Simple Re

Commercial Real Estate Investing and Property Management Require Two Different Skill Sets

Crescendo Properties has acquired 16 commercial properties  valued at over $100 million over the last 5 years.  We've also acquired or leased, and arranged for the debt and equity financing for several Splash and Dash Carwash development sites.  We also manage our portfolio properties.  From this experience I've discovered that real estate investment and property management require two completely different skill sets.

If you consider yourself an investor or developer and are able to you grow your portfolio to more than one or two properties you need to do some hard thinking before you plunge into doing your own property management. 

Don't believe me?  Consider this...

Successful investment requires an understanding of market cycles, financing, cash flow forecasting, due diligence, and contract negotiation. 

Successful property management requires an understanding of operations, leases, facility maintenance, marketing, hiring, training, and bookkeeping.

Investment companies tend to be very lean with small staffs full of well educated and intelligent people that don't require a lot of managing.

Property management firms require professional managers because they have larger staffs with more hirearhy.  By professional managers, I mean people who know how to give direction to their direct reports, give adjusting and affirming feedback, coach and develop direct reports, hire, discipline, and fire employees.  They need to know how to train and coach. 

What it really comes down to is this question. Are you willing to do the hard work of developing the second and different skill set within your company?  If not, you are better off hiring a professional third-party management firm.

If you operate self storage properties and want to swap ideas shoot me an email and we'll talk. 

Back Against The Wall

Crescendo has one portfolio property that is struggling... a lot. Our back is against the wall with it, and that is a gut-wrenching place to be. 

The one silver lining about being in a position like this is that you start looking at operational changes and marketing strategies from the perspective of not having anything to lose.  In one sense, this is a powerful place to be mentally because it allows you to try things you wouldn't have tried before.

All of the activity, creativity, effort and freedom to try may lead to a breakthrough.  A success with a strategy or tactic never tried before.  (I can already think of a few things we are trying that have huge potential).  Not only could that breakthrough be used to benefit the struggling property, but can be replicated and leveraged at other portfolio properties.  What would you do if your back were against the wall?  Maybe there's a breakthrough there, just waiting to happen.

All in Rates

Heres a chart sent to me by Wells Fargo that shows this year's history of their break-even all-in rate on conduit loans.  Since these represent "breakeven" levels, you need to add 25 - 35 basis points to get to what your rate as a borrower would have likely to been. 

CMBS and Credit Spreads

According to several lenders I've been in contact with spreads on CMBS or conduit loans are now in the 250 basis point range.  This is up from a low of around 100 basis points earlier this year.  Although I've talked about swap spreads here before, the most recent action has been with the movement in credit spreads.  What I'm asking and everyone else is asking is, "Where are spreads (and rates) going and how fast are they going to get there?"

Here's my thinking: 

1. There was an unusually high number of b-piece buyers in the market in Februrary and March of this year and spreads were getting unreasonably low at the same time that lenders were getting more aggressive with their terms and looser with their underwriting standards.  As an example we closed an 80% LTV loan with 10 years interest-only at around 120 over the 10 year treasury in February of 2007.  As long as the b-piece buyers were in the market buying the bonds the lenders were happy to push the risk envelope on their loans.
2. The sub-prime meltdown starts in May 2007 and many b-piece buyers get hurt.  Many of these buyers were banks from around the globe who were trying to boost their yields and get outsized profits by purchasing the lower-rated CMBS.  This is important to note because these buyers are not typically market participants.  However, their added participation and aggressive buying caused credit spreads to sink to unreasonably low levels.
3. Once the bond buyers started getting hurt they pulled out and spreads widened. Conduit lenders are still taking losses because they can't profitably sell the b-pieces of their loans or they can't sell them at any price and are carrying the first-loss pieces on their books.
4. Many conduits stop originating, which means less competition for loans.
5. Underwriting standards tighten: less IO, higher debt coverage requirements, fewer earn-outs, lower LTV.
6. B-piece buyers are coming back into the market, but in smaller numbers. 

