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Grave Dancing for Fun and Profit in the

Financial Apocalypse of 2008 and Beyond

By: David Repka, Founder, Bison Financial Group

Overview: The financial markets are in chaos. It seems that as each day goes by another once
mighty financial institution is brought to its knees. Fannie Mae, Freddie Mac, Bear Stearns,
Lehman Brothers, IndyMac, AIG, Countrywide, Merrill Lynch, Washington Mutual
& Wachovia have either been hobbled, failed or have been absorbed by another institution
higher up on the food chain or by the Federal Government.

World View: Chaos creates opportunity. Fortunes were made and lost in the RTC/FDIC crisis
of the late 1980s and early 1990s. We are standing at the edge of the next great real estate
wealth transfer. The old rules (from 2007 and earlier) no longer apply. Entrepreneurs poised to
embrace the new realities will prosper during this upheaval.

The Four Horsemen of the Apocalypse are riding and they are bringing friends:

The Death of Value: Since the beginning of time commercial real estate investors could apply a
CAP rate to the verified NOI of a property and determine what they would be willing to pay
for a property. They would then find a lender that would lend on this value confirmed by an
appraisal using three determinants: Cost Approach, Market Sales Approach and Income
Approach. The Cost Approach and its reliance on recent land sales and costs of bricks and
sticks has historically been subordinate to the other two. With limited transaction volume, The
Market Approach to value is not a reliable metric. The weakness of the Income Approach to
determining value is that it relies on a CAP rate to determine value. In our uncertain market no
one knows what CAP rates should apply. So how does a lender determine loan proceeds if
there is not a rock solid value to hang their hats on? In our current market conditions the only
guideline that is given serious consideration by lenders to determine the loan amount is Debt
Coverage Ratio (DCR). DCR reveals the margin of safety a lender has to weather the real or
perceived financial storm.

The Death of the Liquidating Property: Based on the Death of Value, the logical conclusion is
that the only deals that can be done in this environment are on income producing properties
with a cash flow that can be verified. The days of lending money to build a property that needs
to be sold off (liquidated) to retire the debt are over. A high-rise condo tower received
financing because the developer presented the lender a compelling case showing enough
presale contracts backed up by deposits to retire the debt with the sale of only 50-70% of the
units. The weakness of this strategy is that most of the “presales” were actually speculators
planning to flip the units at a higher price to someone that would actually live there. When the
pool of “end users” evaporated, many of these speculators walked away from their deposits and
put the onus of selling the units back on the developer. If the developer was weak these assets
are now owned by the lender. If the lender was weak the RTC 2.0 will soon own these assets.

The Death of Land: Land is the ultimate four-letter word. It is impolite to mention L-A-N-D in
polite company because it has no cash flow and for the purpose of this Report has no Value
unless it is a raw material used to create a property with an income stream. At the October
2008 Crittenden Commercial Real Estate Finance conference in Orlando, FL the consensus of
lenders was that land had zero value and that site work improvements only added value for half
the original cost.

The Death of Loan Origination: CMBS market has effectively shut down and is not
functioning since lenders need to charge a 10-year fixed rate coupon over 12% just to break
even considering how the various tranches of CMBS paper are trading. Current pricing of
AAA securities is 350 over the 10-year Treasury (vs. 65 over in 2006) with the AA trading at
925 over (vs. 85 over in 2006). The riskier BBB piece has a market price of 2360 over (vs. 175
over in 2006). Think about this for a moment: in 2006 investors were willing to accept a yield
of under 6% for a 10-year BBB “Investment Grade” risk. In our current market the same
investors demand a yield of just under 28% for this risk. Are you kidding me? See the chart
below – a picture is worth a thousand words. Send an e-mail to if
you would like a copy of the source material from CMSA. This was from September 5, 2008.
Many lenders are scratching their heads at why they are originating single loans when they can
cherry pick their preferred risk tranche on an entire pool. Assuming an investor can get
comfortable with the rating agencies’ assessment of the risk (and this is a big IF) outsized
returns can be achieved with little personnel costs. Several loan originators I have talked to
recently are fearful of losing their jobs should their bosses realize this and axe their entire
origination platform.
Source: Commercial Mortgage Alert

The Death of New Customers: Capital is scarce. Many lenders have developed the parochial
mindset that their funding capacity is for existing customers only. No new customers need
apply. In the rare case of a new customer being welcomed to a bank, they need to be prepared
to have a relationship with their new lender. A relationship isn’t nearly as interesting as it
sounds. It does not mean candlelight, bubble baths and foot massages; it means… get ready to
pony up at least 10% of the loan amount in Certificates of Deposit at our bank.

