All risk, no yield is not a flex, stop underwriting like it is

I sat in on a deal review last Friday where a sponsor was pushing a 60% LTV on a suburban office asset in Charlotte with 18 months left on the main lease. The underwriter kept saying the debt service coverage looked fine because they used a 5% vacancy bump and a 3% rent growth assumption. But the building is 1987 vintage with an outdated HVAC system and the parking lot is falling apart. I asked about the reserve account and they looked at me like I asked them to fund a casino. If the tenant walks or the rates stick at 7.5%, that loan is dead in the water. We have seen two similar deals in this market go to special servicing in the last year alone. Why are people still pretending that cash flow today means anything if you are not stress testing the exit cap and the capital expenditure curve? Am I the only one who thinks sponsors flexing on low leverage are just hiding that they cannot handle real distress?

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jamiew833d ago

Whoa, I hear you on the stress testing, but I actually see low leverage as a sign of discipline, not a lack of guts. Sponsors who lock in at 60% LTV are building in a real buffer for the exact cap rate and capex shocks you mentioned, so they can sleep at night if the market turns. Maybe the issue isn't the leverage itself, but the underwriting assumptions they attach to it, which those two things often get lumped together when they shouldn't.