The combination of the more conservative underwriting and the improved liquidity afforded by b-piece buyers indicates to me that spreads are going to come back down. I'm targeting credit spreads under 200 bps by the second quarter of 2008.  Eventually I think we'll be down around 160, but I'm very uncertain about the timing.

Brad Anderson, a CMBS originator at Wells Fargo and all around good guy, pointed me to the recent purchase of AAA rated bonds by Wells Fargo. This is another indicator that tells me that spreads are going to come down.  It seems that Wells thinks the yields are high and the bonds are cheap.  They are betting that the bond prices will go up on tighter spreads in the future.

So, what is a property buyer to do?  IMHO, I believe that one should look at the many portfolio products that lenders are coming out with before jumping into a CMBS deal.  This means more work on the part of the borrower because your favorite CMBS loan correspondent may not quote you anything but the on-balance-sheet program that his/her home institution is offering.  Also, as many have commented, life insurance companies may be a good alternative for fixed rate, non-recourse financing.

Consumption Vs. Production

It's easy to consume.
Read email.  Watch a movie.  Channel surf.  Sit in a meeting and listen to other peoples' ideas but don't really participate.  Dial into a conference call, turn on the speakerphone with your end muted (the modern  equivalent of the cloak of invisibility) while you surf the web or read email instead of really engaging in what is happening and adding to the dialogue, ideas, or content. 

It's much harder to produce.
Successful people, influential people, interesting people, produce things for others to consume.  They are producing breakthrough ideas and acting on them to get results.  They participate in meetings and add to the content. If the meeting is poorly run and a waste of time, as so many are, they are doing something to make sure things are better next time.   

Please don't get me wrong; there is a productive activity that is neither producing nor consuming. 

Its called preparing.  The problem is that often consuming looks a lot like preparing.  People waste a lot of time fooling themselves that they are doing the one when really they are doing the other.  (This happens all the time with attendees at conferences and trade shows.) 

After days, weeks, or months of consuming, will you be any closer to your goals?  I'd rather be a producer, wouldn't you?

Quick CMBS Update

This was sent to me today from Brad Anderson of Wells Fargo:

"The market saw significant tightening in CMBS AAA’s.  The tightening was all due to secondary market trading, not new CMBS issuance.  The tightening related to a positive September jobs report coupled with a major revision of the August report which also drove the 10-year U.S. Treasury up seven basis points.  Some feel that the credit spread rally was exaggerated, since spreads have tightened considerably over the last few weeks.  However, we should have price guidance on a TOP pool this week to get a better sense of pricing for new issuance.  While good economic news has had a positive impact on CMBS credit spreads, it has had a negative effect on bond yields.  It seems like all-in interest rates have maintained equilibrium over the past couple months due to what has become an inverse relationship between CMBS spreads and the U.S. Treasury index."

The bad news is that the all-in rate hasn't improved.  The good news is that as more CMBS pools are priced, lenders have a better sense of breakeven and spreads will stabilize.  With stable spreads borrowers have a sense of what their financing cost is likely to be over a 3 - 6 month period and the real estate markets will be better able to factor in the cost of capital when valuing deals.

Customers, Leg Lamps, and a Note From Your Stuff

In a previous post I talked about an idea we hatched to reach out to our current customer base for referrals.  We wanted something that was interesting and would stand out from the regular statements that we send them. The campaign also has to be motivating enough and easy enough to act on that our customers will actually do something.

Maybe I'm over analyzing, but storage isn't the easiest thing to make word of mouth worthy.  How many times has your local storage facility come up in a conversations with friends?  Probably not very often unless you are in the business.  Storage is not new or cool.  My guess is that if you were using storage because you have too much stuff, you may have even been a little embarrassed to admit you were paying for a place to keep your overflow.

So here's what we did to get storage out of the closet (pun intended), and make it fun.

Each customer received the following mailer written as though their stuff that is in storage is sending them a postcard:

Front

Back

Click for Larger Image (Note the web address: www.notefromstuff.com)

These were mailed to each of our existing customers.  The web address will be more prominent on future versions.  The idea behind the micro-website was to allow people to share the referral card/offer with more people more easily, i.e. electronically.  My guess is most people are not noticing the URL.

