How to Prepare a Commercial Loan Proposal

Winston Rowe and Associates

Preparing a commercial loan proposal involves presenting a comprehensive document that outlines your business, the purpose of the loan, the requested amount, and how you plan to repay it. The proposal should effectively communicate the viability of your business and convince the lender of the loan’s potential success. Here are the steps to prepare a commercial loan proposal:

  1. Executive Summary: Begin with an executive summary that provides an overview of your business and the loan request. Summarize the purpose of the loan, the requested amount, and the intended use of funds. Highlight key points that make your business attractive, such as its track record, market potential, and competitive advantages.
  2. Business Description: Provide a detailed description of your business, including its legal structure, history, and current operations. Explain your products or services, target market, and competitive landscape. Highlight your unique selling proposition and any significant achievements or milestones.
  3. Purpose of the Loan: Clearly state the purpose of the loan and how it will benefit your business. Whether it’s for expanding operations, purchasing equipment, or funding working capital, outline the specific need for the loan. Include supporting information, such as market research, feasibility studies, or cost estimates.
  4. Loan Amount and Terms: Specify the exact amount of the loan you are seeking and the desired terms, such as the interest rate, repayment period, and any collateral offered. Justify the loan amount based on your business needs and the projected financial impact. If possible, provide a breakdown of how the funds will be allocated.
  5. Financial Information: Present comprehensive financial information about your business. Include financial statements, such as income statements, balance sheets, and cash flow statements, for the past three years. Provide supporting documentation, such as tax returns, bank statements, and financial projections. The financial information should demonstrate your business’s stability, profitability, and ability to repay the loan.
  6. Repayment Plan: Outline a clear and realistic plan for repaying the loan. Explain how the loan will generate sufficient cash flow to meet repayment obligations. Include a repayment schedule or timeline, showing the principal and interest payments over the loan term. Provide supporting information, such as cash flow projections or sales forecasts, to demonstrate the feasibility of your repayment plan.
  7. Management Team: Highlight the qualifications and experience of your management team. Provide resumes or biographies of key executives and explain how their expertise contributes to the success of your business. Emphasize any relevant industry experience or notable accomplishments.
  8. Risk Analysis: Identify and address any potential risks or challenges associated with your business or the loan request. This shows that you have carefully considered the risks and have plans in place to mitigate them. Discuss your risk management strategies, contingency plans, and any insurance coverage you have.
  9. Appendices: Include supporting documentation that strengthens your loan proposal. This may include market research reports, industry analysis, contracts or purchase orders, legal documents, licenses, permits, or any other relevant information. Organize the appendices in a logical order and reference them appropriately in the main body of the proposal.
  10. Proofread and Format: Ensure that your loan proposal is well-written, free of errors, and formatted in a professional manner. Use clear headings, bullet points, and subheadings to improve readability. Pay attention to the overall structure and organization of the proposal.

Debt Service Coverage Ratio Explained

Winston Rowe and Associates

The Debt Service Coverage Ratio (DSCR) is a financial metric used by lenders to assess a borrower’s ability to repay their debt obligations. It provides an indication of whether a borrower has sufficient cash flow to cover their loan payments. The DSCR is particularly relevant in commercial lending, where borrowers often seek loans for business purposes.

To calculate the DSCR, you divide the borrower’s net operating income (NOI) by their total debt service. Here’s a breakdown of the components:

  1. Net Operating Income (NOI): This represents the income generated by the borrower’s business operations before deducting interest, taxes, and loan payments. NOI is calculated by subtracting operating expenses (such as rent, utilities, salaries, and maintenance costs) from the total revenue.
  2. Total Debt Service: This refers to the sum of all debt obligations the borrower has, including principal and interest payments on existing loans or the loan being applied for.

The formula for calculating the DSCR is:

DSCR = Net Operating Income / Total Debt Service

The resulting ratio indicates the number of times the borrower’s operating income can cover their debt service. For example, if the DSCR is 1.5, it means that the borrower’s operating income is 1.5 times the amount of their total debt service.

Lenders typically require a minimum DSCR as part of their loan approval process. A higher DSCR suggests a more favorable financial position, as there is a greater margin of safety for the borrower to meet their debt obligations. Lenders often prefer a DSCR above 1.2 or 1.25 to ensure sufficient cash flow to cover loan payments.

