Daily Real Estate News
Thursday, March 07, 2013
10
DEADLY errors that CRE occupants
make
Student Housing
Another lucrative property niche that has emerged post-recession is student housing. With state-run schools facing fund cuts for on-site housing, private developers have stepped in to deliver off-campus facilities. These are not the dorms you remember from your college days, however: the Millennial generations expects the very best, with privately-run student housing offering such amenities as resort-style pools, volleyball and basketball courts, 24-hour workout rooms and state-of-the-art washers and dryers that send text message alerts once the laundry load is complete.
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while sitting on the sidelines. Not an easy choice as there is incredible pressure to invest -- not at all costs, but invest nonetheless."
Monty Bennett, chairman and CEO Ashford Hospitality Trust, doesn’t think refinancing means having to sit on the sidelines. His REIT has been refinancing to draw out capital from its current holdings and buy more.
In July Ashford Hospitality refinanced three mortgage loans that had a combined outstanding balance of $325 million with new loans totaling $469 million resulting in approximately $104 million in excess proceeds.
It used that money to acquire a pair of hotels in Fort Worth, TX and in Silicon Valley, CA. At the same time, Ashford is also selling into this market. It has two small hotels with no debt that it is in the process of selling.
Shaner Hotel Holdings, a Pennsylvania-based hotel owner-operator, is also taking advantage of refinance opportunities to capitalize on current market conditions.
Just this week, it closed on a 10-year, $226.6 million commercial mortgage-backed securities (CMBS) loan with JP Morgan Chase, providing ample capital to reposition and expand its hotel portfolio.
Others, perhaps chastened by the still-fresh knowledge of how quickly real estate cycles can turn, continue to believe that selling off properties when buyers are plentiful is the best option in today’s market.
"We continue to be biased in favor of dispositions and maintaining line capacity and cash, as we continue adding build-to-suit projects to our pipeline,” Will Eglin, CEO of Lexington Realty Trust, told investors this month.
Eglin said that through 2015, Lexington expects to cut $150 million of secured balloon debt from its balance sheet through property sales. And it expects to pay off another $112 million by issuing unsecured debt.
"While we continue to unencumber assets from time to time, we may access secured financing when we believe it is advantageous to do,” Eglin added, “particularly in connection with ground sale-leaseback transactions or financing for a term longer than 10 years.”
The Case for Refinancing Now
In addition to being able to generate money for re-investment by refinancing property in the current market, there is a tax advantage to this strategy, say professionals we contacted regarding the pros and cons of refinancing vs. selling.
Gordon Gilbert, principal of Gilbert Advising & Appraising in Baltimore, said his clients are hoping to avoid selling a property and taking a hit on high capital gains taxes.
"The investor groups I work most closely with are seeking refinancing opportunities, with low loan-to-value ratios,” Gilbert said. "Taking out equity from a re-fi is not a taxable event, although it does reduce one's capital basis."
Kenneth Haydis, head of leasing for International Business Centers in Los Angeles, said his company has refinanced at a 3% rate.
"With the extra cash flow I am hitting the principal balance hard and plan on paying off the loan in five years," Haydis said. "Rates will move higher. And I do not think it makes sense to sell right now with the state and federal tax rate so high."
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Current low interest rates also make the strategy right for certain investors said Barry Silver, principal of The Silver Group in San Rafael, CA.
"If you are comfortable owning an asset long term, a refi is a great option,” said Silver. "Long term interest rates are at historical lows. When interest rates rise, and they will, the low fixed-rate debt will create additional value."
While the market for refinancing is prime right now, there are other important considerations that factor into an owner's decision.
"For some owners that are having trouble buying assets in an increasingly competitive capital markets environment, it may make sense to refinance, which allows them to take some chips off the table but still keep some skin in the game,” said Scot W. Humphrey, vice president in the Capital Markets Group of Cushman Wakefield Thalhimer in Raleigh, NC. “However, bringing a partner into any deal creates a whole new set of challenges that owners should be mindful of before going down that road.”
Jaimine Johnson, director of commercial real estate assets at DRK & Co. in Columbus, OH, sees the strong supply and demand fundamentals in the marketplace as another reason to hang on to properties.
“The market is making slow steady climb. This is the ninth consecutive quarter that the (CRE) market has gained,” Johnson said. “The asking rates are slowly coming back up. We are hoping that this market stays strong and continues to rise. Lastly, we are seeing construction in these markets. Something we have not seen in a very long time. This is typically a sign of good growth. Most landlords will hold assets during a period like this.”
The Case for Selling Properties Now
For some, the decision is more black-and-white, driven largely by recent experience.
A.J. Beachum, senior sales associate of Income Property Organization in Bloomfield Hills, MI, said he tells clients who own apartment buildings to sell now while the selling is good.
“With the combination of free money and artificially high operating fundamentals (partially due to brutal home lending policies) you can sell your deal for a lot more than it is worth." Beachum said. "Separation anxiety? Don’t worry, you can buy it back from the bank for half the price in five or seven years when the buyer’s note comes due and rates are at 8% and he has to hand back the keys.”
While Beachum’s may be the most uncomplicated outlook, the decision to either refinance, pull equity out or to sell a property is anything but one dimensional, others said. It is a multi-faceted issue that largely depends on a property or owners’ specific situation.
“Sources of capital are becoming more comfortable with the improving conditions in the market and are willing to invest in more markets and in a wider set of investment strategies,” said Frank A. Csapo, CEO of Barrister Commercial Group in Louisville, KY. “With that said, however, investors are crowding into the investment-grade category leaving lesser grade categories still starved for investment and capital.”
“Further complicating matters, interest rates will inevitably rise and the potential for rising rates creates uncertainty and discomfort as it muddles the exit strategy for developers if cap rates also rise,” Csapo said.
According to Csapo, the extensive availability of investment capital and cap rate compression on 'blue chip' investment grade properties will continue to be a catalyst for the sale of those property types. As will the fact that many companies are repositioning portfolios by divesting of underperforming assets.
“Disposition activity is likely to continue in 2015 as CRE owners evaluate and reposition their portfolios in light of changing tenant demands and low development activity,” he said. “Cap rate compression across all property types continues to drive higher asset prices and motivates CRE owners to sell rather than refinance.”
Brian P. Ward, president, Capital Markets | Americas for Colliers International in Seattle, said a strong argument can be made for either strategy.
Pointing out that both fixed and floating interest rates are at historical lows. Ward said taking advantage of low rates to drive cash flow and returns makes a lot of sense.
"However, it does not make sense to put a 10-year loan onto an asset that an owner plans to sell in the next two to three years," he added. "Nor does not make sense to put floating rate debt onto an asset that an owner plans to hold longer long term (seven to 10 years)."
And for the undecided property owners who are not sure whether they want to go short or long with their asset, there are financing strategies for them as well in today’s environment.
“These strategies can include conversion options from floating rate to fixed rate, early prepayment flexibility, swaps and liberal loan assumption/ loan re-sizing provisions,” Ward said.
At the end of the day, investment advisors say it all comes down to the individual's investment strategy.
"Selling today and taking profits off the table can make a lot of sense when buyers are willing to pay aggressively for assets because they can finance those assets with a historically low cost of capital,” Ward said. “Conversely, that same owner may be able to refinance using the same historically low rates and capture the cash flow benefits as a result.”