I like the campaign because we can track our results. I'm not sure if this campaign will be effective, but the only way to know is to test it and measure it and we are now on our way to doing that.  We know if it generates actual new customers because to redeem the offer they will have the card or an email generated from our micro-site.  Traffic to the micro-site is also easily tracked.  We are also using a tracking number on the card so that all of the calls generated by the mailed piece, the micro-site, or the follow-up pieces are automatically logged as being a result of this campaign. 

Here's the piece that will piggy-back in the envelopes that carry our customer's bills for the next several months as a follow up.

Front (these are 1/4 the size of the original mailer, maybe smaller)

Back

Kinda like a ticket - each section is micro-perforated so it can be torn off and shared.
We should have put the www.notefromstuff.com URL on these too! Live and learn.

I'd love it if you leave a comment to tell me what you think. 

Swaps - How They Affect Conduit Loan Pricing

If you've financed property with a conduit loan, you have heard the people at your originator of choice talk about swaps, swap spreads, and that they can impact the interest rate you will pay on your loan.  I wanted to know more about swaps and now that I have some answers, I thought I'd share with you.  The information here is pulled from two sources: an email interview I had yesterday with Damon Reed of Capmark Finance (Capmark bought GMAC Commercial Mortgage over a year ago), and from the Bridger Funding website.

Damon Reed explains the pricing process: "In the past, lenders would determine what breakeven pricing was and then add on [their] profitability to the spread along with any other add on’s (I/O, forward rate lock, etc.)  “break-even” would move as deals sold in the market and as swap rates moved up or down.  Generally, as swaps increase, your spread increases on a one for one basis.  Today, some lenders are quoting deals over swaps [rather than over treasuries] due to the volatile market."

Background on Swaps From the Bridger Funding Website: (See the source here)
Swaps -- also known as interest rate swaps -- are an important determinant in the pricing of most fixed-income instruments, including Commercial Mortgage Backed Securities (CMBS). Swaps are a security that most financial institutions utilize to manage interest rate risk. Interest rate risk reflects the potential impact that movements in general interest rates (e.g., U.S. Government Treasury Securities) will have on the value of fixed-income securities. For instance, as interest rates increase, the price (value) of fixed-rate bonds tends to decrease (at higher amounts for longer term bonds).

Swaps are agreements that reflect the notional exchange of fixed-rate interest payments for floating-rate interest payments. This allows an institution to hold a floating rate security, for instance, but effectively receive a fixed-rate of interest for the like term. Although there may be a cost to hold the hedge in place, the "insurance" premium is worth it to most institutions. While the physical exchange of interest payments doesn't necessarily take place, the market price of a swap contract fluctuates in such a manner as to emulate the exchange of payments. The market for swaps is very deep and liquid, and exists because different investors have different views of the direction of interest rates -- not to mention different exposures to rising or falling rates.

The swap yield, or rate, is the fixed-rate of interest paid (or received) in an interest rate swap contract. This yield is equal to the like-term U.S. Treasury Security yield plus a "risk premium", which is referred to as the "swap spread". Think of the swap spread as a generic risk premium that the market prices in to fixed-income securities to compensate for general interest rate risk. CMBS bonds, like most asset-backed bonds, are priced not just over like-term Treasury Securities, but swap spreads as well (in addition to asset-specific credit spreads to account for perceived risk of the subject asset class).

If swaps are an important determinant of CMBS value, why aren't they used more often as a benchmark in quoting CMBS conduit loans?
While larger CMBS conduit loans are often priced over swaps, the traditional practice of the industry has been to index their loan spreads only over the like-term U.S. Treasury Yield (with an increasing caveat explained in the loan application that allows for adjustments to the interest rate based upon swap spreads). The Treasury yield remains the most popular loan pricing index because it is a very relevant determinant of CMBS bond yields, and tend to be more volatile than swap spreads or CMBS-specific credit spreads. In addition, Treasury yields are better understood by many property investors, who find that it’s easier to locate the current Treasury yield in newspapers and web sites (although a few sites, like BridgerFunding.com, also display swap spreads.)  Find swap spreads here.