A higher DSCR also indicates a lower risk for the lender, as it suggests that the borrower has a better ability to withstand financial challenges or unexpected expenses. Consequently, a higher DSCR may lead to more favorable loan terms, such as lower interest rates or higher loan amounts.

It’s important to note that different lenders may have their own specific DSCR requirements based on factors such as the industry, loan type, and risk tolerance. Therefore, borrowers should understand the specific DSCR criteria of the lender they are working with or seeking financing from.

Overall, the Debt Service Coverage Ratio is a key financial metric that helps lenders evaluate the repayment capacity of borrowers and assess the risk associated with extending a loan.

Florida Commercial Real Estate Success by Winston Rowe and Associates

Winston Rowe and Associates

Florida Commercial Real Estate Success

With the state’s booming economy, growing population, and attractive business climate make it an appealing destination for commercial real estate ventures. Here are some key points to consider about Florida’s commercial real estate:

Locations: Florida offers a diverse range of locations for commercial real estate, including major metropolitan areas like Miami, Orlando, Tampa, and Jacksonville. These cities attract businesses from various sectors, including finance, tourism, technology, healthcare, and more. Coastal areas, such as West Palm Beach and Naples, are popular for luxury retail and hospitality developments.

Market Trends: The Florida commercial real estate market has been experiencing steady growth in recent years. Demand for office space, retail properties, industrial warehouses, and multifamily housing remains strong. The rise of e-commerce has also increased demand for logistics and distribution centers, making Florida an ideal location for such facilities due to its strategic proximity to Latin America and the Caribbean.

Tourism Industry: Florida’s tourism industry plays a significant role in driving the commercial real estate market. The state attracts millions of visitors each year, creating opportunities for hotel development, vacation rentals, restaurants, and retail establishments. Areas like Miami Beach, Key West, and the Orlando area (home to many theme parks) are particularly popular for tourism-related commercial real estate ventures.

Industrial and Logistics: Florida’s proximity to major international shipping routes and its robust transportation infrastructure make it a prime location for industrial and logistics operations. The state has numerous seaports, including the Port of Miami and Port Everglades, facilitating trade with Latin America and beyond. Additionally, Florida is home to several major airports and an extensive highway network, further supporting logistics and distribution activities.

Commercial Real Estate Prices: The cost of commercial real estate in Florida varies depending on the location, property type, and market conditions. Prices are generally higher in prime areas such as downtown Miami or Orlando’s tourist corridor. However, compared to other major U.S. cities like New York or San Francisco, Florida offers relatively more affordable options, making it an attractive choice for businesses and investors.

Regulatory Environment: Florida’s business-friendly regulatory environment is often cited as a factor driving commercial real estate investment. The state has no personal income tax, and its pro-business policies and incentives have contributed to a favorable climate for companies seeking to establish or expand their operations.

Winston Rowe and Associates is a national commercial underwriting, due diligence and financing firm prepared this article, they can be contacted at 248-246-2243 or visit them on line at

What is a 1031 Exchange and how it works

Winston Rowe & Associates

A 1031 exchange, also known as a like-kind exchange or a tax-deferred exchange, is a provision in the United States Internal Revenue Code (Section 1031) that allows individuals or businesses to defer paying capital gains taxes on the sale of certain types of investment or business properties.

In a 1031 exchange, the property owner can sell an investment property (referred to as the “relinquished property”) and use the proceeds to acquire another similar investment property (referred to as the “replacement property”) without recognizing the capital gains tax at the time of the exchange. Instead, the tax liability is deferred until a later date, potentially indefinitely, if the owner continues to engage in like-kind exchanges in the future.

To qualify for a 1031 exchange, the properties involved must be held for investment, business, or trade purposes. Generally, most real estate properties can qualify as like-kind properties, such as land, rental properties, commercial buildings, and even certain types of personal property used in a business, such as equipment or machinery.

It’s important to note that a 1031 exchange has specific rules and requirements that must be followed to qualify for tax deferral. These include identifying the replacement property within 45 days of selling the relinquished property and completing the acquisition of the replacement property within 180 days. Additionally, the exchange must be facilitated through a qualified intermediary, who holds the funds from the sale of the relinquished property and disburses them for the purchase of the replacement property.

Tips on Refinancing Apartment Buildings

Winston Rowe and Associates

Refinancing apartment buildings can be a complex process, but it can also provide significant benefits such as lowering your interest rate, extending your loan term, or accessing equity for other investments.

