Why Are Financing Deals Getting More Complex?

Brian Eisendrath is the vice chairman of the capital markets group at CBRE.

LOS ANGELES—“We are working on 20 to 25 deals, and half of them have some complex component,” says Brian Eisendrath , the vice chairman of capital markets at CBRE . Complex financing deals are becoming more and more common in this market as investors search for yield and adopt more out-of-the-box strategies. These complex deals can include anything from ground leases to partnership buyouts, and increase the closing timeline significantly. “Every deal is becoming more complex,” Eisendrath tells GlobeSt.com. “There are fewer of the boilerplate transactions that close in 30 days. A lot more deals today have so many moving pieces that timelines are getting drawn out and the transactions are becoming a lot more complex, whether it is a master lease or a ground lease, or someone that is doing prepayment penalties or partnership buyouts. People are getting a lot more creative now, and it is increasing the timeframe that transactions are taking to close.” The trend toward complex transactions is likely the result of the cycle pattern rather than a longer-term trend, although it is true that there is a general trend toward more complex transactions. “Part of it is related to where we are in the cycle,” adds Eisendrath. “It feels like we are past finding opportunities that bank on significant rent growth in the market. Although it is market specific, people don’t think that we are going to see significant rent growth, and so they have to find other avenues to find upside and opportunities.” Of course, complex transactions are reserved for the most stable and reputable borrowers. Eisendrath recently completed a very complex deal with Kennedy Wilson that involved an 80-year ground lease with the California State University Channel Islands. “The Kennedy Wilson deal was a very complex transaction; in fact, it was one of the most complex transactions that we have ever worked on,” he adds. “Given that complexity, a lender would not have wanted to do that with a borrower that didn’t have a strong track record.” The volatility in the capital markets, however, has increased lender demand for particular deals, and, certain lenders have gotten more selective. “Capital markets have definitely been volatile this year, and there has been a lot of focus on the agency side with Freddie and Fannie to finance deals with a level of affordability relative to the metrics of the use in comparison to area median income,” says Eisendrath. “So, there has been volatility as well as appetite for particular deals. In speaking more about the market, there has also been volatility on the bank side where the banks have pulled back on multifamily lending as a result of influence from the regulator. The life insurance companies, another aspect of the capital markets, as they fill up their allocations for the year, they become a little more picky and transactions that fit in the box for them become fewer as the year goes on. It has definitely been an interesting year.”