How can swap spreads affect your mortgage interest rate?
Sustained increases in swap spreads usually result in lenders’ raising their loan spreads (and/or inserting language in the loan application that adjusts the interest rate for future changes in swap spreads). In addition, if your loan’s interest rate has not been locked, an increase in swap spreads could have a material impact on the value of your loan. Accordingly, in rare circumstances the lender may work with you to adjust the interest rate when it is locked to offset some of the decline in value. The impact of changing swap spreads affects all mortgage players equally.

What factors tend to cause swap spreads to increase?
Typically, interest rate swap spreads will rise with Treasury yields. This is especially the case when the market starts to perceive that higher Treasury yields may last for a while. As interest rates start to rise, the value of fixed-rate bonds decreases, which tends to increase interest rate swap spreads. In other words, the generic risk premium expands in the face of expectations for rising rates. In addition, swap spread movements can be exacerbated by the aggregate impact of asset-backed security hedging, which often becomes acute with quick jumps in interest rates.

As Mr. Reed said when he referred me to the Bridger information, "This will give you some color on swaps, but again it doesn’t help you in today’s market because we are just guessing where break-even is today.  Until all the stacks of a CMBS sells in the market, spreads will continue to be a guessing game.  I expect this to flush out next month as most of the supply will be gone."

In the interest of full disclosure - I've done many deals with Damon, and a few with other originators. I have a sense of what kind of service is standard in the market.  Damon and his team go well beyond "standard"; they have executed far better than any lender I've worked with.  That's why I went to him to help me with this post. That's why I'm plugging him and his team. And that's why we keep doing deals with him even though we are in California and he is in Birmingham, Alabama. If you are looking to do a CMBS/Conduit loan I suggest you give them a shot at your business.

6 Nuggets from the Self Storage Association Conference

A few things I learned at the Self Storage Association conference recently held in Las Vegas:

Operations

1. Ask customers when they are at the counter how many stores they called or visited before they came to rent with you.  According to Ken Nitzberg from Devon Self Storage, 53% of his customers don't shop around.  It's a strong signal that the customer is not price sensitive.This allows you to "spot price", i.e. offer a higher price and/or give fewer concessions than you normally would.


2. Dan Hobin at G5 Search Marketing has a very innovative approach to lowering your customer acquisition cost. He has put together a solution that not only gets you marketing online in a meaningful way with little hassle, but has a great way to track the effectiveness of your spending.  I haven't tried it out yet, but he got lots of raves at the conference from some of the larger operators.  We plan on giving his service a try with a number of our portfolio properties.


3. Devon Storage Group is able to get an 89% penetration rate selling insurance to cover their tenant's stored goods. If I understood Ken's comments correctly, they achieve the high penetration because they require every tenant to purchase insurance or show proof that they have their own coverage.  Sounds like it might be a bit difficult to execute if you are in a soft market. However, it's probably worth trying; by my estimate that is $400 - $800 to the bottom line each month because there is really no incremental cost to the add-on sale.


4. Jefferson Shreve, president of Storage Express made me wonder why we don't at least attempt to rent the space over the phone. I mean actually close the deal.  Most operators talk about trying to convert phone inquiries to store visits and store visits to signed rental agreements. Storage Express operates nearly 70 locations with no on-site staff.  They close every deal over the phone or online. 

Finance

1. Conduit Lenders are starving (no surprise). However the conduits that are quoting deals are offering spreads of about 200 basis points over the ten-year treasury yield.  That is a big spread, but the all-in rate is still less than 6.5%.  Not as good as we were seeing 6 months ago, but still very low relative to historic rates. 


2. LIBOR typically trades within a quarter point of the Fed Funds Rate.  The primary reason it is much more volatile is because there is no Federal Reserve intervening in Great Britain.

