1 | JANUARY 12, 2018

ACORE Capital has provided a $217.5 million loan to Joseph Chetrit’s Chetrit Group to refi-nance Empire Multifamily Portfolio— a portfo-

lio of multifamily properties in Florida, Indiana, Pennsylvania, Ohio

and Kentucky, Commercial Observer can first report.

Iron Hound Management Company Principal Robert Verrone arranged the five-year debt, which includes a first mort-gage plus a mezzanine loan. Verrone declined to comment.

The multifamily assets were previously owned by Empire American Holdings. Chetrit Group acquired the portfolio—comprising 56 properties with a total of 5,400 units—in 2015,

after being brought in as a buyer by Verrone. Prior to Chetrit’s acquisition, Iron Hound spent three years restruc-turing the portfolio’s $317 million CMBS loan, which was being specially ser-

viced by LNR, with an A/B note modification, splitting it into a $205 million A-note and a $112

The Insider’s Weekly Guide to the Commercial Mortgage Industry

FINANCE WEEKLY

“We’re working on deals where you have to go out

and tell a story.”—Morris Betesh

from Q&A on page 18

3 Thorobird Wins $65M in Public Bonds for Bronx Supportive Housing Plan

5 Mesa West Provides $165M Refi of Two San Diego Apartment Complexes

11 Citizens Bank Lends $58M on DC Rentals Citing Hot Market

13 CREFC 2018 Conference Coverage

In This Issue

The LEAD

Chetrit Group Scores $218M ACORE Refi for Multistate Multifamily Portfolio

ACORE financed a portfolio of 5,400 multifamily properties spanning five states (not shown).

CHETRIT...continued on page 3

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Square Mile Capital Management has acquired a $31.8 million mezzanine loan from a subsidiary of Marriott International for financ-ing the development of Lightstone Group’s planned Marriott Moxy Hotel project at 105-109 West 28th Street, Square Mile announced on Tuesday.

The mezzanine debt was originated in December 2016 as part of a $101.8 million financing package for the hotel project, between Avenue of the Americas and Seventh Avenue. At the time of the deal, Bank of the Ozarks provided Lightstone with $53 million in construction financing and assumed a $17 million mortgage that Banco Inbursa had provided to the developer on the property in November 2015, as Commercial Observer pre-viously reported. The $31.8 million mezzanine portion—and the Marriott International sub-sidiary that provided it—went undisclosed at that time.

The Lightstone Group acquired the NoMad site

SQUARE MILE...continued on page 5

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2 | JANUARY 12, 2018

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million B-note, as previouslyreported by CO.The portfolio was seriously neglected and its loan was in special

servicing for five years when it was acquired by Chetrit two-and-a-half years ago. Chetrit Group stepped in and has since increased the port-folio’s NOI from $14 million to $20 million, one source told CO on the condition of anonymity.

“Before Chetrit Group got involved in the deal, the portfolio’s prop-erties suffered a significant amount of disrepair and neglect,” said Tony Fineman, a managing director at ACORE. “Chetrit Group came in, righted the ship and significantly improved the performance of the properties.”

While there are many moving parts in closing a multistate portfolio loan, the complexities embedded within were more on the legal and title side, Fineman said.

“What we liked about this deal is the significant improvement in what was once a pretty dilapidated portfolio—both in terms of performance and the physical plan,” Fineman said. “The Chetrit Group has done a tremendous job. This transaction has the unique blend of a really great cash-flowing portfolio with a really good amount of upside.”

ACORE closed more than $2 billion in loans in the fourth quarter of

2017 and is expecting a busy 2018, too, Fineman said. And multifamily is one sector that the lender is focused on. “We like

the multifamily sector a lot,” Fineman said. “Like everything else, you have to be cautious, but we’re very focused on the particular markets and submarkets we’re lending in and the sponsors’ ability to execute business plans in those markets.”

Officials at Chetrit Group could not be reached for comment. —Cathy Cunningham

A residential project in the Bronx, designed to house middle-class and low-income ten-ants as well as people with addiction and men-tal-health problems, has received $65 million in public bonds to fund construction, accord-ing to an announcement from its developer, Thorobird Companies.

Known as The Grand, the project, which will comprise three buildings at 220 East 178th Street, 225 East 179th Street and 2189-2195 Morris Avenue in the Mount Hope neighbor-hood, will offer 138 apartments targeted to res-idents across the income spectrum. Although a suite of features including a furnished roof deck, solar electricity and a modish design con-cept recall market-rate developments elsewhere in the city, dozens of The Grand’s apartments will be dedicated to supportive housing, as part of a program designed to reintegrate mentally ill or formerly homeless or imprisoned people into the mainstream housing stock.

To that end, the complex will sport round-the-clock onsite counseling and support from social workers and other therapists. That ser-vice will be administered by ACMH, a New York City-based nonprofit that runs programs for transitional residents at several housing pro-grams in the city.

