The Real Deal New York

Interest in TALF cool for now

July 10, 2009 04:36PM
By C. J. Hughes

alternate textCBRE’s Enoch Lawrence (left) and Sam Chandan of Real Estate Econometrics

In a sign of how troubled the market for bonds backed by commercial real estate may be, and by extension, the future of some office building owners, a key deadline for federal bailout money designed to get money flowing again to landlords has come and gone without any takers.

Up until June 16, investors in those bonds, like insurance companies, hedge funds and credit unions, had been invited to dip into the Term Asset-Backed Securities Loan Facility, or TALF, to borrow some of the $200 billion fund set by the Federal Reserve Bank of New York.

The loans, in $10 million increments, can be used to buy commercial mortgage-backed securities, or CMBS, which during flusher times backed about 20 percent of deals involving the purchase or refinancing of apartment buildings, warehouses and office towers.

And if that money can flow again to lenders, which it was doing before the market froze up last summer, the thinking goes, lenders could start opening their purse-strings again to landlords, who may have onerous mortgage notes coming due.

The chief reason there’s been zero interest in TALF so far, according to industry analysts, economists and brokers, is that there hasn’t been enough time to put complicated deals together. Indeed, it was only in May that the Fed announced that commercial mortgages would be eligible for TALF money, and a month wasn’t long enough for lenders to market their assets to willing buyers, they say.

“There was a big timing issue,” said Sam Chandan, the chief economist for New York-based research group Real Estate Econometrics. “It takes more than a few weeks time to originate loans and package them.”

But investors may also be figuring that, even with distressed assets, it may be wiser to invest directly in a bricks-and-mortar building that could prove more profitable in the long run, than a paper-based CMBS, which could be hard to sell if the bond market deteriorates, Chandan added.

Also, lenders may not want to guarantee that they can pay investors the typical 9 percent returns for their CMBS, when the capitalization rate of the buildings behind the notes might be lower, said Enoch Lawrence, a senior vice president for CB Richard Ellis Capital Markets; more money might be going out than coming in.

“The cost of funds to put that kind of structure together [isn't] competitive,” Lawrence said.

Other less obvious factors may be playing a part, said Daniel Fasulo, managing director of Real Capital Analytics, like investors’ unwillingness to have Uncle Sam peering over their shoulder if they borrow his money.

“Many master of the universe types don’t like government dictating terms for them,” he said.

Plus, other investors, particularly those with some kind of banking arm, may have already indirectly received bailout funds through the Troubled Asset Relief Program, or TARP, the similarly omnibus legislation that also passed last fall but was geared toward banks. In that case, those investors may be able to weather the storm for a while without getting rid of troubled CMBS.

In addition, under TALF rules, only AAA-rated assets may be purchased with borrowed government money, and that high rating may have to be reevaluated if the buildings behind those assets have since deteriorated in value, Fasulo explained.

Who could benefit from TALF in the New York real estate world?

Many large commercial property owners, experts say, like SL Green Realty, the Durst Organization and Jack Resnick and Sons, though none would comment.

Still, some are looking ahead to July, when older CMBS loans — that is, those packaged before 2009 — can be unloaded with TALF money, too. However, general economic conditions might have to improve before widespread interest in CMBS fully kicks in.

“There is a wait-and-see attitude, no matter what asset class you are dealing with,” CBRE’s Lawrence said.

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