Impact of Lending Crisis on Sale/Leaseback Transactions

Tighter Mortgage Market Demands Lower Risk Profile
by Shawn Gilreath & Jeanne St. John of CresaPartners

The implosion of the sub-prime residential lending market has been well covered by the media in recent months with the collapse of Ameriquest, New Century, Novastar, Ownit, Mortgage Lenders Network USA and many others. This drop in the residential debt marketplace also has caused repercussions in the commercial mortgage markets.

In May, two of the five groups that were buyers of the lower grade levels of commercial mortgage backed securities debt stopped buying these debt tranches. Seeing the devastation in the sub-prime market, bond rating agencies are requiring higher subordination levels and have begun lowering ratings on commercial mortgage backed securities bonds.

Commercial mortgage backed securities investors are now demanding lower risk profiles from securitization programs and requiring higher returns in order to compensate for the increased risk. Some of the demands to reduce risk include increasing debt service coverage, increasing amortization and reducing loan-to-value. This tightening in the market is already trickling down as stricter financing terms and higher interest rates on new loans to property owners. Commercial mortgage backed securities woes are being further compounded by treasury yields rising to their highest point in five years. Perhaps hardest hit will be property owners who purchased real estate in recent years, used floating rate debt and assumed that generous debt programs and low rates would be available for several more years. For companies occupying real estate, this shift in the commercial mortgage backed securities market may have dramatic adverse results.

A large amount of capital was allocated this year for real estate investments. Most market players agree that less capital will be available in 2008 and the dollars that are allocated will require higher rates of return.

Companies considering a sale/leaseback or other transactions in 2008 should consider executing those strategies now, while there is a surplus of capital.

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