The 40-year financing for the project—which consists of contributions from the New York State Housing Finance Agency and the New York City Department of Housing Preservation & Development—will help

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Thorobird Wins $65M in Public Bonds for Bronx Supportive Housing Plan

Thorobird create a more humane commu-nity for needy residents than currently exists in the city, according to Thomas Campbell, Thorobird’s founder.

In typical affordable housing projects, “housing is something you do to someone, not for someone,” Campbell said. “We believe in homes, and we want to humanize the experi-ence for our residents, [allowing them] to live

in a place built with them in mind…We’re so far behind as a society in providing affordable housing”

The project was jump-started in part by a $250,000 capital injection from the office of the Bronx borough president, Ruben Diaz Jr. The grant, known as Resolution A funding after the city provision that allows for the discretionary outlay, was crucial for getting larger agencies on board, according to the developer.

“When you get started with a project, you need someone to step in first,” Campbell said.

Diaz described Campbell’s project as a model for integrated housing solutions in the city.

“This is construction with common sense and compassion,” Diaz said, praising the con-ceit to house some of the city’s neediest resi-dents alongside working-class neighbors. “It’s important for us to have income diversity.”

Still, Diaz said, the funding process was flawed. The HFA pushed Thorobird around in the project’s planning stages, the borough pres-ident averred, requiring the developer to meet exacting specifications before providing the financing bond.

Freeman Klopott, a deputy commissioner in the state housing administration, resisted that narrative, noting that New York State received an application for funding in February 2017 and approved the bond in September, without unusual delay. An official at HPD, who requested anonymity, agreed that no delay had occurred. —Matt Grossman

One of the portfolio properties in Pennsylvania.

The Grand.

4 | JANUARY 12, 2018

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The City of New York has sold an active park-ing lot at 180 Broome Street for $30 million to the developers of the nearly 2-million-square-foot Essex Crossing megaproject.

Delancey Street Associates (DSA), which comprises BFC Partners, L+M Development Partners, Taconic Investment Partners and Goldman Sachs, is expected to begin construc-tion of a 26-story tower at the Broome Street site later this month, according to a recent press release. The sale closed on Dec. 29, 2017, accord-ing to property records made public this week.

The proposed $300 million mixed-use build-ing will comprise 175,000 square feet of office space, 263 rental apartments (121 that are afford-able) and 27,000 square feet of retail space, the release indicates. The building’s cellar will house a section of the Market Line, a 150,000-square-foot market at Essex Crossing. The building, also known as Essex Crossing Site 4, was designed by Handel Architects.

A spokesman for the developers referred this reporter to the release, and its quote from Delancey Street Associates’ Isaac Henderson, the project manager at Essex Crossing: “With mixed-income housing, Class A office space, retail and a section of the Market Line all under one roof, what was once a parking lot will soon be a dynamic place to live, work and visit right in the heart of Essex Crossing.”

To acquire the property, the site was con-veyed, or transferred, by the City of New York for a $6 million upfront acquisition payment,

Wells Fargo Senior Vice President Elizabeth Oakley told Commercial Observer. New York City Department of Housing Preservation & Development supplied an additional $24 mil-lion in the form of a subordinate purchase money mortgage—to be doled out in four annual install-ments of $6 million.

With the acquisition, the development group also sealed a $296 million package for the con-struction of Essex Crossing Site 4, expected to open in 2020. Wells Fargo originated $200 mil-lion in construction financing—$125 million of which will be held by Wells Fargo while M&T

Bank will take on the remaining $75 million in debt, Oakley told CO. In addition, Goldman Sachs Urban Investment Group led a $96 mil-lion equity investment on the property—the bank provided 85 percent of the funds while the trio of developers in DSA each supplied 5 percent.

According to Oakley, Wells Fargo has provided a total of $306 million in debt and $91 million of Low Income and New Markets Tax Credit Equity to finance five of the project’s nine buildings—sites two, four, five, six and eight.

When Essex Crossing is complete, it will fea-ture 1,079 apartments, approximately 51 per-cent of which will be affordable. And it will have a 15,000-square-foot park, Splitsville Luxury Lanes, Trader Joe’s, a community center and the new home of the International Center of Photography. The project will also host 450,000 square feet of retail space and 350,000 square feet of office space.

“Decades in the making, Essex Crossing is bringing new economic and commu-nity resources to the Lower East Side,” James Patchett, the president of the New York City Economic Development Corporation—which handled the award of the Essex Crossing project to the developers via a request for proposals pro-cess—said in the release. “With this most recent closing, DSA will help provide high-quality office, retail and housing space to the neighborhood, creating more good jobs for local residents.” —Liam La Guerre with additional reporting pro-vided by Mack Burke

in July 2014 and broke ground in April 2016.“For the Moxys, in particular, we really

liked Lightstone as a sponsor. It’s a talented developer, and its buildings are thought-fully designed,” Square Mile Principal of Investments Mike Lavipour told Commercial Observer. “With the Moxys, it’s a continuation of a trend of efficient rooms with larger com-mon area space.”

