Providing unique real estate capital solutions: Helping deals get done in 2012 and beyond

In today's tight economic times, everyone - major tenants, landlords, and lenders - is much more conscious of the precious nature of capital. As many observers have noted, even organizations with access to plenty of capital are taking a much more disciplined view regarding its uses. At Lance Capital, we believe that part of meeting the demands of the new real estate marketplace invites a new form of tenant improvement financing that works with tenants, owners, and lenders. As we all witnessed over the last two years, commercial real estate deals are not happening quite like they used to, driving both market volume and velocity down. While the drop in activity starts with overall political/economic uncertainty, it ultimately comes back to deploying capital and real estate capital markets are still very cautious. The CMBS conduits continue to adjust and recover from rating agency (S&P) rule changes that, by any standard, shocked the market and widened pricing. Lenders in general are requiring perfection to execute anything, including capital for leasing deals, specifically tenant improvements, which are often the key to closing difficult and complex transactions. Today more and more tenants are exercising caution as well, taking a more thoughtful approach to real estate, especially when entering into major deals requiring large capital outlays. Many owners and landlords either don't have equity capital or don't want to use it for tenant improvement (TI) because they see better uses such as opportunistic investing. This widespread circumspection creates an environment in which it is just harder to get deals done. The effective shortage of capital resulting from the forces described above creates a vicious circle: Tenants are unwilling to make capital expenditures for tenant improvements, and then in the absence of landlord funding restrict themselves to short-term lease renewals. The lack of long-term tenant commitments then negatively impacts asset value and loan-to-value ratios for lenders and owners, who are thus reluctant to provide not only the capital needed to do the leasing deal but also sufficient debt necessary just to keep buildings healthy. So what is the answer? Recently Lance Capital, a firm specializing in tenant improvements funding, developed a solution for landlords, tenants and lenders who are seeking capital to make deals happen. The firm was successful at accessing non-traditional capital sources that relied on tenant's credit, not underlying real estate values. It provided a new tool for borrowers to access a different source of real estate capital by focusing on a tenant's credit in a multi-tenant building. Last fall, Lance did one of its most creative funding deals that helped pave the way with a multi-faceted $44 million TI loan package that financed a portion of the rent to pay for tenant improvements and commissions at 470 Vanderbilt Ave. The 650,000 s/f office building in Brooklyn is where N.Y.C.'s Human Resources Administration agreed to a 20-year lease with an owner partnership including GFI Development, Starwood Capital and The Carlyle Group. The non-recourse and unsecured financing was arranged by Lance and provided by CGA Capital Corp., which structures credit-backed financing for real estate and other assets. It was a unique formula that included a specific portion of the rent that can be amortized over the course of the lease. The funding was part of over $100 million for the landlord's building renovation and improvements, and for the new tenant's space. A sub-5% rate for both TI and commission funding, all provided at closing, was made possible by focusing on the creditworthiness of the City of New York as a tenant, rather than the building owner's blended cost of capital or the security collateral value of tenant improvements. The financing from the Lance/CGA team provided the owners of 470 Vanderbilt with an extremely attractive low cost, non-recourse alternative to additional expensive equity or mezzanine capital. Lance is now in the process of replicating the Vanderbilt Ave. deal with other corporate and government tenants in deals throughout the country and also overseas in the U.K. More and more, tenant improvement costs are coming under scrutiny, causing landlords and tenants to rethink how they use capital. This impacts everything they do - the ability of a landlord to close a lease, vacancy rates, and ultimately valuations. We are confident and proud to say that applying the Lance TI financing methodology will help many deals get done in 2012 and beyond. Richard Podos, is CEO and president of Lance Capital, LLC, New York, N.Y.