Loan term sheets for identical assets are coming back varying 50 to 100bps on interest rate, as well as seeing material changes in amortization schedules and recourse requirements.
By Matt Marlin and Patrick Nutt
Over the past several weeks, net lease investors have been trying to quantify the impact that the COVID-19 pandemic will have not only on the terms of long-term financing, but their ability to secure debt altogether. The rapid nature at which this black swan event unfolded has created confusion as to what is still achievable, as well as what the landscape will look like in the next few months. Pre-COVID, many borrowers felt comfortable with existing lending relationships and the ability to secure competitive debt, and when pricing competitive loan terms out, often the spread between 3 to 5 lenders was less than 10bps on interest rate. Given what has occurred over the past 6 weeks, we’ve been reminded of the need and value to broadly price debt, as loan term sheets for identical assets are coming back varying 50 to 100bps on interest rate, as well as seeing material changes in amortization schedules and recourse requirements. In order to analyze this correctly, it is important to understand what types of lenders are active in the net lease space. They are as follows:
CMBS
Life Insurance Companies
Private Financing
Banks
Credit Unions Out of these five, CMBS lending has been hit the hardest, with all new originations essentially being put on hold due to the lack of liquidity in the “B – Piece” of the securitization stack. There has recently been a new CMBS issuance that successfully transacted, but the return to “normal” is believed to be 4 to 6 months before CMBS is a viable option for anything retail related.
Life insurance companies have always been conservative in terms of their criteria. They rely more heavily on local demographics, quality of the underlying real estate, credit of tenants, and requested LTV. While most insurance companies are still technically able to lend, their underwriting constraints have tightened up even more which has led them to scale back on new originations. They remain willing to underwrite new assets, however, they are slow to commit to an actual rate or term sheet. We have seen rates move 100bps+ from pre-COVID levels, but believe that move was heavily influenced by the bond market as a whole, and this lender class should be back to normal within 2 to 4 months, primarily for long term leases to high credit tenants with sub-60% LTV debt.
Private financing is still readily available in this market, but there is a disconnect between what type of pricing is expected by borrowers and what is realistic for lenders. Specific terms for private financing vary on a deal-by-deal basis, but for the most part, it will be short term and rates will be in the low double digits. These lenders understand that they might be the only option for certain deals and price accordingly for whatever risks they are taking on. These types of lenders are best reserved for a worst-case scenario and a quick close (e.g. a traditional lender denies a borrower at close and the seller will not grant any extension to find another financing option). This is an active space for bridge lending options, but pricing is reflective of the circumstances.
This leaves us with banks and credit unions. Similar to the life insurance companies, these lenders have all had to sharpen their pencil when it comes to underwriting constraints. While some have put a hold on new origination entirely, there are still lenders who are issuing term sheets and getting deals closed. In addition to stricter lending parameters, banks and credit unions are working diligently to approve and fund SBA loans in accordance with the multiple stimulus bills. This, of course, has been creating significant delays in their ability to take the time to look at new deals. Pre-COVID, pricing for a new 7-Eleven occupied NNN asset was quoted with a mid-3% interest rate at 65% LTV and a 30-year amortization. Post-COVID, that similar asset is now seeing 60% to 65% LTV being achievable, but rate is hovering between 4.00% and 4.25% with a limited number of lenders able to provide 30-year amortization with most looking for a 25-year schedule. This sector is the most prevalent as we facilitate a large number of net lease deals, but the situation remains very fluid, which makes it imperative that any active buyer align themselves with a qualified and well-connected mortgage broker to ensure best pricing and execution.
Although these 5 lending sectors have and will continue to adapt, there is still opportunity out there for investors to secure financing. While we service a majority of inquiries for independent third parties, having visibility and collaboration with the National Net Lease Group at SRS, we are able to leverage their real time data on terms available across their $2B+ active pipeline. Hiring professionals to assist in a net lease acquisition is always one requiring thoughtful selection, but if there ever were a time where advisors and mortgage brokers are earning their fee, now is that time, so regardless of who you engage, make sure it’s an individual or group that has the infrastructure and national reach to provide you with the best results and ensure success.
Matt Marlin is Vice President Debt and Equity for SRS Real Estate Partners. Patrick Nutt is Executive Vice President, SRS Real Estate Partners – National Net Lease Group.