The Lightstone Group is developing five Moxy Hotels in partnership with Marriott International in New York City. In November 2017, CO reported that Goldman Sachs pro-vided Lightstone with a $262.2 million financ-ing package for the company’s repositioning of its 618-key, flagship Moxy Hotel at 485 Seventh Avenue in Times Square.

Property records show that Lightstone acquired the 16-story Times Square former office property between West 36th and West 37th Streets in 2014 for $182 million.

Square Mile has proved to be a reliable

player in the Moxy Hotel scene. In total, the firm provided $330 million in financing to Lightstone in January 2016 for the Times Square Moxy, CO reported at the time, com-prising the previously consolidated $205 mil-lion construction loan and $125 million in additional capital provided by two unnamed institutional investors.

“Before entering any new segment of a market, we like to dip our toes on the credit side, and on these deals, we’re at roughly 60 percent loan-to-cost and less than 300,000 per key,” Lavipour said. “In New York, spe-cifically, we plan on being active on the debt side in the hotel space. There’s a lot of supply coming online, and we’d rather not take a bet on the equity side. We want to play in the space on a discounted basis. We think lend-ers have pulled back more than they should have in New York, and we also like the low leverage points we can get in at.”

The Lightstone Group did not immedi-ately respond to a request for comment. —Mack Burke

SQUARE MILE...continued from page 1

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Moxy NoMad.

Essex Crossing Developers Close on $30M LES Site for 26-Story Tower

180 Broome Street.

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to the property’s website.The seven-story Vive on the Park was con-

structed in June 2017 and is home to 302 units. Amenities include a pool and spa, a fitness cen-ter with multiple stories, rooftop lounges with barbeque pits, social areas with sand fire pits, a business center, a clubroom, a game room, a social club and onsite dry cleaning.

Monthly rents at Vive on the Park range from $1,835 for a 546-square-foot studio to $3,530 for a 1,409-square-foot three-bedroom.

“The sponsor has done an excellent job in leveraging the portfolio’s quality finishes, high-end and diverse amenity offerings and central Kearny Mesa location in the lease up of these two projects in a very competitive market,” Mesa West Principal Steve Fried, who led the origina-tion team with Bressler, said in prepared remarks. “We are confident in their ability to maintain the strong leasing velocity to meet the demand for this type of product in one of the most rapidly developing pockets in San Diego County.”

Ariva Apartments and Vive on the Park are the two most recent residential developments for Sunroad’s planned 40-acre community called Sunroad Centrum, which will sur-round the nearby Centrum Park and will be included as part of the Spectrum Technology Center—the redevelopment of the former 232-acre General Dynamics aerospace facility—in Kearny Mesa. Once completed, Sunroad Centrum will include 1,622 multifamily units and approximately 856,000 square feet of com-mercial office space, according to the release.

HFF’s Tim Wright and Aldon Cole—out of the firm’s San Diego office—arranged the financing. Wright and Cole did not imme-diately respond to a request for comment. Sunroad Enterprises could not immediately be reached.—M.B.

Mesa West Capital has originated $165 mil-lion for San Diego-based Sunroad Enterprises to refinance two San Diego luxury rental com-plexes, Mesa West announced on Monday.

The five-year, nonrecourse and first-mort-gage financing was split into two pieces with Mesa West keeping a $145 million A-note and New York-based investment manager Clarion Partners retaining the remaining $20 million on its books, according to a news release from Mesa West. The deal closed Dec. 19, 2017.

“With Clarion, we had a conversation with the borrower to bring in a partner, and lever-age was important to the borrower,” Mesa West Vice President Jason Bressler told Commercial Observer. “We identified Clarion as being active in multifamily in Southern California. Clarion was a natural fit to get the execution the bor-rower wanted.”

The debt is backed by Ariva Apartments and Vive on the Park at 4855 Ariva Way and 8725 Ariva Court in Kearny Mesa, a suburb of San Diego.

“We continue to be bullish on multifamily,” Bressler said. “It’s an asset class, in whole, that’s always going to bounce back very quickly. These properties are brand new and are very high quality and what each benefits from is they are in a central location with certain demand drivers.”

Ariva Apartments comprises 253 rental units within two four-story buildings. Construction was completed in 2014, and the building was fully occupied within 16 months of opening, according to a press release from Mesa West. The complex includes a cardio and strength playground and assigned, underground parking.

Monthly rents for Ariva range from $1,815 for a 595-square-foot studio to $2,700 for a 1,241-square-foot, two-bedroom pad, according

300 10th Street in Petersburg, Fla.

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Ariva Apartments in San Diego Vive on the Park in San Diego.