Meetings

I know that this isn't really on-target with the commercial real estate focus of this blog, but its on my mind so I thought I would share.

Here are seven good reasons to have them:

1. To build personal relationships
2. To give public recognition
3. To make a presentation that requires visuals or group interaction (preferably both)
4. To inspire the group in a way that a memo or email never will
5. To collaborate, discuss, debate, and decide
6. To brainstorm
7. To give candid, personal feedback on someone's performance

Here's some ways to make meetings a frustration

1. No one takes charge and keeps things on track
2. Meet only to give and receive reports that could just as effectively been communicated in an email or memo.
3. Discuss, at length, items that pertain to only a portion of the assembled group (the group within the group need their own meeting)
4. Start late and go over the allotted time
5. Stifle discussion or conflict - if you are having a "discussion" but most are not talking and the others are only agreeing, there is a problem.

Training Self Storage Employees

Three factors have pushed us to train our employees more effectively. 

1. The self storage business is becoming increasingly more competitive.


2. We are buying properties with a value-add strategy and that means we need excellent execution at the operational level.


3. Our portfolio is spread out geographically which means we need managers who can be effective without a lot of continual hand holding because it is difficult to visit all of our locations as often as we would if they were all concentrated in one metro area.

Although we don't have it down yet, here are some of the things we are learning as we have been training our employees to be more effective converting phone inquiries to store visits and rentals.

1. Training in a teleconference environment is difficult, but it is better than nothing. You have no idea who is engaged and who is falling asleep.


2. It is more effective to follow up any teleconference training with some written materials that outline everything covered while on the phone.  It is likely that the people working behind the counter at a storage facility were not good students when they were school age.  They are probably not taking notes, and if they are they may have messed them up.


3. Record the teleconference/webinar and let the participants watch or listen to it again.  If you are interesting and dynamic enough in your training that they listen to you again you should take it as a compliment.


4. Follow up relentlessly with activities that reinforce the learning and force the participants to apply their newly acquired knowledge. 
   
   We have our on-site managers review and critique their own "secret shopper" calls. In addition, they listen to the calls of their colleagues and vote for the best one. We are starting to record live calls so that our employees can listen to themselves interact with real live prospects, not mystery shoppers.


5. Make the follow-up learning/application activities as fun as possible. 
   
   If you can't make it fun, at least make it so obviously relevant to their job performance that the participants want to engage in the activities.  So far we've made it a contest with a prize awarded by the voting of their peers and a second "editors choice" award decided by me so that I can point out calls that have an excellent section that can be used to illustrate one of the sales strategies covered in the training.  We need to get more creative in this regard.


6. Once you train your staff and begin monitoring how well they perform the new behaviors, you will quickly realize that some are catching on much much more quickly than others, others improve slowly, and a small group makes almost no improvement at all. 


7. The ones catching on the fastest need more attention and coaching, not less.  Eventually they can help the middling group.


8. The ones who are making no progress probably have an attitude problem.  If you care about the behavior enough that you are taking the time to train and monitor, then you should consider replacing these people or changing their role.


9. Your  employees with positive attitudes will be grateful that you are helping them do their job better and you will improve their commitment and loyalty to your company.


10. Training allows you to hold your employees to a higher level of accountability because you are taking away excuses for poor performance.


11. Training is also a tool to help build camaraderie among employees who rarely interact, because through the training they have some shared history. 


12. It's not all about the phone, they need training on how to handle email inquiries as well.


13. I wish we started sooner.

What's Coming Up

Sorry for going radio-silent on everyone.  I was on vacation for a week and then I spent 3 days in Las Vegas visiting portfolio properties, having a marketing pow-wow with my property management staff, and attending the Self Storage Association conference and trade show.

Here's what's on the docket for the next few posts:

1. What I learned at the conference in Vegas
2. Talking a little about Swaps.  What they are and how they affect spreads on CMBS loans.
3. Talking about what I've learned trying to train employees
4. Of course I'll talk about the loan assumption I've been posting about recently

My two oldest daughters play soccer, and I'm the coach.  I ran my rear end off this evening, so I'm pooped.  I'll start with these topics in the next day or two.  Goodnight.

