Return of Lending
Obama's meeting with the "fat cat" bankers made news yesterday. Apparently, Obama pressed the bankers to make loans. This is all well and good, but talk can only go so far. There have been glimmers of hope that lending is going to return without presidential prodding. As I have noted before, the CMBS market is re-emerging. Now I see this article on Bloomberg discussing the return of Collateralized Loan Obligations (CLOs).

The idea of traditional banking exists on a limited level - i.e. making loans and collecting interest until the loans mature. This is portfolio lending and it limits banks' capital because they cannot recycle and grow capital until the loans mature. Bankers now want to originate loans, package them into CLOs or CDOs or CMBSs, and then sell these groups of loans to third parties. The collapse of the packaged loan market and the inability to price these securities sparked the financial crisis of 2007 through 2009.

In an ideal world, the bankers now know how to price these securities and they surely know how these loan packages perform in down markets. The collateral backing the loans will be more realistic now due to the drop in asset prices over the past two years. A return of securitized lending will help the economy. It will also help companies that need to refinance debt.

Fairfield's Bankruptcy and a Non-Traded REIT
Behringer Harvard's Multifamily REIT I has three multifamily properties that are nearing completion that were developed by Fairfield Residential. Fairfield Residential filed for bankruptcy this morning. To Behringer's credit, it looks like it has made moves to limit the impact of Fairfield's bankruptcy. It is worth reading Multifamily's recent 8-K filings. The complexity of Multifamily amazes me every time I read one of its 10-Qs. In a nutshell, the REIT invests in apartment developments via mezzanine loans that are then converted to equity, although Multifamily is now buying existing apartments.

The complexity is detailed here in an 8-K filing regarding of the properties being developed with Farifield:

Parties. The Baileys Project is owned by Behringer Harvard Baileys Project Owner, LLC (“Baileys Project Owner”), which is solely owned by Behringer Harvard Baileys Investors, L.P. (“Baileys Investment Partnership”). Baileys Investment Partnership is owned by Behringer Harvard Baileys GP, LLC (“Baileys GP”), by Behringer Harvard Baileys REIT, LLC (“Baileys REIT”), by BREOF Baileys, LLC (an equity investor unaffiliated with Fairfield Residential or us) (“BREOF Baileys”), and FF Investors III East LLC (an affiliate of Fairfield Residential) (“FF East”). Baileys Venture owns 99% of the economic interest in Baileys REIT and manages Baileys REIT. Baileys GP, the general partner of Baileys Investment Partnership, is wholly owned by Baileys REIT.

What?!?! Another way to look at this 90% completed property is that it is 414-units and the development cost is $143.2 million, or about $346,000 per unit. I know nothing about the Virginia sub-market where the property is located, but my gut tells me that $346,000 per unit is expensive no matter the ownership structure. And this is before adding the syndication costs, and worrying about selling or adding permanent financing....

Inland Western CMBS Pricing
The CRE Review is all over the Inland CMBS offering and is where I found this Reuters' link. The top two classes, representing $389 million out of the $500 million CMBS offering, were oversubscribed, and the final pricing was at yields at the low end of expectations. From Reuters:

The 10-year CMBS, just the third U.S. deal since issuance broke an 18-month void in mid-November, was oversubscribed, according to documents reviewed by Reuters on Wednesday.

Inland Western's two top-rated classes sold at yield premiums of 1.5 percentage points and 2.05 percentage points above an interest-rate benchmark, about a third of current levels on existing CMBS made at the height of the real estate boom. The yield spreads were at the low end of expectations.

I am finding it hard not to see why this is not good for Inland and commercial real estate in general.

Simon Clarification
Through The CRE Review I have more clarification on the Simon/Prime Outlet deal. Looks like the sales price is $283 per square foot and the implied cap rate is 6.7%. I still think this deal is positive for the commercial real estate market.

Commercial Real Estate Continues to Gain Traction
Simon Property Group's acquisition of Prime Outlets is a big deal. Here is the Bloomberg article on the transaction. Simon is gaining twenty-two outlet properties and now has sixty in its portfolio. Patching information together with help from The CRE Review, it looks like Simon is paying approximately $315 per square foot. Not sure whether this is a good deal or what the aggregate cap rate is. The Bloomberg article quotes an analyst saying that the deal is good for Simon. Six of the properties are in Florida, which is another good sign for real estate, since Florida has been in such a slump. The slow emergence of the CMBS market will generate more transactions like this. It is interesting to note that Simon's outlet malls generate more sales per square foot than its regional malls ($492 v. $438).

Big Week In The Non-Traded REIT World
There have been three big news items so far this week. First was the news that Piedmont Office Realty Trust has filed an S-11 as the first step in listing its shares on an exchange. I encourage you to go to Piedmont's website and follow the link to the SEC's website and read the S-11. The listing is not as straight word as you'd think. It involves a reverse stock split and dividing Piedmont's shares into four classes, where only a quarter of the shares will have liquidity initially, and the remaining shares will have delayed conversions to liquidity options.

On the heels of this news, Wells has filed Wells Real Estate Investment Trust III, a $5 billion office and industrial REIT. I don't think these two events are unrelated. I would question the financial advice to sell Piedmont, when it is listed, and buy Wells REIT III.

Inland's troubled Western Retail REIT refinanced %625 million of debt, and $500 million of it will be sold as Commercial Mortgage Backed Securities. Here is a link to the Wall Street Journal article and a key passage:

Inland Western Retail Real Estate Trust Inc., which owns some 300 retail properties nationwide, closed on Tuesday $625 million in new financing from J.P. Morgan Chase & Co. to pay down its existing debt. The bank is expected to convert the $500 million first-mortgage part of the financing into a CMBS offering and sell through private placements the remaining $125 million in "mezzanine," or junior, debt to investors hunting for higher returns, according to people familiar with the matter. A spokesman at J.P. Morgan declined to comment.

This reads like good news:

For Inland, of Oak Brook, Ill., the $625 million in new financing represents a big relief as it has about $789 million in debt coming due by the end of this year and another $1.5 billion maturing in 2010, according to the company's third-quarter report. So far, the company has refinanced almost all the debt maturing this year and a sizable portion of the debt coming due next year.

The debt is secured by 55 properties, has a 10-year term and a 75% loan to value, with the underwriting taking into account the current market values and potential for leases renewing at lower rates. I have not read what yield is expected on this deal.