Mesa West Provides $165M Refi of San Diego Apartment Complexes

ACORE Capital provided $48.8 million to New York-based firms Novel Property Ventures and Atlas Real Estate Partners for the acquisition and extensive renovation of a

multifamily property at 300 10th Street South in down-town St. Petersburg, Fla.,

Commercial Observer has learned.The six-year financing package, which closed

on Dec. 20, 2017, includes a first mortgage and mezzanine piece.

“St. Petersburg historically has consisted of an older population,” ACORE Managing Director Kyle Jeffers told CO. “From 1970 to 1990, the average age dropped from just over 50 years old to just over 40 years old, and today, the aver-age age is 39. It fits the mold of the live, work and play area that’s in higher demand today among the younger generations, which gener-ally results in higher rents.”

The complex, called Urban Style Flats, con-sists of three towers comprising 481 rental units and 227,240 square feet of rentable space, according to Jeffers. The three towers are of different sizes—15, 11 and 10 stories—and were constructed separately in the 1970s.

“Generally, we like the Florida markets,” Jeffers said. “We look for good risk-adjusted returns, good sponsors and good real estate with good returns for investors. We hadn’t done anything in St. Petersburg, but from a debt per-spective it became an attractive investment.”

Jeffers added, “The play here is that it’s an older building, but there’s a significant val-ue-add opportunity. The sponsor can easily improve the amenity base.”

Officials at Novel Property Ventures and Atlas Real Estate Partners did not return requests for comment on the deal.—M.B.

ACORE Lends $49M on Florida Multifamily Property

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Douglas Development has secured a $58 mil-lion bridge loan to refinance its construction debt on Brookland Press Apartments, a freshly built rental complex in Washington, D.C., according to an announcement from Citizens Bank.

The Providence, R.I.-based lender is providing the two-year loan just as the twin-building site at 806 Channing Place NE is beginning to find renters. Financing for the construction of the 295-unit development came from an undisclosed D.C.-area bank, but Citizens took that lender out as Douglas aims to lease the building before tran-sitioning to a longer-term mortgage.

The financing is further supported by mez-zanine loans from Guggenheim and Hunt Companies, though officials at Douglas and Citizens declined to provide further details. Representatives for the two mezzanine lenders did not return requests for comment.

Jordan Klinger, the finance director for Douglas Development, talked up the project’s affordable pricing and its location within the city as assets to potential tenants.

“We’re a block from the Metro, across the street from Rhode Island Row”—a newly rede-veloped retail strip—”and we’re right on the Metropolitan Branch trail,” Klinger said, citing a popular local jogging route. “Northeast D.C. as a whole has been a growing market, and a lot of new housing deliveries have been done there. But we’re happy with where we are.”

Tim Leon, Citizens Bank’s regional vice pres-ident of commercial real estate, shared that

enthusiasm for the burgeoning D.C. neighborhood.“As growth moved into the city east from the

Capitol Building, older neighborhoods have become growth areas for the city,” Leon said. “Major retailers have come into this market in the last couple of years, and there are new restau-rants and bars. It’s really becoming a desirable place to live.”

One of the two six-story buildings, which

Douglas christened the Foundry, was origi-nally constructed as a printing factory in the 1920s. The other building, known as the Forge, is newly built, and the two are connected by a one-story common space whose roof doubles as an outdoor courtyard shaded by the apartment structures. Amenities include bicycle storage, an exercise facility and an outdoor swimming pool. —M.G.

A group of institutional investors, Santander Bank and People’s United Bank have provided a combined $91.6 million to developers Alexander Development Group and The Bluestone Organization for the pair’s planned 249-unit transit-oriented, mul-tifamily building at 42 Broad Street West in Mount Vernon, N.Y., HFF announced.

The financing was arranged by HFF’s David Giancola and Geoff Goldstein.

The investor group—advised by J.P. Morgan Asset Management—provided $32.6 million in joint venture equity, while Santander and People’s United Bank teamed up to provide $59 million in construction financing.

“I am thrilled to work on such a transfor-mative project with such great partners and advisers whose collective efforts will enable us to deliver to the city of Mount Vernon one of the most amenitized and energy efficient rental properties in Westchester County,”

Alexander Development Group Principal Mark Alexander said in prepared remarks.

The building was designed by global archi-tecture firm Perkins Eastman, and the developers broke ground on the project last summer, according to a project fact sheet from Alexander Development Group.

When completed, the roughly 354,000-square-foot building in Fleetwood, a neighborhood of Mount Vernon, will be 16 stories tall and will include more than 16,000 square feet of amenity space, 12,000 square feet of ground-floor retail space and a four-story, 580-space parking garage connected to the building. The property will house studios and one-, two- and three-bedroom rentals.

The building’s amenities include a swim-ming pool, a fitness center, a courtyard, mul-tiple roof decks, a library, a lounge, a package room and a concierge.

