Not On Private Side of the Playing Field - Posted by David P. Butler
Posted by David P. Butler on March 28, 2009 at 21:45:32:
Hello Notey Boy,
Mike has offered some excellent discussion, but I’d like to add a few observations to it as well. An important point we have made often is recognizing that the private cash flow business per se, even in its apex in the late 1990’s (when a number of relatively large institutional private note buyers were on the scene), never had buyers for large single notes or portfolios in the dollar ranges you are presenting here. There were what we refer to as “spot buyers” jumping into the market from time-to-time, generally through established note brokers who have developed their own resources over time. But these were not a reliable resource that was openly marketed, whereby note brokers who did not have such contacts directly, or business relationships with experienced brokers who did, could reasonably expect to engineer such transactions.
And… even in those “Days of Wine & Roses”, commercial paper buying guidelines were very limited, in comparison to the “bank-to-bank” transactions where paper of this magnitude is generally “circled”. Also, as Mike suggested, a corollary problem are the yield spreads typically asked and bid in this type of paper. We had an excellent $53M package of mixed commercial RE loan paper come in through a mainstream lender late last summer. First question I asked was how much do you want? They stated that they would not sell to yield more than 7%. I was very familiar with several of the properties and the high quality they represented. Nevertheless, I told them the chances of placing that package “off-Wall Street” at less than 11% was extremely remote, and immediately thanked them in the process of turning it down.
A bigger issue in the current market, NNN leases or not, is that the commercial real estate market has been crumbling behind the scenes almost as badly as the residential real estate market. As more and more commercial space is going “dark” in the face of foreclosure and/or downsizing, the risk of commercial loan paper implosion is growing exponentially. Itâ??s clear that the financial meltdown is shaking up commercial real estate markets locally and nationally, with virtually all industry sectors absorbing the blow.
The consequences of holding “see-through” property are generally much more troublesome to landlords stuck with them, as the demand ratio is not the same as for residential.
If the strike price is low enough, and the notes are sound enough, we do have a few of the resources described above, and are willing to take a look at the spreadsheet, for preliminary review. Right now, we do have two aggressive commercial institutional buyers who might be interested. One has $125M to spend for performing commercial real estate loan paper; the other has $800M. But these folks are highly experienced, highly demanding, and require absolute clear guidance and Intermediary control going in. So concise Executive Summary of the offering, and clear, meaningful spreadsheet, will make or break the deal out of the gate.
I’d also like to make sure that you are talking notes secured by real estate, and not the NNN leases themselves. No offense intended, but in January and February I received five or six requests from different sources, for bid on $400M of commercial real estate paper. Upon reviewing the spreadsheet, it was clear that they were all the same package - and what was being offered were the leases themselves… NOT commercial real estate paper. A very important distinction!
Hope this helps in some fashion, and best wishes for finding a home for your transaction(s) one way or another.
David P. Butler
National Equity Solution &
Hotspur Investment Group