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Commercial broker Dek Potts recently represented a sellerd who picked a lower offer on a buildin g because the bid was more lesspromissory -- reducing chances that the buyer woulfd need a large loan to close the deal. "Irf the equity is 30 percent or less of the totaopurchase price, we're going to have to look really hard at said Potts, senior managing director at the D.C. officr of , a mortgage banking firm that specializes in financint commercialreal estate. "If there's somebody reasonably close, with 40, 50, 60 or even all equity, we're going to have to look harder at that group even if it means less he said.
That's just one way the subprime which has led tothe re-evaluation of risk is beginning to affect valuations in local real estater investment sales and financing. Money is becominyg more expensive, and people returning to work afterd Labor Day may be in for somerude shocks. But theree also are sentiments of comeuppance and hope that toughed credit rules could tame the overblowb prices of real estate and sparjk an overdue and substantialmarket correction. "Thw last few years have been an aberration," said Victod MacFarlane, chairman, president and CEO of San Fransciso-based .
"Capital was so readily available folks with not much equity got 95 percenf financing from theirdebt providers. This is back to a balancef approach, where people with equity have more of a leg up over peoplwith debt. As long as it does not cause a weare pleased." Some believe the corsetint of the free flow of monety has not yet reached its fullest impact. "Thse summer vacation effect is basically hiding the fact that there is a declinew in actual dealsgoing on," said Christian senior vice president of finance with , a D.C.-basec real estate firm.
"Some of the slowdowmn is likely due to but some is also due tothe [credit] Others say the longer lead time and planning cyclesa of commercial real estate projects may delayg the day when the effecty is felt. September, Miles and others say, is when the real test playes out as more deals hit the biddinh or duediligence phases. "We'll have to see how thinge shake out at that point when people are back intheir offices," Pottss said. The general sense is that D.C.
's commercial real estater market is inherently robust and its strongt fundamentals will carry it through this with some but not too much unless the financial markets fail to recover and the economyu heads intoa recession. One thing is for The days of easy money and creditare over. Changin g interest rates on loans waiting to fewer lenders, tougher terms, demand for more equity and conservativer underwriting standards have made real estate financing an expensivw proposition. "Cost of debt has been changing on a hourly basis for the past 60 saidMichael Yavinsky, vice president of of "We are trying to help owners understan d what cost of capital is on a day-to-dag basis.
" And Potts pointed out, "The cost of debt is goin g up whether you're a $5 milliomn loan or a $100 million loan." Financial advisers and loan brokere are telling clients that if they're planning to financer a deal today, they'lol need to close it within 24 to 48 hoursz if they don't want the terms to change. That requirees a huge shift in thinking for real estate businesses used to lingerinv over deals for several months to more than a yearbefore closing. But it's a changer that has to be made, insisg those finding the money. "Time kills all deals, and it's never been [morde true] than today," Yavinsky said.
"We need to get the deal done as quickluy as possible and limit exposureto market." Lenders typically included a "material adverse change" clausse in their agreements. That provisiob allows them to revise or cancep terms when market conditions and rateschange significantly. So if a deal doesn'y close, the lender can keep changingf interest rates and terms on adailyy basis.
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