Alexander Development Group has

experience in Fleetwood, having developed a Class-A rental community in the area called The Horizon at Fleetwood at 550 Locust Street in 2011. The building has 101 rental units, according to Rent.com

Officials at The Bluestone Organization could not be reached for comment.—M.B.

Santander, People’s United Provide $92M in Financing for Rental Building

Citizens Bank Lends $58M on DC Rentals, Citing Hot Market in City’s Northeast

Brookland Press Apartments.

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A rendering of 42 Broad Street West.

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CREFC’s January conference at the Loews Hotel in Miami kicked off with an overview of how the CMBS market has been faring, courtesy of Eric Thompson—Kroll Bond Rating Agency’s

senior managing director. All eyes have been on CMBS with the financing source showing

its competitiveness in 2017 and going up against bank and life company loans. The proof is in the pudding, and last year’s issuance volume neared $90 million, surpassing most analysts’ expectations.

Single-borrower issuance in particular increased by a whopping 88.7 percent in 2017 year over year to $36.5 billion, while conduit issuance remained flat at $48.5 billion.

KBRA expects single-borrower issuance to remain strong in 2018. “There’s a number of fac-tors that might contribute to that,” Thompson told Commercial Observer between panels. “Some borrowers may be seeking to lock in a bet-ter rate than they currently have, do so ahead of rising interest rates and take some value accre-tion out of a property. It is also anticipated that M&A activity may spur acquisitions that result in capital market financings.”

There are also a couple of dynamics going on in the single-borrower space that make it appealing to market constituents, Thompson said: “One is that while it can be a very competitive market for pricing and execution for issuers that can lead to compressed profit margins, they can pre-place a lot of the debt with investors and have a good idea of where that execution might be. Two, I think there’s a deeper pool of subordinate buyers who are will-ing to buy further down in the capital stack because they’re comfortable with the credit on a single asset and comfortable in looking at their basis from the perspective of owning it. Unlike in a conduit deal, if things do go bad, you have more transparency into what conditions can effectuate a change in control as there is only one asset.”

KBRA is aware of a dozen or more single-bor-rower transactions coming down the pipeline as the year begins and expects to see up to three CRE CLOs issued by mid-February.

At 57 percent, 2017 appraisal loan-to-values were at their lowest since KBRA began rating con-duits in 2012, which is both good and bad. “The issue is that when you have that level of lever-age CMBS is competing more with insurers and banks,” Thompson said. “Even if banks pull back because of regulatory concerns, you have more competition than you would even if you had mar-ginally higher leverage.”

Historically a financing source dedicated to

assets in secondary and tertiary markets, one interesting trend uncovered in KBRA’s research last year was CMBS’ increasing exposure to pri-mary markets. “We found that primary markets default less than secondary markets by 2 to 3 points. When they do default, they have losses that are five points less than any other market,” Thompson said. “In the most liquid MSAs, the default rate is actually half that of other market tiers. So this is a positive credit element and a bright spot in terms of trends from prior years.”

CMBS loans in the largest, most liquid mar-kets MSAs—New York, Boston, Washington, D.C., Chicago, Los Angeles and San Francisco—reached 33 percent in 2017, up from 28.1 percent in 2016. When combined with exposure to the next 11 largest MSAs, that percentage pierced the 50 percent level for the first time in KBRA’s rating history, reaching 54.3 percent (compared with 45.5 percent in 2016).

In his opening remarks, Thompson cautioned

that, while primary market’s diverse economies can certainly withstand downturns, oversupply is always a concern to consider.

In terms of property types, 2017 was the year of the office with CMBS exposure to the asset class increasing to 39 percent. Perhaps unsur-prisingly, retail exposure took a hit, dipping to 25.4 percent after averaging above 31 percent in previous years.

And while delinquency levels remain low, they are increasing. KBRA’s conduit portfolio delinquency rate reached 0.44 percent by year-end 2017, up from 0.15 percent at the end of 2016. The increase was somewhat expected given sea-soning in transactions, Thompson said. Term defaults historically peaking between years four and six; the bulk of the delinquency (0.32 percent) is from the 2013 and 2014 vintages.

As one of the most buzzed-about topics at the CREFC conference, it looks like CMBS will con-tinue to shine in 2018.—C.C.

How’s CMBS Doing? KBRA’s Eric Thompson Fills Us In

CREFC 2018

KBRA’s Eric Thompson.

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Commercial real estate collateralized loan obligations (CRE CLOs). It’s a mouthful for sure. For some, CLOs are a sobering reminder of the pre-crisis Wild West. But, they’re baaack. And,

judging by the packed house with standing room only that the CREFC panelists—includ-

ing issuers, lenders and an investor—spoke to, people are curious about the new and improved 2018 CRE CLO market.

And for good reason: The market is heating up, significantly. Case and point, in December 2017, Blackstone Group issued the largest CRE CLO post-crisis, the BXMT 2017-FL1 transaction, weighing in at a whopping $1 billion. The trans-action was collateralized by 31 senior participa-tion interests in loans secured by 71 properties, according to a report by KBRA at the time of the deal’s issuance.

