(Save the date: RealShare L.A.comes to the Hyatt Regency Century Plaza in Los Angeles, CA on March 27, 2013)

LOS ANGELES-Continuing the momentum that started in the fourth quarter of 2011, CMBS volume grew by a third to reach almost $50 billion in loan securitizations in 2012. This trend continues in 2013, and CMBS lenders have started the year by continuing their quest for financing opportunities.

While multifamily financing is still dominated by the GSEs, CMBS has resumed its place as the top capital source for long-term, fixed rate, non-recourse financing for commercial real estate.  This new influx of CMBS lending might be viewed as “CMBS 2.0.”

At George Smith Partners we have met with more CMBS sources in the past few months than we have seen since before the financial crisis.  Eager for transactions, CMBS lenders are now aggressively competing for business and for excellent terms. Over the past quarter, risk spreads over swaps have narrowed and debt yields have compressed. Even full-term, interest-only provisions, which many thought were one of the ills of CMBS 1.0, have become more common.

But looks may be deceiving.

While everything old appears new again, this cycle seems somewhat different and more disciplined than before. Driven by the desire of originators to limit their portfolio exposure, CMBS lenders are less willing to hold loans on book for a long time between closing and securitization.  As a result, “B-Piece” buyers and rating agencies are consulted prior to loan closings, rather than after, so the originator can be assured of the ability to quickly securitize and sell the loan into the secondary market. Today's B-buyers are actively involved in underwriting and structure decisions throughout the loan process.

It is my experience that once the business terms are agreed to and the term sheet signed, the CMBS approval and closing process, which was never easy, can become considerably more difficult. Issues which never became problems in CMBS 1.0 are now manifesting as potential deal killers.

CMBS 2.0 issues to consider include:

• Appraisals:  Appraisals are more carefully scrutinized (which can be problematic since comparable values are still negatively affected by distressed sales and REO dispositions). With falling debt yield requirements and historically low interest rates, lower appraised values become the limiting constraint on loan amounts.
• Dark Values:  A property's “dark value,” i.e. the net value of a property after it is renovated and released, has become more of a constraint on the amount that a lender will lend on single tenant properties, even with a long term lease to a strong credit.
• Insurance:  The amount and type of insurance coverage required to be carried by tenants by their lease terms have posed concerns on activity oriented properties.
• Risk:  Tenant concentration and rollovers are more heavily scrutinized and event risk is underwritten and budgeted more conservatively than before.
• Loan Documents:  CMBS loan documents, which were always complex and restrictive, have become only more so in CMBS 2.0, meaning that negotiations are more protracted and expensive.

Despite all its challenges, CMBS financing still offers the best terms for many borrowers. Provided that there are no severe shocks to the economy and B-buyers continue to be active, CMBS production in 2013 is projected to be $65 billion. Still, CMBS is not a panacea, and borrowers need to approach the CMBS process with their eyes open and be prepared to deal with the challenges, head on.

Gary M. Tenzer is a principal and managing director of George Smith Partners Inc. The views expressed in this column are the author's own.