-out for things other than property improvements. Borrowers with these needs often end up losing more than the opportunity. We stay away from these types of situations for just that reason. [b]Q: [/b]Your lending parameters specify that you focus more on the asset itself, rather than the borrower. At the same time, what sort of minimum requirements to do you typically look for in the borrower? Have those criteria become more stringent? [b]Siman:[/b] In the past, our underwriting guidelines were heavily focused on the asset and not tremendously focused on the borrower. However, today we are being more selective. While still very asset-focused, we have increased credit requirements and look to the borrower for financial strength as additional support for the loan. Further, we have significantly increased our focus on multiple exit strategies and considered the likelihood of any one of them being realized. [b]Q:[/b] When do you foresee a widespread recovery for the commercial real estate market? What about for the U.S. economy in general? [b]Siman:[/b] It's obvious that until the financial crisis and the banking and CMBS markets stabilize, fear and uncertainty will remain, and the stabilization/equilibrium in asset pricing and capital pricing and capital inflows into this segment will continue to hinder transactions. There is a lot of equity being assembled, but it is still on the sidelines. Many companies have been dealing mostly with their capital structures and stabilizing their current assets the last several years. Looking forward, distressed opportunities will likely be the predominant sources of activity through 2010. We suspect equilibrium to settle in late 2010 and into early

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