Last year saw approximately $8 billion in CRE CLO deal volume, but panelists estimate that amount will easily rise to between $12 billion and $14 billion in 2018, driven partly by investor demand for the bespoke financing market. It’s a significant increase, given that in 2016 there was only $2 billion in issuance. That said, the mar-ket remains disciplined and well balanced, one panelist said.

Today, CRE CLOs are a benign, completely non-recourse source of financing that serve a distinct market purpose, panelists noted. Specifically, they solve the capacity issue around balance sheet financing. As an added bonus, when the

market is functioning well, a CRE CLO is an accre-tive form of financing that complements ware-house financing nicely. Further, the deals create new capital markets opportunities and relation-ships for their participants.

First up in the panel discussion was the ques-tion of how recent CRE CLOs differ from CLOs issued pre-crisis. One panelist said that today’s CRE CLOs are “plain vanilla” unlike the more exotic pre-crisis days. But simply put, they have improved collateral quality. Pre-2007, the major-ity of transactions were more leveraged and the loans pledged as collateral had higher leverage attachment points. Today’s CRE CLOs are also composed entirely of first lien mortgages in con-trast to pre-crisis collateral, which consisted of various position in the capital stack.

Most of the loans securitized in today’s CRE CLOs are floating-rate, short-term bridge loans on transitional assets where the sponsor is in the process of implementing a business plan on the property.

The notion that the loans included in the structures must always be cash-flowing is over-stated, one panelist said. While generally true, the spectrum of loans in deals varies greatly and rating agencies are very pragmatic on how these loans are viewed. However, ground-up construc-tion loans won’t make the cut.

Lenders also have more flexibility with CRE CLOs than they typically would in a REMIC struc-ture, panelists said, with less servicing restrictions when it comes to modifying the loans. A key factor,

given the transitional nature of the underlying col-lateral and the varying timelines of a borrower’s business plan implementation for those assets.

Tempted to dabble in the space and issue a one-off CRE CLO deal?

Proceed with caution, participants said. Significant resources are required from both an expense and labor perspective in order to pull a transaction together. From pooling the assets in an investor-friendly structure to working with the rating agencies and legal counsel to con-tending with extended transaction timelines and market volatility. The gestation period can take up to 15 weeks, and in a volatile market, the cost of funds targeted by an issuer can move signifi-cantly. And don’t forget, CRE CLO issuances, like CMBS, are subject to risk retention requirements.

Something else to bear in mind if considering a single deal is that investors are typically more receptive to those who are in the market more frequently, panelists said.

Investors in the asset class are—as always—responsible for doing their homework. While one panelist had some concern that this isn’t neces-sarily always the case, evident in oversubscribed AAA tranches, another panelist argued that inves-tors today are buying CRE CLO bonds based on diligence and underwriting as opposed to ratings—another key differentiation from the pre-crisis era.

One thing is pretty clear, with issuance expected to almost double this year, the use of CRE CLOs for transitional lending will continue for the foreseeable future.—C.C.

Say Hello to CLOs! Panelists discuss CRE CLOs at the CREFC conference.

CREFC 2018

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Industry experts weigh in at the CREFC conference.

Taking a markedly dim view of Congressional politics, members of CREFC’s policy group spoke skeptically this week of the federal government’s ability to guide stable economic growth, telling

an audience at the group’s annual Miami conference that compromise in Washington

seemed increasingly hard to come by.One senior panelist, bemused that what he

saw as a pro-growth tax reform successfully made its way to President Donald Trump’s desk last year, cautioned conference attendees not to expect more of the same, citing an unheralded level of partisan enmity in the legislative branch that he said would distract lawmakers from com-mon-sense compromises.

(CREFC’s rules for the conference prevent jour-nalists from identifying or quoting speakers at the meeting’s events.)

Most pressing on legislators’ agenda in the New Year, another speaker explained, will be a loom-ing debt-limit struggle. Congress, responsible for

setting the nation’s budget, also separately writes the laws on how much debt the government may carry. Since December 2017, when federal debt hit the current legal ceiling just above $20 trillion, the Treasury Department has funded the gov-ernment using extraordinary measures, paying bills using only incoming tax receipts and inter-est it has captured from federal pension funds. That financial flexibility will run out in March, setting the government up for default without Congressional action.

A default event would be unprecedented, pan-elists agreed, hesitating to speculate on the eco-nomic fallout.

A questioner from the audience asked the speakers how they thought ballooning federal debt should be resolved in the longer term, won-dering allowed whether millennials could expect to face an irreparable social crisis when they inherit the reins of political power in coming decades. Panel experts agreed that the issue was nearly intractable, pointing out that mandatory

spending, that is, payments for social safety net programs that are not approved in yearly Congressional budgets, makes up as much as two-thirds of annual federal outlays. Revising commitments to those programs, the panel stated, would take unusual legislative willpower because Americans who rely on Social Security and Medicare vote at a disproportionate rate in nonpresidential elections.

