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Last week’s announcement that Franklin Street Properties Group terminated the $130-million acquisition of 525 W. Van Buren Street in Chicago is just one more example of how lenders unwillingness to lend is affecting buyers looking to acquire $20-million plus properties. However, investors acquiring sub-$20-million assets are seeing much greater success placing their debt. This is demonstrated through the fact that 92% of transactions closed in the fourth quarter of 2008 were in the sub-$20-million price range. Deals of this size are still getting financed, albeit on more conservative terms and mainly by local and regional banks who plan to keep the loans in-house. So what does it require to do one of these deals? A property must be underwritten to reflect the actual performance and deteriorating conditions of the market. The days of overly aggressive pro formas have been replaced by actual incomes and conservative estimates of leasing time and costs. The credit-worthiness of the tenants and condition of the building are also being scrutinized much more extensively. Buyers must be able to prove the financial strength of tenants and be willing to set aside more money for capital reserves than in years past. The final piece of the puzzle is the buyer. With non-recourse debt available almost nowhere, investors must have a strong resume and a net worth high enough to support the debt they’re taking on. So the market is sending a clear signal that the creative financing of 2006 is no longer available, but if you’re an investor with a strong balance sheet, who’s looking to acquire solid properties with conservative financing, then you can still get your deals done. |