Here are some tips from Winston Rowe and Associates to consider when refinancing apartment buildings:

  1. Evaluate your financial situation: Before refinancing, assess your current financial position, including your credit score, debt-to-income ratio, cash flow, and the overall value of your property. This will help you understand what terms and rates you may qualify for.
  2. Contact Winston Rowe and Associates: They have lenders who specialize in commercial real estate or apartment building refinancing. Research their reputation, terms, interest rates, and fees. It’s important to compare multiple lenders to ensure you’re getting the best possible deal.
  3. Prepare your documentation: Gathering the necessary documentation ahead of time can speed up the refinancing process. This typically includes financial statements, tax returns, rent rolls, occupancy rates, and other property-related documents. Be prepared to provide any additional information requested by the lender.
  4. Assess your property’s value: An appraisal will likely be required during the refinancing process to determine the current value of your property. Consider making any necessary improvements to boost its value and increase your chances of securing favorable terms.
  5. Determine your refinancing goals: Clearly define your objectives for refinancing. Are you aiming to reduce your monthly payments, obtain cash-out equity, or secure a longer loan term? Understanding your goals will help you choose the right loan product and terms.
  6. Calculate the costs and benefits: Take into account all the associated costs of refinancing, including closing costs, appraisal fees, and any prepayment penalties on your current loan. Compare these costs against the potential benefits, such as lower monthly payments or accessing equity.
  7. Negotiate terms: Once you’ve selected a lender, negotiate the terms and conditions of the loan. This includes interest rates, loan term, prepayment penalties, and any other applicable fees. Be prepared to negotiate based on your property’s financial performance and your creditworthiness.
  8. Stay informed on market conditions: Keep yourself updated on market conditions, including interest rate trends and local real estate market dynamics. This knowledge will help you make informed decisions regarding the timing of your refinancing.
  9. Consult with professionals: Consider seeking advice from real estate attorneys, accountants, or financial advisors who specialize in commercial real estate. They can provide valuable insights and guidance to ensure you make informed decisions throughout the refinancing process.

Remember, each refinancing situation is unique, and it’s essential to tailor these tips to your specific circumstances. Consulting with professionals and conducting thorough research will help you navigate the refinancing process effectively and secure the best possible terms for your apartment building.

Debtor-in-Possession (DIP) Financing Defined

Winston Rowe and Associates

Debtor-in-Possession (DIP) financing refers to a type of financing arrangement that occurs during bankruptcy proceedings. When a company files for bankruptcy under Chapter 11 of the United States Bankruptcy Code, it is allowed to continue operating its business and managing its assets as a debtor-in-possession. In this situation, the company becomes the borrower and retains control over its operations under the supervision of the bankruptcy court.

DIP financing provides the debtor-in-possession with access to funds to continue operating its business while in bankruptcy. It is typically provided by lenders who are willing to lend money to a distressed company despite the bankruptcy filing. The lenders providing DIP financing are often given a higher priority for repayment compared to other creditors in the event of liquidation.

DIP financing serves several purposes. First, it helps the company fund its ongoing operations, such as paying employees, suppliers, and other operating expenses. This funding is crucial to maintain the value of the company’s assets and facilitate a successful restructuring or reorganization.

Second, DIP financing allows the debtor-in-possession to pursue restructuring efforts, such as negotiating with creditors, developing a reorganization plan, and seeking approval from the bankruptcy court. The availability of funds can help the company demonstrate its ability to meet its financial obligations and increase the likelihood of a successful restructuring.

DIP financing is typically secured by the assets of the debtor-in-possession, and it often takes priority over existing debts. This means that the DIP lender has a higher claim to the company’s assets in case of default or liquidation. However, the bankruptcy court must approve the terms of the DIP financing, including the interest rate, repayment terms, and any collateral or liens associated with the loan.

Overall, DIP financing plays a critical role in helping distressed companies navigate bankruptcy proceedings by providing them with the necessary funds to continue operating and reorganize their affairs in an attempt to emerge successfully from bankruptcy.

Trends Affecting The U.S. Economy 2023

Winston Rowe and Associates

Understanding these trends could help you protect your financial future.

U.S. Recovery from the Pandemic

In the first quarter of 2020, as COVID-19 began its spread across the U.S., economic growth declined by 5%. This signaled the onset of the 2020 recession. It also ended 128 months of expansion, the longest in U.S. history. In the second quarter, the economy contracted by a record 31.4%. Quarterly gross domestic product (GDP) had never experienced a drop greater than 10% since record-keeping began in 1947. The economy recovered in the third quarter, expanding by 33.1%. Although a record, it was not enough to offset earlier losses.

