August 4, 2017
By Dennis Kaiser
The new White House administration is working to achieve the goals set by President Donald Trump. Clearly, many of those objectives and policies will affect the business of commercial real estate. Connect Media checked in with a trio of financing leaders at George Smith Partners to hear how those efforts may play out in the CRE market. Here’s insights from Malcolm Davies, Shahin Yazdi and Jonathan Lee in our latest Q&A.
Q: There’s been a lot of talk about how the new Trump administration will affect CRE. Now that the new administration is well underway, what policy changes may potentially impact financing for CRE investments?
A – Davies: I think there are a lot of things on the plate right now, and while everyone had figured we’d see some of these have a chance of being implemented, I believe there is now more of a ‘wait and see’ approach. If certain items like the repeal of Dodd-Frank, tax cuts, deregulating the banks and loosening credit standards happen, these will all have a large impact on the market.
Personally, I would like to see changes that allow and make getting a home loan easier. The housing market in essence has only slightly returned to what it once was. I don’t think any of us would like to repeat the carnage of 2008; however, the pendulum has swung too far the other direction.
Q: How will rising interest rates impact financing?
A – Yazdi: I believe that rising rates will impact financing in a few ways. First, I think that it will lead to some lenders slightly reducing their spreads. Second, it will reduce the loan amount that borrowers will be able to get due to DCR and cash flow restraints. Finally, cap rates may go up, reducing the value of some properties.
Q: Construction lending has become increasingly more difficult, especially with existing development and financing restrictions. How have the HVCRE regulations impacted construction financing, and how are developers getting deals done in spite of these restrictions?
A – Lee: Because HVCRE rules stipulate a project must have 15% equity in a project at completion, most developers who purchased or owned land for some time are running into constraints on their debt leverage. In order to increase their leverage, they are either looking for a JV equity partner or preferred equity lender.
At the moment, lenders are not differentiating between the borrowers’ equity and third party equity, so both JV and preferred equity are acceptable forms of leverage to fill the gap created by the bank’s receding leverage levels. Preferred equity is similar to mezzanine financing in pricing and leverage, but because of the security interest, it is treated by most lenders as debt. As a result, preferred equity has become the solution.
For comments, questions or concerns, please contact Dennis Kaiser