Assumption Update

Let me first say that the head of the Transactions Group at Key Bank, Peggy S., is a gem.  Since getting involved with our file she has been extremely responsive and is a very reasonable person.  I sincerely enjoy working with her. 

She clarified with me today that they don't have an issue with our Buyer assuming the loan. They are happy to recommend him.  They only have an issue with him self-managing the property. 

So, here's the learning point.  When dealing with a Conduit Loan/CMBS loan, the Special Servicer is looking for an experienced third party management company or a self-managing buyer who has experience operating the same type of property, preferably in the same market area. It doesn't really matter if they have other relevant experience if it doesn't fit into their narrowly defined box.

They are willing to reconsider their position in 18-24 months after the buyer has some experience with the property.  She commented that if the DSCR stays strong and the property continues to perform well, a request to self-manage at that time would likely be approved.

As you can tell, my tone is a lot less frustrated today. I have renewed hope that we will get this deal done.

Conduit Loan Assumption - The Ongoing Saga With Key Bank

In a previous post I talked about the challenges I was having with Key Bank in getting an assumption approved so we could sell a portfolio property.  My dealings with Key improved briefly, and then they got much worse. 

Let me explain.

My original frustration was that they were moving so slowly.  On 8/15/07, the day after my last post about this matter, I started calling around to see if I could get an ally within Key Bank to exert some pressure.  To my pleasant surprise that same day I received a call from the head of the Transactions Group in Dallas before any of my acquaintances within Key had a chance to call or email them.  It turns out that the management is competent and had, on their own, realized that my file was languishing and reached out to me to assure me that they were prioritizing it.  They told me that it would soon be passed from their hands into the hands of the Special Servicer.  In fact, they said it should all be written up and passed along by Monday, August 20th.

So far so good.  I had a smile on my face.  I couldn't believe my good fortune. 

But then things took a turn for the worse.  On Monday the 20th both the Buyer and I get a last minute request for some additional information.  I was perturbed because it was information that they could have requested weeks ago if only they had reviewed the file more carefully at some point in the first 14, 21, or even 30 days. 

Now today, a week later, our underwriter calls the Buyer to tell him she is not inclined to approve the assumption.  I'm blown away.  Her reason is that the Buyer doesn't have the experience needed to make her comfortable with him doing his own property management. 

Did I mention that they have had the Buyer's resume and a description of his professional experience for about two months now?  How is it that they are just now concluding that the Buyer is not sufficiently qualified to operate a small commercial property? 

What does an unqualified buyer look like you might ask.  In this case our unqualified buyer is in his late fifties or early sixties.  He has been a real estate investor most of his career.  He has made most of his money in single family homes, and although not commercial property, he has had the organizational ability and professional savvy to buy and sell hundreds of homes and most recently maintained a portfolio of 42 homes in two states, CA and TX.  He mastered the landlord/tenant laws in two states sufficiently to stay out of trouble with his tenants and keep his properties rented.   He has fee managed other peoples SFR investment properties. He has amassed enough personal wealth that he would qualify as an accredited investor.  He is also a real estate broker in California and Texas.  He manages a staff of several employees while running his own brokerage and investment business. 

Not only that, but should the deal close, he will have nearly five times the cash equity in the deal than our current partnership. 

If I were the lender I would be rejoicing.  Key Bank has a performing loan on a property that has gone up in value improving their LTV position.  Rents have been substantially increased so the property's DSCR is much higher now than when they underwrote it.  And they have a person of substantial means and good credit who wants to step in and replace our paper gains with his own real cash equity in the deal. 

I just don't get it. I pray that reason will prevail.

If you're reading this and think I'm missing something, please email me or comment and let me know. I'll take all the help I can get.