In December 2020, it was forecast that U.S. GDP would contract by 2.4% in 2020 but rise by 4.2% in 2021.3 By the fourth quarter, it had risen 7.0%.

At the onset of the pandemic, the unemployment rate skyrocketed to 14.7% in April as companies furloughed workers.5 It remained in the double digits through July of that year.6 By the beginning of 2021, however, the unemployment rate had fallen to 6%. By the second month of 2022, it had decreased to 3.8%—very close to the unemployment rate just before the pandemic hit, which was 3.5%.

Interest Rates Are Slowly Rising

As the economy heats up, inflation is heating up, too. The Fed uses interest rates to help control inflation.

In March 2020, the Federal Open Market Committee (FOMC) held an emergency meeting to address the economic impact of the COVID-19 pandemic. It lowered the federal funds rate to near zero, targeting a range of between 0% and 0.25%. The fed funds rate is the benchmark rate for adjustable-rate and short-term loans.

In September 2020, the FOMC announced it would keep the benchmark rate at that level until inflation reached 2.0% over a long period of time. The Fed’s December 16 forecast said that wouldn’t occur until at least 2023.103 But it occurred much sooner than that. Supply chain issues, soaring home prices, and volatile oil price fluctuations, among other factors, caused inflation to rise rapidly. By February 2022, inflation had risen 7.9%—the largest jump since 1982.

The Fed had been taking steps to keep interest rates low on fixed-rate and long-term loans to encourage recovery after the pandemic. It had restarted its quantitative easing (QE) program in 2020 as well, announcing it would purchase $500 billion in U.S. Treasuries and $200 billion in mortgage-backed securities. It soon expanded QE purchases to an unlimited amount.12 The cost of loans plummeted, with mortgages falling to record-low levels. Such low borrowing costs spurred home prices higher still.13

By its March 2022 meeting, the FOMC couldn’t ignore the rapidly rising inflation any longer and announced it would begin selling securities as well as raising the target fed funds rate by 25 basis points, to 0.25% to 0.50%. The FOMC also said it expected to continue raising rates to get inflation under control.

Financial Markets Control Oil, Gas, and Food Prices

Supply and demand have become less important in controlling prices. Instead, commodities traders set prices for oil, gas, and food, and foreign exchange traders determine the value of the dollar. The speed of transactions has also increased economic volatility. Gas and oil prices rise and fall, depending on investors’ moods. This translates to either higher food costs or plummeting commodities prices.

Gold prices hit a new record high in August 2020 and kept rising, hitting new highs again and again. The price of gold topped $1,972 per ounce in March 2022.

Types of SBA Loans

Winston Rowe and Associates

The Small Business Administration (SBA) offers various loan programs to support small businesses in the United States. Here are some of the main types of SBA loans:

  1. 7(a) Loan Program: This is the SBA’s primary and most flexible loan program. It provides financing for a wide range of purposes, including working capital, equipment purchase, inventory, and real estate. Within the 7(a) program, there are specialized subprograms such as the Export Loan Program, Rural Lender Advantage Program, and Small Loan Advantage Program.
  2. CDC/504 Loan Program: This program helps small businesses acquire fixed assets such as real estate or large equipment. It involves collaboration between the SBA, Certified Development Companies (CDCs), and lenders. The loan structure typically consists of a loan from a lender, a loan from a CDC, and equity from the borrower.
  3. Microloan Program: The Microloan program offers small loans of up to $50,000 to help small businesses and certain non-profit childcare centers. These loans can be used for working capital, equipment, inventory, or other purposes.
  4. Disaster Loans: In the event of a declared disaster, the SBA provides low-interest loans to businesses, homeowners, and renters to help them recover and rebuild. These loans can cover physical damage, economic injury, or both.
  5. CAPLines: CAPLines is a line of credit program designed to meet the short-term and cyclical working capital needs of small businesses. It offers various options, including seasonal lines of credit, contract lines of credit, and builder’s lines of credit.
  6. Export Loan Programs: The SBA offers loans designed to assist businesses in expanding their export activities. These include the Export Working Capital Program, Export Express, and International Trade Loans.

