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[Fee Simplistic] Jesse James Buying Wholesale and Selling at Retail

Fee Simplistic is a regular post by Martin Tessler, whom after more than 30 years of commercial fee appraiser-related experience, gets to the bottom of real issues by seeing the both the trees and the forest. He has never been accused of being a man of few words and his commentary can’t be inspired on a specific day of the week. In this post, he takes Jesse James to lunch” …Jonathan Miller


Although the Bloomberg administration outlawed the serving of trans-fats in restaurants they neglected to apply their zeal to the world of real estate lending in all its permutations whether it was on the debt or equity side or the acquisition side. The May 2nd NY Times reported on how the collapse of the subprime mortgage market has resulted in bond rating agencies now beginning to take a closer look at the commercial lending market and its underwriting practices. For those of us who have a sense of humor beyond the reading of USPAP and the Appraisal Institute’s textbook it reminds me of the old Hollywood westerns when the likes of Jesse James type train robbers would place their ears close to the rails to listen if a train was approaching. According to the article, Moody’s reported that the CMBS market accounted for just under $770 BILLION and represented 26.1% of all outstanding commercial mortgages inclusive of apartment buildings. In other words, the rating agencies were beginning to realize they had a big pot of gold to protect from those larcenous underwriters eager to give money away.

It seems that the rumblings on the rails have been triggered by some macro research data revealing a slight tick up in the average office vacancy rate among 58 metropolitan markets which was the first increase since 2004 and that the rate of rent growth was moderating. Thus, while office rents in Manhattan had rapidly escalated, some in the bond rating world were getting a bit nervous over the hasty manner in which deals were getting done. The Times article cited how Macklowe Properties took only 10 business days to complete its $7.25 billion purchase of 8 Midtown office buildings that the Blackstone Group had previously bought from Sam Zell’s Equity Office Properties. Most notably, the bond raters woke up to the fact that the average annual rent in the properties was $55-$59/sq. ft. BUT the deal was underwritten at $100+ /sq. ft.

The upshot of all this recent scrutiny by the rating agencies is that CMBS investors are demanding higher yields making the bonds costlier for the dealers and it has also forced a throttling back in some of the CMBS deals. A recent $4.2 billion GE Capital deal where investors were concerned that the lenders relied too heavily on projected rent increases forced the removal of $226.7 million in loans; the investment grade portion of the CMBS was trimmed by $50 million and the prospective proceeds from the high yield end of the bonds could be reduced by $8 million because of the higher yield discounting.

As a lowly toiler in the appraisal field all these years I cannot help but be reminded that the standard joke in my repertoire was

tell me the value you need and I’ll tell you the assumptions you need to get there.

However, in my previous college life when I had connections in the wholesale clothing world I always followed the dictum, never buy at retail when you can get it wholesale which made me ask (at the time that Blackstone had announced that they were selling off much of their Zell portfolio) why would these guys be buying at retail when Blackstone had already taken out their “vig” at the front end of the deal?

But that’s why I’m writing in a blog instead of checks at the closings of these big deals.