NNN Leased Asset Financing Update
The NNN leased asset financing landscape remains strong with cap rates holding steady despite the recent changes in CMBS pricing. Borrowers have resorted to lower leverage Interest Only debt to maximize cash flow against aggressive cap rates, and credit unions have been picking up a good majority of the slack attractive long-term pricing with some I/O, long amortizations and very flexible prepays. Many of the long-term fixed-rate lenders have reached capacity with certain credits (i.e. Walgreen’s) and the recent acquisition of Rite Aid has caused a bit of a pause while the issue of store closures gets sorted out.
Due to the very aggressive cap rates being seen on NNN leased asset types, and the increase of institutional investors lowering their dollar amount requirements to get their capital out, many deals are going all cash with lower leverage debt being sought after the fact, as sellers are always quicker to entertain all cash offers rather financing. We are also seeing sellers investigate the financing offers their buyers are bringing to the table in an effort to ensure their successful execution.
CMBS financing remains the main source for assets over the $5MM mark, but in the current lending climate there is definite cause for borrower prudence. Many firms, including some of the big names, are starting to put pricing down on apps that is fairly undeliverable in order to get the deal off the street, only to re-trade the borrower right before closing. The best way around this is to work with a broker who understands this market and is able to gauge what true break even pricing is with the major firms, so that unrealistic bids can be sorted out. For example, if you take a B or C conduit lender who is pricing much lower than the A lenders, then there is cause for some concern. Keep in mind the smaller shops do not have their own trading platform, they have to partner with larger firms to get their securitizations out the door. So it stands to reason that if an offer is well below the main players in the market, and they have to trade alongside the major players (and often are borrowing from them), that well below market pricing is suspect. True, there may be some economies of scale with smaller operations and therefore less overhead costs, but that typically doesn’t equate to a 15 -20bps difference.
Next year will see some changes with Dodd Frank being implemented (around 1-16-16) and there will be some changes with the A-B structure being required where the feds will require a warm body on the lenders’ side to sign reps and warranties, even on deals they partner with from other lenders. How this will all shake out remains to be seen, but higher borrowing costs (especially CMBS) are to be expected. We may be seeing the last of the sub 5% coupon rate going forward, so if you have an opportunity to buy or refinance, there’s no time like the present.
by Alex Chenarides