"Ideas And"

Ideas, even really great ideas, don't add a lot of value.  Its the "idea and" that really matters.  The idea and the execution.  Or the idea and the persuasion.  Or the idea and a the expert communication that leads to  a new perspective. Or the idea and the data and analysis

A few days ago I listened to a free "teleseminar" put on by a self storage marketing consultant, Derek Naylor. He did a decent job sharing some ideas.  Most of them I've heard before, but there were a couple of good nuggets.  Did I mention that the call was free (except my time)?

I've also read a few good books lately: Word of Mouth Marketing by Andy Sernovitz, Go Put Your Strengths to Work by Marcus Buckingham, and the classic Influence: The Psychology of Persuasion by Robert Cialdini.  These three books are packed with good ideas.  Total cost: less than $50. 

Seth Godin's Blog is free.

The ideas are everywhere and they are not that expensive.  Mounds of really good ones can be had for a bargain.  What we are striving for at Crescendo is the And.  We have a super-bright people.  We have lots of ideas for how to improve the performance of our properties, how to find more and better deals, and how to make our work more fun and meaningful.

Figuring out how to implement and test the ideas we already have is where the real value lies.  For me at least, this is the low-hanging fruit.  My guess is it is likely the same for you. 

Conduit Loan Assumption Nightmares

Like I mentioned in a previous post, when dealing with a conduit loan assumption you should expect it to be more hassle and take longer than you think it should.  I felt prepared for that.  However, dealing with Key Bank on our current deal is maddening.  We originated the loan with Column Financial, and Key Bank is the Master Servicer. The deal calls for our buyer to assume our existing financing.

When we first submitted the application for the assumption we planned on closing the deal by the end of August.  Thankfully our buyer (the assumptor) is very motivated to close the deal and has been very prompt in providing all of the requested documentation about himself and his entity. 

After several phone calls and emails looking for confirmation that we were on track for an end-of-August close, I finally received an email saying that closing in August will be impossible.  I called again this morning to find out what the new timing would be (of course Key Bank didn't include that vital bit of information in the original email response).  I looks like we are more likely close around the end of September.  The explanation for the delay... there are other borrowers with looming exchange deadlines.  Pam, the rep I've been working with hasn't been able to get our package together to submit to the Special Servicer who is the second step in the assumption process.  AAAARRrrrrggggg! 

OK, so lets assume you are in my shoes someday.  What should you do?  Here's some suggestions.  I'll let you know how they work.

1. Create urgency.  Since I don't have a looming exchange deadline, I'm going to tell them that my buyer's resolve is wavering and they better not make me lose the deal.   
2. I'm going to contact our rep at Key Bank who works in origination (not servicing) and see if he can exert some pressure. 
3. I'm going to contact the head of Key's Conduit Lending group here in the West, Louis Weisman, and see if he can help me.  Key originated a $5M loan on a self storage property we acquired in 2005 and Louis wants to put the permanent financing in place now that the property is leased up. Hopefully he'll see helping me as getting a leg up on the competition. 
4. I'm going to talk to the correspondent lenders who originated the loan and see if they can exert any influence even though they are not with Key Bank.

I wondered out loud in a previous post if there is room in the market for "premium servicing".  I'm not sure I would pay for it up front when it was so uncertain whether I was going to need the "premium" part.  However, in the present circumstances I would gladly pay an addition $1-5K to get some speedier service and a guarantee that we would close by a reasonable date. 

I also wonder if a lot more assumptions are in the pipeline because the spread on conduit loans have increased to around 200+ bps over the treasury with lower LTV and higher DSCR thresholds.  The current conditions in the lending market  certainly make assuming a loan a lot more attractive these days. 

Ugly Storage

I mentioned that MyNextDeal.com has an interesting blog.  I was taking a peek and found this interesting post about an ugliest building contest put on by Curbed LA. 

It turns out two of the finalists were (not surprisingly) self storage buildings.  One is an ugly Public Storage.  The other is an A-American Storage.  It's true, these are scary-ugly.  For more laughs, scroll down below the pictures to see the comments. 

Maybe that's why the returns in self storage are so healthy.  It's hard to believe something so ugly could be so profitable.  Also, no one is going to brag about their "trophy" self storage property. 

