Frequently Asked Questions
• What is the CapHarbor Realty Advisors (“CRA”) process?
1. Property Analysis. CRA starts with a no-cost, no-obligation analysis of your property. In order to conduct this analysis, CRA needs the following items:
a. A confidentiality agreement with one or more of the co-owners. This allows you to know that CRA will hold as confidential any information that you send us, which is not already in our possession or generally available to the public;
b. A copy of the TIC /DST agreement that was executed by the co-owners;
c. A copy of the asset and/or property management agreement for the property;
d. Prior calendar-year financial statements, including income statement and balance sheet;
e. Current year-to-date financial statements, property reports and correspondence from the sponsor/manager;
f. A current copy of the rent roll;
g. Copies of any analysis or review completed on behalf of the co-owners.
h. Description of any current or near-term capital need.
Once CRA receives the information listed above, we conduct a financial and, if possible, physical examination of the property. We will distill the evaluation into conclusions and recommendations for consideration by the co-owners.
2. Determination of Strategy. Depending on a property’s capital needs, we typically recommend one or more strategies:
a. Seek refinancing of the existing mortgage encumbering the property;
b. Seek bridge financing for properties in transition to stabilization;
c. Seek mezzanine financing for higher-leverage transitional needs;
d. Seek preferred equity to cover the gap between capital needs and mortgage capital;
e. Seek legal counsel and/or a borrower advocate to assist in negotiating with the lender(s) and/or to secure borrower’s rights.
These strategies are not mutually exclusive and may be used in combination as appropriate for specific circumstances.
3. Execution. When engaged by the co-owners, CRA uses its deep knowledge and relationships with capital providers to ‘clear the market’ for the financing sources that best fit the co-owner’s needs. Specifically, we:
a. Develop a financing package for the property based on its specific needs;
b. Contact every capital provider in our data base (both in writing and telephonically) to discuss the capital need and opportunity;
c. Obtain term sheets from capital providers;
d. Create a capital spreadsheet for the co-owners that outlines and compares the details of each term sheet;
e. Solicit ‘best and final’ term sheets from those capital providers who seem to be the best fit for the property and the capital requirement. Select the best fit;
f. Negotiate a loan application (when applicable) between the co-owners and the capital provider;
g. Assist the co-owners in providing the information and analysis required by the capital provider as a part of their due diligence;
h. Assist the co-owners in creating a new, multi-member LLC to ‘own’ the property if so required by the capital provider;
i. Assist the co-owners in the closing and post-closing process.
• What kind of capital providers does CapHarbor Realty Advisors (“CRA”) work with?
At CRA we work with all types of capital markets participants including:
- Senior Lenders
- Insurance Companies
- Private Lenders
- Mezzanine Debt Lender
- High-Net-Worth Investors
- Preferred Equity
- Rescue Capital
- Individual Investors
- Private Equity
- Owners Self Funding
• Can CapHarbor Realty Advisors (“CRA”) recommend other professional disciplines (i.e. attorneys, accountants, appraisers) to assist with specific property needs?
Yes. Because of our extensive experience in this arena, we are well acquainted with many of the best professionals servicing co-ownership groups in TIC / DST structures. CRA does not receive any compensation from the service providers it recommends. Instead we provide these recommendations in order to expedite the process and ensure the co-owners are represented by well-qualified, high-integrity service providers who can streamline the process for all involved.
• Does our Ownership group need an attorney?
For certain matters regarding your property, you may need an attorney's assistance. However, in our opinion, the assistance should be limited to only those areas where it is absolutely necessary in order to avoid adding unnecessary costs to the process. In our experience, the following are areas where the assistance of an attorney can be helpful:
1. Defending against foreclosure. You will need an attorney to represent the ownership group in defending against a foreclosure action. Defense of the foreclosure action can sometimes buy time and provide the Ownership Group with leverage in loan modification negotiations. After your initial response to the foreclosure motion, lender’s counsel will assess your claims and arguments. This assessment will have a significant impact (either positively or negatively) on the negotiations going forward.
2. Drafting or reviewing legal documents. These documents may include a purchase and sale agreement, loan modification documents, Internal Revenue Code 721 deferred exchange LLC roll-up agreement, new multi-member LLC agreement, etc.
• What are the Differences Between CMBS Financing and Non-CMBS Financing?