Cheerful thoughts were difficult to come by at the Tuesday morning event, though the speakers expressed their relief that the recent tax reform had not barred tax-free like-kind exchanges for real estate and expressed optimism about pos-sible reforms at Freddie Mac and Fannie Mae in the year to come. With a slew of Republican senators, such as Tennessee’s Bob Corker and Arizona’s Jeff Flake, announcing their retire-ments, the CREFC panelists suggested that departing lawmakers could move to enact pop-ular, common-sense economic reforms to help cement their legacies.—M.G.

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Reviewing an Obstinate Congress,CREFC Sees Half-Empty Glass

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A panel of commercial real estate property managers and developers at the Commercial Real Estate Finance Council’s Miami con-

ference this week offered strongly divergent views on the state of debt and equity markets with larger, more

powerful firms reporting far greater ease in obtaining favorable terms from lenders and CMBS services. They described the trend as pervasive across asset classes from retail to multifamily to office, but allowed that smaller borrowers’ flexibility in seeking finance from a wider variety of sources partially countervailed the lenders’ power in setting covenants.

The panel’s executives also acknowledged that business-cycle concerns had shifted the sorts of projects lenders were willing to finance, pointing out that banks and alternative lenders are growing more reluctant to fund unconven-tional acquisitions or construction projects.

Comparing the period of economic growth fol-lowing the Great Recession to a baseball game, the speakers, who included GGP’s Heath Fear and Blackstone’s Michael Lascher, agreed that the current market is analogous to the final inning, although one of the members of the panel speculated that the metaphorical game may yet go into overtime.

Appropriate to the scene of a conference whose value to the industry is largely in net-working opportunities, the members of the borrowers’ panel emphasized the importance of personal relationships in their transac-tions with one panelist stating that his firm was willing to pay somewhat higher fees and interest rates to work with financing institu-tions that provide a more human touch. Such interpersonal networking has become espe-cially important in financing retail projects, the panelist said, noting that in many cases, larger banks have developed blanket policies

that strictly limit lending to shopping centers, whereas smaller players like community and regional banks maintain more flexibility with regards to the asset classes they can fund.

The panelists didn’t hold their tongues on the subject of CMBS servicers: when asked if the CMBS borrower experience had improved lately, one commentator responded that those relationships could hardly have gotten worse. Others complained more broadly about real estate structured finance, stating that the sec-tor’s one-size-fits-all covenants and deal terms are causing frequent migraines at the negoti-ating table.

Still, one executive wryly implied, financ-ing decisions still depend very much on simple bottom-line analysis. Adopting the resigned, conciliatory tone of a parent responding to questions from impudent siblings, the execu-tive told the room of sundry financiers that his firm loved all lenders equally.—M.G.

Developers Take to CREFC Stage to Air Gripes With Financiers

Conference attendees listen in to panelists’ views.

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The Takeaway Amid Optimal Conditions, CMBS Shone in 2017

“Heading into the year, the potentially unsightly and disruptive risk retention era was a big concern with most CMBS pros thinking, ‘no, no, no.’ But it didn’t take long for the market to warm up to the idea,” said Sean Barrie, an analyst at Trepp. “The result was better-than-expected new issuance volume in 2017. For CMBS issuers, perfect conditions for lending and issuing certainly helped. That included tighter spreads than those seen in 2016 as investors approved of the new require-ments of the risk-retention era. Other ideal conditions includ-

ed low Treasury rates, yield-hungry investors, an absence of volatility and an ample volume of loans in need of refinancing. No property type received more non-agency issuance in 2017 than the office sector, as about $25.7 billion across 574 loans was doled out. Conduit deals remained at the top of the heap when looking at deal type, but the single-asset space continued to take a bigger piece of the issuance pie. The horizontal risk retention holding was barely the more popular option, nudging out the vertical structure by less than $1 billion.” Source:

