Valuation Management and the Importance of Appraisal Review
Situs recently completed an assignment with a new client to underwrite a purchase loan utilizing a previously accepted appraisal report on a 52-unit multifamily complex.
The original appraisal was done on behalf of a previous lender who eventually declined the deal, prompting the borrower to turn to our client as a debt source. As part of the regular underwriting process, Situs experts reviewed the appraisal and its conclusions and realized that the appraiser had made material errors and the value was overstated.
Situs underwriters also uncovered errors in the seller financial statements, which resulted in cash flow levels being much lower than what was originally stated. Our concluded value was nearly $1 million lower than the original appraiser’s determined value, and the contemplated loan would have been almost a 100 percent LTV.
As a result of the Situs team’s expertise and due diligence work, the client was advised that the borrower was overpaying for the project and the requested loan amount was more than the value of the property.
If you would like to learn more about the valuation management services Situs provides, which include engagement, review and final acceptance of appraisals, please click here.
Lender Competition Heats Up for Refi Deals
Refinancing activity has typically been a steady source of business for mortgage lenders. But abundant debt capital in the marketplace, a thinning pipeline of maturing loans and a desire to stack loan portfolios with high-quality deals heading into the latter stages of the cycle are just a few of the factors that are fueling a highly competitive lending market.
Lenders are being aggressive on bids to win refinancing business, especially for high-quality assets. “If we are putting an offering in the market for a debt financing, it is not unusual for us to get 15 to 20 bids from Wall Street and from life insurance companies,” says David Sonnenblick, a principal at Sonnenblick-Eichner Co., a Beverly Hills-based real estate investment banking firm.
Sonnenblick-Eichner recently helped a client close on a $165 million, non-recourse interest-only loan to refinance the Airport Industrial Park, a 1.5 million–square-feet office and warehouse property adjacent to the Honolulu International Airport. The asset attracted more than 15 lender bids. When a life insurance company realized it was not going to win the bid, it kept coming back with tighter spreads and reduced fees until it did win the deal, according to Sonnenblick. “At the end of the day, it was a deal that they didn’t want to lose,” he says.
The high volume of loans that were originated during the peak of the market in 2004, 2005 and 2006 has resulted in a significant volume of loan refinancing over the past 24 to 36 months, notes Sonnenblick. “We also have seen a tremendous amount of our clients who are willing to pay off loans early and take pre-payment penalties or defeasance costs associated with these prepayments because they are able to roll into a lower interest rate loan today than they had eight or 10 years ago,” he says.
read more: NREI
Wal-Mart Stores to Change Name to Walmart, as it Shifts its Focus to e-Commerce
Wal-Mart Stores is dropping a 48-year-old habit, the dash in its name. It’s also ditching the word “stores.”
Wal-Mart said Wednesday it is changing its legal name to Walmart, as the company looks to emphasize its shift from a company that sells in stores to one that sells online and off.
“While our legal name is used in a limited number of places, we felt it was best to have a name that was consistent with the idea that you can shop us however you like as a customer,” said President and CEO Doug McMillon in a statement.
The name change comes as Walmart been investing in its digital initiatives, propelled by its acquisition of Amazon competitor Jet.com last year. Through Jet, Walmart has been building a coterie of online brands, which now includes Modcloth and Bonobos.
The retailer also recently struck a deal with Lord & Taylor, giving the department store dedicated space on Walmart.com.
read more: CNBC
Neiman Marcus CEO Says Affluent Shoppers in ‘Very Good Shape’
America’s most affluent shoppers are capable of spending big this holiday season. They may just require a bit of coaxing.
That’s the view of Neiman Marcus Group Inc. Chief Executive Officer Karen Katz, whose typical customer is a well-heeled woman.
“Her balance sheet is in very good shape,” Katz told Emma Chandra on Bloomberg Television. It’s “really a matter of how emotionally she feels about things, and she seems to be in a good place right now.”
The holiday season comes ahead of a potential tax overhaul that has been touted as a way to give consumers a boost in take-home pay. The National Retail Federation said over the weekend that shoppers are already spending more this holiday season in anticipation of a tax cut.
Neiman Marcus is already seeing some benefits. The company reported in November that same-store sales — a key measure — rose 4.2 percent last quarter. That was the first increase in more than two years. But the closely held department store is still laboring under billions in debt, and reported a loss of $26.2 million in the period.
read more: Bloomberg
EPA Deregulations Might Increase Risk for Real Estate
It is the business of insurance companies to price risk. Insurance, in fact, has been doing this since the second millennium B.C., as evidenced in the Babylonian Code of Hammurabi. Lloyd’s of London has been underwriting risk since the 1750s, and Benjamin Franklin set up a fire insurance company in the colonies as early as 1752. Today, no commercial real estate owner would consider forgoing property and casualty insurance.
A key reason for the long-term success of insurers is a by-the-numbers discipline. Statistics rule in this field, almost beyond any other. Risks are evaluated by the magnitude of potential loss, and by its probability. The calculations are cold, with little or no tolerance for sentiment or ideology. Loss is more or less inevitable — though it can be mitigated — and must be appropriately priced.
So attention must be paid when the Insurance Information Institute devotes an extensive analysis to the impact of natural catastrophes in the United States, drawing on data compiled by Munich Re’s NATCAT Service. The data measures property loss events exceeding $25 million in insured losses, affecting a significant number of policyholders and insurers. In 2016, there were 91 such events, with an estimated $43.9 billion in overall losses, of which just $23.8 billion was insured. The majority of the uninsured losses were to homeowners hit by floods and hurricanes.
Perhaps more troubling is the long-term trend in the incidence of catastrophes. In the 1980s, an average of 44 catastrophic events took place per year. That grew to 60 events in the 1990s and 67 events in the first decade of the current century. Since 2010, that number has surged to 82 events per year (through 2016). Although final data on 2017 is not yet in the books, this has clearly not been a good year. Wildfires have taken 8.5 million acres, and have consumed thousands of structures. Hurricanes Harvey, Irma and Maria carved a swath of devastation through Texas, the Southeast and the Caribbean, with total losses likely exceeding $100 billion.
read more: Commercial Property Executive
Here’s What Else Tax Reform Means: Another Bailout of Fannie and Freddie
The tax legislation currently under discussion in Congress is almost certain to have one big unintended, and uncomfortable, consequence.
Fannie Mae and Freddie Mac, the two giant mortgage financiers, hold billions of dollars of “deferred tax assets” on their balance sheets. These assets include items like credits that can be used to defray tax bills in future years.
But if the corporate tax rate is reduced, the value of those assets would tumble.
Mark Zandi, chief economist for Moody’s Analytics, estimates that the hit to the assets, which are currently worth about $45 billion, would be about $20 billion, assuming the corporate rate is cut to 20 percent from 35 percent.
Losses of tens of billions would be tough for any corporation to withstand. But Fannie and Freddie will have it especially hard. Under the terms of a 2012 directive from Congress, the two are required to send their quarterly profits to the Treasury, thereby reducing their capital buffers to zero by 2018.
read more: Marketwatch
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