Nice Note

I got a nice note in my inbox today from Fred Simanek at MyNextDeal.com.  Actually, it was sent from Fred's email address, but signed by the "My Next Deal Team".  So, I'm wondering if Fred really likes my blog like he says he does, or if the email is just a marketing ploy.  I assumed the email was sincere, and I replied to him.  I wonder what I'll get back. 

In case you haven't heard of them, MyNextDeal.com aggregates commercial real estate listings.  According to their website, "Our site searches hundreds of commercial real estate websites in real-time, every day, so that you need only search one..."

I'm a big user of Loopnet.com and have never tried MyNextDeal.  I'll give it a whirl sometime soon, and if it's any good I'll write about it.  Whether or not the search function is any good, I'm not sure, but they do put together an interesting and entertaining real estate blog.

Market Swings Vs. Fundamentals

In my last post I talked about the volatility in the debt markets. 

The thing that really strikes me is that all of the increases in spreads are coming after the problems with the sub-prime loans and after lenders have tightened the underwriting criteria for conduit loans.  It seems like the time for the bigger spreads was before the underwriting got more conservative, not after. 

The spreads widening after is a function of the fear in the market.  It has nothing to do with the underlying fundamentals of the loans or the assets behind them.  Because of the changes in underwriting, the loans have become less risky, not more.

I bet the guys who are moving into the corporate bond and CMBS markets now are going to do great because they are taking advantage of a market swing caused by market forces that are not tied at all to the fundamentals of the investment.

I believe Splash & Dash Carwash is going to benefit from the same thing.  Car washes are the redheaded stepchildren of commercial real estate.  Retail developers are reticent to include them in their developments, and many lenders are reticent to loan on them.  However, in my opinion, that's just the current market perception.  If you look at the fundamentals, these are great deals. 

Because Splash n' Dash and their investors are ignoring the market for the time being and focusing their attention on the fundamentals, I think they are poised to win big in the medium to long term.

You can make money on momentum and arbitrage, but most investors will make money by taking risks based on the fundamentals.

Key Financing Indicators

Today's Wall Street Journal Reported today in an article by Sudeep Reddy, Mark Whitehouse, and Kelly Evans:

• "Futures markets, in a reversal, now bet that the Federal Reserve is almost certain to cut its key interest rate, now at 5.25%, by a quarter-point before the end of the year."
• "Mark Kiesel, a corporate-bond portfolio manager at Pacific Investment Management Co. in Newport Beach, Calif., estimates that the backlog of unsold bonds and bank loans exceeds $300 billion -- a situation he sees as similar to that in the housing market, where the backlog of unsold homes has also reached new highs. At June's rate of existing home sales, it would take 8.8 months to unload all the houses on the market -- a 15-year high."

Brad Anderson, of Wells Fargo Commercial Mortgage, sent me some interesting info on the CMBS market and the impact it is having on Conduit Lenders and borrowers.

• Because  of the heavy supply and the  weak demand for  CMBS by  hedge funds and other institutional investors  the  spreads  charged by the conduits to borrowers have soared in the last week.  A typical conduit loan on a Self Storage deal is likely to be priced at 180 basis points over the treasury yield.  This represents a 50 basis point or one-half percent increase in interest rates to the borrower over the last week. According to Brad there is  $58,658.60 MM in CMBS supply  hitting the market in the  third quarter.   
  
  It looks like higher spreads are hear to stay for a while.

Click Image to see it bigger.

A silver-lining and possible white knight

• Treasury yields have dropped over the last week to somewhat offset the increase in spreads. Treasuries yields dropped 17 basis points over the last week to close at 4.79%.  This is down 41 basis points from the July high of 5.20% on July 6th.
   
• The WSJ reported today that some hedge funds that have not been hurt by the sub-prime mortgage fiasco and the volatility in the bond market are stepping in to buy bonds because of the more generous yields.
  
  
• These new entrants, although acting opportunistically, are bringing an additional level of liquidity to the debt markets at a time when liquidity is sorely needed.  If this trend continues, it may help stabilize the CMBS market as well.