Commercial Real Estate Loans Requesting Loans

Beaverton, OR, August 23, 2005 -- http://www.pacificsecuritycapital.com -- Pacific Security Capital (“PSC”), a leading commercial real estate investment bank, headquartered in Beaverton, Oregon, explains how to best navigate the commercial capital market to choose a capital provider.

Financing a commercial real estate transaction is no longer a simple matter. Now, there are many considerations that must be evaluated when selecting a capital provider.

Mike Myatt, executive managing director with Pacific Security Capital, explains that “in order to increase project velocity, improve operating efficiency, conserve internal capital, increase leverage and lower the overall cost of capital, it is essential that a sponsor develop an integrated capital formation strategy surrounding acquisition/refinance/development initiatives.”

Among the many things those commercial real estate borrowers in today’s marketplace need to address when seeking capital are:
- The selection of the appropriate capital provider;
- Level(s) of the capital structure to be addressed;
- Operating considerations;
- Control provisions;
- Rate, term, pricing and structure;
- Closing time frame;
- Third party requirements;
- Certainty of execution;
- Recourse provisions;
- Exit and pre-payment options;
- Inter-creditor or other multi-party agreements;
- Post closing servicing issues;
- The effect of the capital acquired on tax, balance sheet, future projects or portfolio considerations, and;
- A whole host of other value-added considerations.

The first thing that borrowers must understand is that all capital providers are not created equal. There is a definite hierarchy within the world of capital providers and understanding the value-ads offered by different capital providers is important in choosing a relationship.

Myatt adds that “while many borrowers believe financing to simply be a commoditized offering, the selection of a capital provider, should take into account far more than rate and term considerations. In choosing a capital provider, the goal of any borrower should be to develop a close relationship with the firm that can provide not only the broadest access to capital, but more importantly a firm that offers best-in-class subject matter expertise, certainty of execution and as many value-added benefits and services as possible. Capital providers can most easily be broken-down into three groups:

Direct Lenders – Those that lend their own funds
- Commercial real estate investment banks
- International, national, regional and local banks
- Life Insurance Companies
- Agencies (Fannie, Freddie, FHA)
- Pension Plans
- Real Estate Investment Trusts (REIT)
- Mutual Funds, Hedge Funds, Opportunity Funds
- Credit Companies
- Private Lenders

Indirect Lenders – Those that place funds on behalf of others
- Financial Intermediaries
- Investment Advisors
- Syndicators
- Mortgage Bankers
- Mortgage Brokers

Hybrid Lenders – Those that do both of the above
- Certain Investment Banks
- Certain Investment Advisors
- Certain Banks
- Certain Credit Companies
- Certain Financial Intermediaries

Once a borrower has selected the appropriate capital provider, it is essential that the capital provider be engaged as early on, and at as high a level as possible. Experienced sponsors realize the benefit of getting their capital provider involved early on in the planning process. Waiting too long to involve your lender will typically lead to a project built with less leverage and at a higher cost of funds. By including your capital provider in the beginning of the project planning process you will end-up with a project plan that is built around optimizing capital formation leading to greater project profitability.

Effectively utilizing the entire capital structure, to maximize leverage while achieving the lowest blended cost of funds and isolating risk, is essential to the creation of a solid capital formation strategy. In general, the farther you move up the leverage curve utilizing more leverage in the senior position the lower the overall cost of funds will be. Conversely, the deeper you move down the capital stack utilizing mezzanine or equity instruments the more expensive the cost of capital.

Selecting the appropriate capital provider and engaging them properly will aid in the streamlining of the borrowing process. If borrowers will focus on capital formation as a priority at the early stages of project planning the likelihood of increasing profits in a risk managed environment is high.

For more information about Pacific Security Capital commercial real estate investment bank, please visit www.pacificsecuritycapital.com or call 1-800-844-6085.

Pacific Security Capital, a leading commercial real estate investment bank, addresses the impact of rising interest rates on commercial real estate loans.

Beaverton, OR August 1, 2005 -- http://www.pacificsecuritycapital.com -- Pacific Security Capital (“PSC”), a leading commercial real estate investment bank, headquartered in Beaverton, Oregon, addresses the impact rising interest rates could have on commercial real estate loans and the commercial real estate market overall.

There has been no shortage of conversation surrounding the topic of rising interest rates in the commercial capital markets over the last two years. Mike Myatt, Executive Managing Director of Pacific Security Capital explains that “the reason for all the column fodder is that interest rate movement has a direct impact on the state of capital markets supply and pricing and can have a very real impact on the overall commercial real estate market.”

As a baseline for a deeper analysis it is useful to have a macro-economic understanding of what happens to property level supply and demand drivers and the resultant impact on Net Operating Income (NOI) in a rising interest rate environment. As a general economic principal when interest rates rise the cost of new construction increases thereby slowing the number of construction starts and depleting new supply of product coming online. This scenario in turn causes an increase in overall market absorption rates and creates a “landlord’s market” environment.

Myatt adds that “the environment which favors the landlord creates an opportunity for property owners to increase rents thereby allowing NOI growth to keep pace with any escalation in interest rates. While this scenario is favorable to existing property owners and making the rise in interest rates less of a concern, the impact to developers and tenants is detrimental and can have a negative overall impact on the economy if a high interest rate environment lasts for any length of time.”

At a more micro level some of the major issues surrounding the impact of increasing interest rates on commercial real estate loans and commercial capital markets are addressed below:

Flow of Funds: In a low interest rate environment real estate provides a reasonable investment alternative to other low yielding asset classes. With rising interest rates the supply-side availability of capital marked for commercial real estate will constrict. The aforementioned contraction will be due to a combination of reduced demand for new supply as weaker developers are weeded out of the market and alternate investment opportunities in other asset classes begin providing a better yield while being perceived to have less risk when contrasted to commercial real estate investments.

Loan Pricing, Sizing and Cost of Funds: The overall blended cost of capital will increase dramatically. This dramatic increase will come not only as a result of rising rates across underlying indices but moreover as a result of lower advance rates in the senior position shifting a higher percentage of the capital structure up in the leverage curve. The reduction in LTV and LTC advance rates will cause a borrower to rely more heavily on mezzanine and equity financing resulting in shift from the current “borrower’s market” climate to a “investor’s market” environment.

Investment Sales: Sales of investment grade properties will slow rapidly as many of the buyer’s in today’s low interest rate environment will move to the sidelines. Institutions and REITS will remain active buyers while many of the individual investors will be forced from the investment sales market. Default rates will climb and more distressed property will come onto the market as investors who leveraged up on floating rate debt during the low interest rate environment will have a hard time keeping control of property as their debt service obligations increase.

Commercial real estate owners who believe that interest rates will rise substantially and will remain elevated for any period of time should be looking to refinance short-term commercial real estate loans, floating rate debt with long-term fixed rate debt. Buyers looking to acquire investment property should look for assets with upside potential for NOI growth through improved management and upside pop in leasing opportunities.

About Pacific Security Capital
Pacific Security Capital is a leading commercial real estate investment banking firm providing commercial real estate loans, structured finance, investment sales and advisory services. The combination of direct lending, advisory, intermediary, corporate and professional services, syndication and acquisition services consistently allow PSC to rank among the leaders in the industry. PSC is headquartered in Beaverton, Oregon with other offices in major markets in North American and Europe.

For information about Pacific Security Capital commercial real estate loans contact us at 1-800-844-6085.