The Death of The Amateurs: In the go-go times lenders were flush with cash and willing to
take a shot on an amateur developer with a limited track record, experience, net worth and
liquidity. Bankers wooed Developers with fancy Porterhouse Steaks, limo rides and tickets to
sporting events. Not anymore. Now experienced developers with $50 or $100 million personal
financial statements are being kicked to the curb left and right. Sponsorship has become more
important than ever: Sponsors need to have a verified track record, real liquidity not just
“paper” net worth. They also need to have strong global cash flow to be able to service any
new debt out of their pocket since interest reserves are a thing of the past.

The Death of Leverage: The entire global financial system is deleveraging. The Death of Value
section outlined the new reality that the days of quoting loans based on the concept of Loan to
Value (LTV) and Loan to Cost (LTC) are over. The new reality is that Debt Coverage
Constrained Loans are the only ones that will get closed during these uncertain economic
times. During the underwriting process lenders will verify the income side of the equation,
adjust for tenant turnover risk & market vacancy and make sure that operating expenses used in
the analysis are appropriately conservative. Once the NOI is determined the lender will
determine a conservative allocation for Reserves for Replacement to Arrive at the
Underwritten Cash Flow (UCF). This gives the lender another swing at the funds available to
pay debt service and further hammer loan proceeds. DCRs will continue to rise. Lenders that
were at 1.2x 6-months ago have increased to 1.25 to 1.3x on the safest, lowest risk properties.
The difference in loan proceeds generated by the new conservative underwriting and the cost
of the property will need to be filled with Sponsor Equity. As the Equity requirements get
larger and larger borrowers will need to find a creative solution or transactional volume will
continue to drop.

The Death of Upside and Appreciation: During the good old days lenders added a level of
optimism to their proformas. They underwrote inflation into the rents, gave weight to a
Borrower’s proposed cost cutting strategy, lightened the Reserve requirements and sized loans
based on interest only DCR as opposed to loans that require amortization. This artificially
raised the UCF and the corresponding loan proceeds. Current market conditions have made
lenders dubious that future rent increases and operating expense reductions will ever happen.
August financial institutions such as Fannie Mae & Freddie Mac have suspended offering
forward commitments to fund new construction upon completion and stabilization. With a less
certain exit strategy construction lenders are assuming that they will need to hold an asset on
their books for the duration and are evaluating their risk accordingly.
The Good News: The good news is that there is actually good news for well capitalized
commercial real estate investors. A marked contrast to the comparisons to the Great
Depression is the tremendous liquidity in the current market.

The Global Stock Market Meltdown has folks re-evaluating the trust and confidence they
placed in Wall Street for their financial future. Investors have gone back to basics and are now
more concerned with return “of” capital than return “on” capital. This has caused a rush of
capital into cash substitutes like US Treasuries causing yields to plunge to historic lows. A
massive drop in yields has resulted as investors seek a safe haven for their cash. Recent market
events have exposed the fragility of Money Market Funds and Auction Rate Securities as true
cash substitutes.

Real estate that they can see, touch and feel has a tangible intrinsic value. Contrary to the
impression created by the mainstream media CAP rates have held steady and CMBS defaults
are still relatively low. In researching this article the CMSA had some great historical data.
While there has been some lift in CAP rates it is nowhere close to the increase in BBB CMBS
spreads. See next page:
As the credit crunch makes it more difficult for individual families to qualify under ever
increasing credit standards, rental apartment communities will continue to thrive. Provided true
market inventory can be determined and that there is not a lot of shadow inventory messing
with the occupancy levels, many lenders are still advancing funds on rental apartment
communities. The entire spectrum of capital from private lenders, banks, insurance companies
to Government Sponsored Enterprises such as Fannie Mae and Freddie Mac are actively
lending on stabilized multi-family housing.

