CMBS lenders are becoming pickier about locations and total loan amounts. How is this affecting potential buyers?
Cinelli: Buyers are not as willing to accept a story about potential increases in rates and occupancy at the facilities they’re considering. Loan rates are higher; the buyers are looking at a minimum of 8 percent on their return before debt.
Mendola: Yes, CMBS lenders have the Wall Street affect to deal with. Even though the one-year T-bill is a full 100 basis points lower than it was six months ago, the credit spreads have widened to the point that the rate for leveraged deals is 75 to 100 basis points higher than it was last summer. Under leveraged deals of 60 percent to 70 percent seem to fare better than the 75 percent to 80 percent deals. These lenders do not seem to be in a real hurry to get their money back out on the street.
Shields: As the CMBS lenders change their attitudes, philosophies and standards about lending, the buyers’ attitudes also change. A lot of buyers are now looking to more class- A locations and facilities because they give them the best opportunity to get funding. On the other hand, there are a number of buyers who are eliminated. These buyers would look to acquire class-B and -C facilities, but now can’t meet the lenders’ standards or they don’t have the cash for deals that require additional equity.
You can be sure that any deal that is made by a CMBS lender today is getting big-time scrutiny. As Mendola says, the days of unlimited leverage are gone! Thus loan-to-value ratios are probably the most important thing lenders look at when underwriting today.