There are generally two types of lenders who provide mortgage financing for real estate: institutional lenders, such as banks, insurance companies and mortgage REITS, who tend to hold and service the loans that they make; and conduit lenders, who make loans, which they then package with other loans to be sold as bonds known as Commercial Mortgage-Based Securities (CMBS).
Prior to the emergence of the CMBS market in the mid-1990’s, most mortgage financing for commercial real estate was provided by institutional lenders and most of that financing was recourse to the borrowers (the lender could sue the borrower for any deficiency following a foreclosure). These recourse provisions could add substantial risk to a borrower as their entire net worth could be at risk because of their commercial real estate investments. In addition, much of this financing was at a floating rate of interest, possible putting the borrower at additional risk if interest rates increase. Additionally, since most institutional lenders hold their mortgages and only get repaid over time (as opposed to selling the entire mortgage in the CMBS market), they tend to be more conservative in their underwriting than most CMBS lenders.
Most CMBS financing, however, is non-recourse, meaning that in most cases, the lender can look only to the collateral for repayment and cannot sue the borrower if there is a deficiency following a foreclosure. In addition, these loans are typically fixed-rate for their entire term, eliminating the risk of increasing interest rates.
The process for obtaining a mortgage from either an institutional lender is similar; however, after the mortgage is funded there can be significant differences as to how the loans are serviced. Institutional lenders tend to service their mortgages in-house, so there is typically continuity between the origination of the loan and its servicing. CMBS mortgages are part of a mortgage trust and are typically serviced by a company other than the originator of the mortgage. Additionally, CMBS mortgages include a ‘special servicer’, who takes over servicing of the mortgage if it deviates in any material way from the loan documents (for example, when seeking a loan modification or restructuring). This can cause difficulty in finding someone to talk to if a borrower needs to speak with someone who can make decisions regarding their mortgage.
• How Does a Loan Workout or Modification Work?
There are several ‘standard’ forms of loan workouts and modifications. As noted above, the process may be less complicated if the mortgage originator still holds and services the loan. The standard forms of loan modification are:
1. Reduction of Principal. This entails the lender reducing the mortgage balance. It is the least likely alternative as all any future growth in value accrues to the benefit of the borrower. Depending on the type of loan and other circumstances, a reduction of principal may result in cancellation of debt (COD) income to the borrower(s).
2. Reduction of interest rate. This entails either a temporary or permanent reduction in the interest rate on the mortgage, reducing the monthly debt service payments. In some cases the reduced interest payments are added to the principal of the mortgage.
3. Interest-Only Payments. This entails either a temporary or permanent elimination of principal payments, reducing the monthly debt service payments. The mortgage balance will not be reduced (amortized) during the interest-only period.
4. Discounted Pay-Off. Similar to a reduction of principal, but requiring that the mortgage be repaid at a negotiated reduced balance when the loan modification is completed. As with a reduction of principal, this may result in COD income to the borrower(s).
5. Bifurcated A-B Structure. Perhaps the most common form of loan modification, the loan is split into two pieces; an ‘A’ piece and a ‘B’ piece. The A piece is usually equal to the current fair market value (FMV) of the property. The B piece is the remainder of the mortgage balance. The A piece continues as a normal mortgage subject to foreclosure if there is a payment default. The B piece is typically not foreclosable and payment of the B piece is often a 50%-50% split of cash flow with the borrower(s) after payment of the A piece.
What Can Cause CRA’s Process to Fail?
1. The property does not qualify for new capital. Not all properties and circumstances will meet the criteria of capital providers. CRA carefully analyses each property to determine the probability of success and provides that analysis to the co-owners before beginning any capital markets assignments.
2. The lender is unwilling to agree to a loan modification or workout. Given the constraints of the CMBS structure (which accounted for the vast majority of TIC/DST financing), it is often impossible to induce the servicer/special servicer to accept a workable loan modification or workout. CRA is well experienced in dealing with all of the loan servicers and special servicers so that it can provide expert guidance to the co-owners of a property before engaging in a loan modification or workout assignment.
3. The co-owners do not agree to the terms of the new capital and/or to the terms of the loan modification or workout. Often times, co-owners have different financial and tax positions and/or motivations. When this occurs, it can be impossible to achieve unanimous approval, or even super-majority approval for a loan workout, modification or property recapitalization. CRA makes every effort to have the co-owners have unanimous consent prior to undertaking a capital markets and/or loan modification or workout assignment.