Contrary to the perception created by the mainstream media and to paraphrase Mark Twin, “the
report of the death of Fannie and Freddie are an exaggeration”. Fannie and Freddie are still in
business and still writing mortgage insurance on multi-family income producing properties.
You know they never actually lent the money themselves, right? By agreeing to pay up
whether or not the borrower actually pays them back, Fannie and Freddie provide an incentive
to lenders to make loans. While the underwriting criteria as previously discussed have
tightened, lending activity continues.

Large, well-capitalized investors and developers will thrive. Independent entrepreneurs with
local contacts and “boots on the ground” will need to develop strategic relationships with
equity capital providers. Structured finance products intended to fill the equity gap between the
senior debt and the overall project cost will become less exotic and more mainstream.

Borrowers will learn to say, “HUD is my BUD”: Borrowers will learn to love FHA. The much
maligned government agency has been around since 1934 and continues to offer owners and
developers of multifamily properties the highest leverage, fixed rate, non-recourse loans on the
market. Multifamily properties funded by FHA insured loans include traditional rental
apartments, age restricted apartments, mobile home parks, Assisted Living Facilities and
Nursing Homes.

Investors need to develop relationships with intermediaries that have access to REO assets held
by lenders and ultimately RTC 2.0. This is where the bargains will be. Many lenders have
already shut down their Construction Loan Division and reassigning folks to Special Assets.
Well-capitalized opportunity funds are already buying portfolios of REO assets and distressed
notes & mortgages.

All indications are that this recession will be longer, deeper and uglier than anyone thought.
Many pundits are calling this the worst financial times since the Great Depression.

A big disconnect in the market is that Land “Sellers” still think it is 2005 and they can get
developers to buy their property at the 2005 value with a 30 day due diligence and 30 day
close. Well-capitalized opportunity funds with a 5+ year time horizon have an unprecedented
opportunity to buy parcels for future development. It is not uncommon for parcels that traded
for $20 million in 2004-2006 to go begging for offers despite a price reduction to $3 million.

Conclusion: We have the good fortune to be living in interesting times. It is a time to be

focused on properties with an income stream that can be placed with Agency and Portfolio
Lenders. The market especially likes multi-family properties: rental apartments,
affordable/workforce housing, student housing, senior housing & ALFs. Multi-tenant
office/warehouse/industrial is next in line with retail and hospitality properties bringing up the
About the Author:
David Repka of Bison Financial Group

What does Bison do?

• Bison connects people, opportunities and capital.

• Bison has relationships with the key decision makers that close commercial real estate
transactions quickly and efficiently.

Track Record:

Founded in 1994 Bison has closed approximately $1 billion in commercial real estate
transactions as a real estate broker, mortgage broker and principal.

The principals of Bison pride themselves on attracting and retaining a core group of repeat
clients and lenders who view Bison as their trusted financial partner. Our record is closing 36
transactions with one client and 34 loans with one lender. We are always looking to build
relationships with investors, developers and lenders that can surpass these records. Bison
understands the turnaround and value creation process from the perspective of owner, lender
and borrower because the principals have worn all those hats since starting in the real estate
industry in 1985.


• Debt: Arranging Bridge, Mezzanine, Construction & Permanent Financing on income

producing properties. We match the project and sponsor with investors across the
capital spectrum from private funds to institutional.
• Equity: Structuring Joint Ventures & Participating Preferred Equity

Pledge: To determine on the first phone call if we can match the needs of your project. We are
especially good at time sensitive situations: our record is closing a $12 million loan in 8 days.

Goal: To build long lasting, mutually beneficial relationships built on the foundation of trust, honor
and utmost integrity.

More Information: Call David Repka at 727-289-4400 or e-mailto:

visit: office: 449 Central Avenue, Suite 204 - St. Petersburg, FL 33701
View my LinkedIn profile at

Where opportunities meet capital