Moody's Approach to Rating Commercial Real Estate Mezzanine Loans

In March, 2007, Moody's released their rating methodology for Mezzanine Loans: Moody's Approach to Rating Commercial Real Estate Mezzanine Loans.

This report outlines Moody's view of a baseline, "credit neutral" mezzanine loan structure and how they apply that view in rating mezzanine loans.


Baseline Expectations:

• Mezzanine Loan Agreement - comparable to CRE mortgage loan agreement.
• Underwriting - same third party deliverables as a mortgage loan
• SPE - Borrowers should be special purpose, bankruptcy remote entities. They should have independent directors and non-consolidation opinions at the same thresholds that apply to REMICs.
• Pledge of 100% membership
• Recourse Carve-out Guaranties
  
• Cash Management - hard lockbox
• Maturity - same date as mortgage loan
• Certificated entities - opt-in to Article 8 of the UCC
  
• Title Insurance - ALTA 16 Mezzanine financing endorsement
  
• Intercreditor agreement - expects the 2002 CMSA form of agreement
  
• Interest Rate Caps
  

Security Deposit in Massachusetts

The Massachusetts Appeals Court ruled that a security deposit for a Massachusetts residential lease must be deposited in a Massachusetts branch of a Massachusetts bank: Taylor v. Burke. (subscription required)

The landlord in the case opened the security deposit account in the New Hampshire branch of Citizens Bank.

Under MGL c.186, S. 15(B) , (3)(a) provides: "Any security deposit received by such lessor shall be held in a separate, interest-bearing account in a bank, located within the commonwealth under such terms as will place such deposit beyond the claim of creditors of the lessor, including a foreclosing mortgagee or trustee in bankruptcy, and as will provide for its transfer to a subsequent owner of said property. . . ."


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Adult Entertainment Firm To Launch Real Estate Loan Fund

Real Estate Finance and Investment is reporting that an Adult Entertainment Firm To Launch Real Estate Loan Fund.

I guess there is an investor market for anything.

Historic Turning Points in Real Estate by Robert Shiller

Robert J. Schiller published a new paper that looks for markers at the ends of real estate booms or busts:
Historic Turning Points in Real Estate by Robert Shiller.

His best guess "is that ends of housing booms have multiple causes, and cannot generally be interpreted as just an unraveling of boom psychology. Still a rising sense of enthusiasm and excitement for the investments, followed by a sense of betrayal and embarrassment at having fallen for the boom and underestimating the supply response to the boom, played a significant, if unquantifiable, role in the booms and their subsequent break."

How Much Is a Realtor Worth?

Stephen Dubner continues to bash Realtors on his Freakonomics blog: How Much Is a Realtor Worth? If you have read his Freakonomics book, you know that he pointed out that real estate agents tend to sell their own property for more that their clients.

The latest is a discussion of a paper comparing MLS sales against FSBO.Madison.com. The results did not come out in favor of the Realtors. The National Association of Realtors claims that sales through agents had a median price 16% higher than a home sold directly by an owner ($230,000 vs. $198,000). The paper disputes that statement.

Foreclosure Activity in Middlesex North Registry of Deeds

Dick Howe at the Middlesex North Registry of Deeds in Lowell reports that foreclosure sales are up but that the foreclosure pipeline has not dramatically increased: Foreclosures Up - but not for long.

In May, 2006, there were 78 Orders of Notice and 8 foreclosure deeds.
In May, 2007, there were 65 Orders of Notice and 40 foreclosure deeds.

It looks like the flow of borrowers in trouble is starting to slow and lenders are clearing the troubled loans from their books.

Based on a comparison of the number or recorded deeds in this registry, the volume of sales has not changed significantly. In April of 2006, 555 deeds were recorded. In April of 2007, 541 deeds were recorded.

One Financial Center in Boston goes on the market

The Boston Globe is reporting that the original developer/long-time owners of One Financial Center in Boston are cashing out: Amid towering prices, One Financial Center in Boston goes on the market.

The building cost $100 million to build and opened in 1984. It has 1,065,607 square feet of space is nearly 100 percent leased.

The sale price of this building will set the market for Class A office buildings in Boston. The other most recent transfers were portfolio transactions. The broker is looking for a sales price of $800 per square foot.

The Problem with Email Addresses on Law Firm Websites

The Massachusetts Bar Association's Committee on Professional Ethics has issued an advisory ruling that having a lawyer's email address available on the firm's website can be a problem.

Massachusetts Lawyers Weekly published this story about MBA Ethics Opinion No. 2007-1, Lawyers Weekly No. 24-001-07 (Subscription Required).

"In the absence of an effective disclaimer, a lawyer who receives unsolicited information from a prospective client through an e-mail link on a law firm web site must hold the information in confidence even if the lawyer declines representation. Whether the lawyer's firm can represent a party adverse to the prospective client depends on whether the lawyer's obligation to preserve the prospective client;s confidences will materially limit the firm's ability to represent the adverse party."

The opinion distinguishes between email sent to a lawyer through the firm's website and an email sent by other means. Ordinarily, the lawyer has no opportunity to control the flow of information to their email inbox and a prospective client should have no expectation regarding confidentiality or the establishment of an attorney-client relationship. The opinion points out that the law firm can control the flow of information originated from its website and condition the use of email links by appropriate disclaimers. In addition, since the law firm website makes the expertise of lawyers available, the client has the ability to identify an appropriate lawyer to communicate with.

I have always been annoyed at websites that do not expose the lawyer's email address, but instead requires you to fill out a form that passes the information on to the person. I always preferred websites with a readily available email address.

It looks like firms in Massachusetts will have to start using an email message form on the website with an appropriate disclosure that "any information communicated before the firm agrees to represent the prospective client will not be treated as confidential" and that the "receipt of information from a prospective client will not prevent the firm from representing someone else in the matter."

Justifying New York Rents

Howard Michaels of The Carlton Group justifies the high prices being paid for commercial real estate in New York in Real Estate Finance and Investment: IRR-Driven Investments Bring Investors To New York.

While others in the market may wonder if they should be underwriting rents in excess of $100 per square foot, Mr. Michaels looks to other major global cities to compare.

He uses a CB Richard Ellis survey to see that the average occupancy cost in New York is $62, but in London's West End it is $212 and Tokyo's inner city is $145.

He also compares the cap rates in Tokyo, London, Madrid, Paris and New York. Tokyo is at a 3% cap rate. London, Madrid and Paris are at a 4% cap rate. With New York at a 6% cap rate it ranks cheaper than other major cities.

I previously pointed out stories about changes in the markets that impact real estate prices. Mr. Michaels thinks they are still comparatively cheap.

Skyscraper Prices Might Start Returning to Earth - WSJ.com

WSJ.com reports Skyscraper Prices Might Start Returning to Earth(subscription required).

In part because "On April 11, Moody's Investor Service sent up a warning flare, saying that lenders had gotten too aggressive and underwriting standards had become too lax."

The sub-prime lenders in the residential market running into trouble was the warning sign for the collapse of the residential real estate market. Could the warning on debt for the commercial markets signal a decline in the commercial real estate sector?

Probably not. As the story points out "Demand for real estate remains strong among foreign buyers eager to take advantage of the weak dollar, and among institutional investors, who have roughly $1.8 trillion -- as much as four years' worth of money -- queued up ready to invest in real estate." There is still a tremendous demand for institutional real estate that will keep prices up. The issue is whether purchasers and lenders should be underwriting based on the rapid increases in rent.