2017 Private-Label US CMBS Issuance

Metropolitan Statistical Area Loan Count Securitization Balance

New York City, N.Y.-N.J. 375 $15,683,585,019

Los Angeles, Calif. 173 $4,885,388,098

Las Vegas, Nev. 37 $3,463,418,193

Chicago, Ill. 77 $2,726,285,674

Washington, D.C. 60 $2,473,582,217

San Francisco, Calif. 70 $2,456,434,684

Houston, Texas 85 $1,649,173,410

San Jose, Calif. 38 $1,607,973,102

Boston, Mass. 15 $1,446,024,731

Dallas, Texas 92 $1,443,868,840

San Diego, Calif. 45 $1,408,070,140

Philadelphia, Pa. 60 $1,345,885,548

Atlanta, Ga. 65 $995,577,315

Seattle, Wash. 27 $846,862,261

Riverside, Calif. 50 $833,983,638

Deal TypeDeal Count

Loan Count

Securitization Balance

Conduit 51 2,487 $47,764,144,317

Single Asset/Borrower 72 147 $37,161,060,000

Large Loan 8 169 $3,928,106,170

Risk Retention Structure

Deal Count

Loan Count

Securitization Balance

Horizontal 57 1,123 $38,397,832,029

Vertical 61 1,113 $37,573,711,952

L-Shape 13 567 $12,881,766,506

Property Type Loan Count Securitization Balance

Office 574 $25,686,672,337

Lodging 419 $24,819,577,045

Retail 768 $11,973,536,596

Mixed-Use 247 $11,300,888,883

Multifamily 265 $4,906,970,841

Other 41 $3,599,643,365

Industrial 147 $2,728,950,572

Self-Storage 189 $1,796,269,701

Warehouse 2 $1,295,000,000

Co-op Housing 91 $382,581,851

Mobile Home 600 $363,219,294

Deal Count Loan Count Securitization Balance

131 2,803 $88,853,310,488

16 | JANUARY 12, 2018

Q+A

Commercial Observer: How has business been since you joined Meridian last May?

Justin Boruchov: It’s been great. In general, the market has been challenging, as there has been a pullback in construction lending and a lot of difficult loans. But Morris and I cut our teeth in that part of the industry, so we specialize in that.

Was 2017 a busier year than expected, would you say?

Morris Betesh: Much busier. The sales mar-ket was somewhat slow, but there was some fol-low-through from acquisitions that occurred 18 months ago. So, we weren’t doing as many acqui-sition loans, but we did a lot of construction loans and a lot of refi take-outs. We did a recent acquisi-tion-conversion loan on the Bowery and another in Williamsburg. Our business was up signifi-cantly, both in dollar volume and in terms of the number of transactions.

Where did you grow up? Boruchov: I grew up in Long Island and

studied business at Indiana University. I actu-ally come from a family of doctors. I’m the only non-doctor in a family of five males. I was pre-med for five-and-a-half years then decided it wasn’t for me.

Betesh: I grew up in Brooklyn, went to Brooklyn College and was also a pre-med drop-out. I had a classic Jewish mother who hoped I’d become a doctor. While I was in college, I started working part time with my father who managed a small portfolio of real estate at the time. It was just the two of us in the office, and he gave me a lot of responsibility. I really learned the busi-ness ground-up, in terms of managing real estate, negotiating tenants and financing prop-erties. Once I graduated college I was looking for something more entrepreneurial and ultimately landed my first job outside of the family business with Massey Knakal [acquired by Cushman & Wakefield in 2015] in 2011.

Why did you make the jump from Cushman & Wakefield to Meridian?

Betesh: Our time at C&W and Massey Knakal was a really great experience, and we built a siz-able business there. But Meridian has amazing strength, knowledge and firepower that we’re able to use at our client’s disposal. One of the big-gest misconceptions of Meridian, which is one that I had before I came here, is that it’s an older firm that specializes in small apartment build-ings in Brooklyn, which was not our forte histor-ically—we specialized in value-add construction

loans, bridge loans and land loans that needed a story to be told. When we came to Meridian, we realized the volume that gets done here in that space dwarfs the amount we’d done to date, and it’s for some of the largest most reputable clients.

What were some of your recent deals?Betesh: We financed a warehouse acquisition

and conversion in Williamsburg [at 61 North 11th Street]. It was a $38 million loan, roughly 85 per-cent loan-to-cost—to take a vacant warehouse in Williamsburg to an office and retail building over a 24-month period. It was a very tight clos-ing time frame, and we were able to get 85 percent financing on a nonrecourse basis. The loan had a combination of lenders in it, so we helped syn-dicate the loan. That’s an example of our typical deal where it’s adaptive reuse. We’re not work-ing on deals where you mail in rent rolls and get a quote—we’re working on deals where you have to go out and tell a story and you have to know every office rent comp in Williamsburg to sell your deal.

We closed a very similar loan recently on a vacant property on the Bowery. It was an acqui-sition conversion transaction, and we got 75 per-cent loan-to-cost nonrecourse financing. Then we’re also doing a ground-up hotel in Philly. Our client was in the market attempting to finance it for a year without success. We agreed to a per-formance hurdle where our fee would tick up if we got above 70 percent leverage; we were able to get 80 percent leverage through a senior and mez-zanine loan, and we had four offers at that level.

Boruchov: Those are indicative of the type of loans we’ve worked on. Our clients view us more as an adviser, I think—whether it’s leverage or prepayment or a loan’s term that requires more of a storytelling and a deep dive into the deal.

Morris Betesh and Justin BoruchovManaging Directors at Meridian Capital Group

Morris Betesh and Justin Boruchov

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