What Does It Mean to Raise the Debt Ceiling

Winston Rowe and Associates

Raising the debt ceiling refers to the act of increasing or lifting the statutory limit on the amount of debt that the government can legally borrow. When the debt ceiling is raised, it allows the Treasury Department to issue additional debt beyond the previous limit, enabling the government to continue borrowing money to fund its operations and meet its financial obligations.

Raising the debt ceiling does not grant the government permission to spend more money. Instead, it authorizes the government to borrow the necessary funds to cover the expenses that have already been approved by Congress through the budgetary process. It essentially enables the government to pay for spending that has already been authorized and incurred.

The decision to raise the debt ceiling rests with the U.S. Congress. Typically, it involves passing legislation that increases or suspends the existing limit on the national debt. This legislation can take various forms, such as a standalone bill, a budget resolution, or as part of broader spending or fiscal policy negotiations.

Raising the debt ceiling is crucial to avoid a potential default on the government’s financial obligations. When the outstanding debt nears the existing limit, the Treasury Department can employ extraordinary measures to continue meeting its obligations temporarily. However, these measures have limitations and can only provide a temporary solution. Without raising the debt ceiling, the government would eventually run out of funds to pay its bills, leading to a default, which would have severe consequences for the economy and financial markets.

Debates surrounding raising the debt ceiling often involve discussions about fiscal responsibility, government spending, and the national debt. Some argue that raising the debt ceiling without corresponding measures to address the underlying fiscal issues could contribute to long-term economic challenges. Others contend that failing to raise the debt ceiling could lead to a financial crisis and have far-reaching negative consequences.

Ultimately, raising the debt ceiling is a legislative action that allows the government to continue borrowing and servicing its debt, ensuring the ongoing functioning of the government and avoiding a potential default on its financial obligations.

Debt Ceiling Explained

Winston Rowe and Associates

The debt ceiling, also known as the debt limit, refers to a legislative cap on the total amount of money that the government can borrow to finance its expenditures. It is a legal limit set by the U.S. Congress on the amount of national debt that the U.S. Treasury can issue.

When the government spends more money than it collects in revenue, it runs a budget deficit. To make up for this shortfall, the government borrows money by issuing Treasury bonds and other debt instruments. These bonds are purchased by investors, both domestic and foreign, who lend money to the government in exchange for the promise of repayment with interest in the future.

The debt ceiling comes into play when the outstanding debt of the government approaches or reaches the limit set by Congress. At this point, the Treasury Department can no longer issue additional debt to meet its financial obligations, such as paying for government programs, salaries, and interest on existing debt.

To continue borrowing beyond the debt ceiling, the Treasury employs various accounting measures and financial maneuvers, often referred to as “extraordinary measures.” These measures allow the government to continue meeting its financial obligations temporarily while staying under the debt ceiling.

If Congress does not raise or suspend the debt ceiling, the Treasury will eventually exhaust all available extraordinary measures, leading to a situation known as a “debt ceiling breach” or “default.” A default occurs when the government is unable to make principal or interest payments on its outstanding debt obligations. This scenario could have severe consequences for the economy, financial markets, and the government’s ability to function.

In the past, when the debt ceiling has been reached, Congress has usually acted to raise or suspend it to avoid a default. However, these debates can become contentious and politically charged, with discussions surrounding fiscal responsibility, spending priorities, and the role of the government in the economy.

It is important to note that the debt ceiling does not directly control or limit government spending. It only determines the maximum amount of debt the government can issue to finance its spending decisions that have already been approved by Congress. Changes to spending levels and revenue collection require separate legislative actions.

Overall, the debt ceiling serves as a mechanism for Congress to exercise oversight on the government’s borrowing and fiscal policies, and its discussions and decisions can have significant implications for the country’s financial stability and economic well-being.

Commercial Real Estate Types Defined

Winston Rowe and Associates

Commercial real estate encompasses various types of properties that are used for business and income-generating purposes. Here are some commonly recognized types of commercial real estate:

  1. Office Buildings: These are properties designed for conducting business activities and providing office space. They can range from single-story buildings to skyscrapers and may include professional suites, corporate headquarters, or coworking spaces.
  2. Retail Properties: This category includes properties used for retail businesses, such as shopping centers, strip malls, standalone stores, and outlets. They are typically leased to retailers for selling goods or providing services to customers.
  3. Industrial Properties: Industrial real estate includes warehouses, manufacturing facilities, distribution centers, and industrial parks. These properties are primarily used for production, storage, and distribution of goods.
  4. Multifamily Properties: These properties consist of residential buildings with multiple units, such as apartment complexes, condominiums, townhouses, and residential rental communities. The income is generated through rental income from tenants.
  5. Hospitality Properties: This category includes hotels, resorts, motels, and other lodging establishments. These properties provide temporary accommodation and services for travelers and tourists.
  6. Healthcare Properties: Healthcare real estate includes hospitals, medical office buildings, clinics, assisted living facilities, and nursing homes. These properties cater to the healthcare industry and often have specialized infrastructure to support medical services.
  7. Mixed-Use Properties: Mixed-use developments combine multiple types of real estate within a single project. For example, a development may include a combination of residential, retail, office, and entertainment spaces, offering a mix of functions in one location.
  8. Special Purpose Properties: These are properties with unique features and purposes, often designed for specific industries or uses. Examples include educational institutions, religious buildings, recreational facilities, data centers, and self-storage facilities.

It’s important to note that these categories can overlap, and there can be subcategories and niche segments within each type. Additionally, local market conditions and regulations may influence the specific classifications and terminology used in different regions.

Hypothecation Loan Explained

Winston Rowe and Associates

Hypothecation loan is a type of loan that involves pledging an asset as collateral while retaining possession and use of the asset. It is commonly used in financing arrangements where the borrower needs to obtain funds while using an asset as security. Let me explain the concept in more detail.

When you take a hypothecation loan, you offer an asset (such as a car, property, or stocks) as collateral to the lender. The lender assesses the value of the asset and provides you with a loan amount based on that assessment. While the loan is outstanding, you continue to possess and use the asset for your needs.

However, the lender holds a charge or lien on the asset, which means that if you default on the loan payments or fail to meet the agreed-upon terms, the lender has the right to take possession of the asset and sell it to recover the outstanding loan amount.

Here are some key points to understand about hypothecation loans:

  1. Collateral: The asset you pledge as collateral must have sufficient value to secure the loan. The lender evaluates the asset and determines the loan amount based on its market value.
  2. Ownership and possession: Although you retain ownership of the asset, the lender holds a charge on it until the loan is fully repaid. You can continue to use the asset as long as you fulfill the loan obligations.
  3. Default and asset seizure: If you fail to make loan payments or breach the loan agreement, the lender has the right to seize the asset and sell it to recover the outstanding debt. This process is usually done through legal means.
  4. Interest rates and repayment: Like any other loan, a hypothecation loan also involves an interest rate that you need to pay on the outstanding balance. The loan is typically repaid in installments over a predetermined period.
  5. Usage restrictions: Depending on the lender’s terms, there may be certain restrictions on the use and modification of the asset. For example, if you hypothecate your car, you may not be able to sell or make significant alterations to it without the lender’s consent.

Hypothecation loans are commonly used for various purposes, such as vehicle loans, margin loans for stock trading, or business loans using business assets as collateral. It allows borrowers to access funds while utilizing their assets, but it’s crucial to fulfill the loan obligations to avoid losing the pledged asset.

It’s important to note that the specific details and legal aspects of hypothecation loans can vary by country and jurisdiction. It’s always recommended to consult with a financial professional or lender to understand the terms and conditions specific to your situation.

Private Capital Commercial Loans Explained

Winston Rowe and Associates

Private capital commercial loans, also known as private commercial real estate loans, are a type of financing provided by private investors or non-bank entities for commercial real estate projects. These loans are not originated or regulated by traditional banks or financial institutions but rather by private individuals, companies, or investment funds seeking to invest in real estate.

Here’s an overview of how private capital commercial loans work:

  1. Source of Capital: Private capital lenders use their own funds or money raised from investors to provide loans. They may include high-net-worth individuals, real estate investment firms, private equity funds, or crowdfunding platforms.
  2. Loan Terms: Private capital loans typically have more flexibility in terms of loan structures and repayment terms compared to traditional bank loans. The terms are negotiated directly between the borrower and the lender, allowing for more customization to meet the specific needs of the commercial real estate project.
  3. Collateral: Private capital loans are secured by the commercial property itself, similar to traditional commercial loans. The lender will assess the property’s value and its income-generating potential to determine the loan amount and terms.
  4. Loan Types: Private capital lenders offer various types of loans, including acquisition loans, construction loans, bridge loans, mezzanine financing, and refinancing. These loans can be used for a wide range of commercial properties, such as office buildings, retail centers, industrial properties, or multifamily residential complexes.
  5. Speed and Flexibility: Private capital lenders often provide faster loan approvals and closings compared to traditional banks. They have more flexibility in underwriting criteria and are willing to consider unique or unconventional projects that may not meet the stringent requirements of traditional lenders.
  6. Interest Rates and Fees: Private capital loans generally have higher interest rates compared to traditional bank loans. The rates vary depending on factors such as the borrower’s creditworthiness, the project’s risk profile, and market conditions. Private lenders may also charge origination fees, points, and other closing costs.
  7. Risk and Due Diligence: Borrowers should be aware that private capital loans often come with higher risk compared to traditional financing. Private lenders may have less regulatory oversight and may have different underwriting standards. Borrowers should conduct thorough due diligence on the lender, review the terms and conditions of the loan carefully, and assess the potential risks associated with the loan.

Private capital commercial loans can provide an alternative financing option for commercial real estate projects when traditional bank loans are not available or do not meet the borrower’s requirements. They offer more flexibility, faster processing times, and the potential for financing unique or complex projects. However, borrowers should carefully evaluate the terms, costs, and risks associated with private capital loans before proceeding with the financing.

CMBS Loans Explained

Winston Rowe and Associates

CMBS stands for Commercial Mortgage-Backed Securities. CMBS loans are a type of commercial real estate loan that is packaged and sold as a bond or security to investors in the secondary market. These loans are typically secured by income-generating commercial properties such as office buildings, hotels, retail centers, or multifamily residential buildings.

Here’s how CMBS loans work:

  1. Origination: A commercial mortgage loan is originated by a lender, usually a bank or a financial institution. The loan is underwritten based on the income-generating potential of the property and the creditworthiness of the borrower.
  2. Pooling: After origination, multiple similar loans are pooled together to create a collateral pool. These loans may vary in terms of property type, location, and borrower. The pool of loans is then transferred to a trust.
  3. Securitization: The trust issues bonds or securities called CMBS to investors, who purchase them in the secondary market. These securities represent an ownership interest in the pool of loans.
  4. Tranches: CMBS securities are divided into different tranches, each with its own risk and return characteristics. The tranches are based on the order of repayment priority. The senior tranches have the highest repayment priority and generally offer lower yields, while the subordinate tranches have higher yields but higher risk.
  5. Servicing: A loan servicer is responsible for collecting payments from the borrowers and distributing them to the CMBS investors. They also handle other administrative tasks such as property inspections and borrower communications.
  6. Cash flow: The income generated by the commercial properties serves as the primary source of repayment for CMBS loans. Borrowers make monthly payments on their loans, which include principal and interest. These payments are distributed to the CMBS investors as interest income.
  7. Risks and Benefits: CMBS loans offer benefits to both borrowers and investors. Borrowers can access large loan amounts and favorable terms, while investors can diversify their investment portfolios and earn income from the interest payments. However, CMBS loans also carry risks, such as interest rate risk, property value fluctuations, and the potential for default by the borrower.

In summary, CMBS loans are a way for lenders to convert commercial mortgage loans into securities that can be bought and sold by investors. This securitization process provides liquidity to the commercial real estate market and allows investors to participate in the income generated by a diverse pool of commercial properties.

The Best Real Estate Investing Books

Winston Rowe and Associates

There are numerous excellent real estate investing books available that can provide valuable insights, strategies, and knowledge for both beginners and experienced investors. Here are some highly recommended books:

  1. “The Millionaire Real Estate Investor” by Gary Keller, Dave Jenks, and Jay Papasan: This book offers a comprehensive guide to building wealth through real estate investing. It provides a systematic approach, practical advice, and real-life examples from successful investors.
  2. “Rich Dad Poor Dad” by Robert Kiyosaki: While not solely focused on real estate, this book provides a mindset shift about money and investing. It emphasizes the importance of passive income and highlights real estate as a means to achieve financial independence.
  3. “The Book on Rental Property Investing” by Brandon Turner: This book delves into the fundamentals of investing in rental properties, including finding deals, financing, analyzing properties, tenant management, and building a real estate portfolio.
  4. “The ABCs of Real Estate Investing” by Ken McElroy: Written by a seasoned real estate investor, this book covers various aspects of real estate investing, including market analysis, property management, negotiation strategies, and financial analysis.
  5. “The Real Estate Game” by William Poorvu: This book explores the nuances of real estate investing, including the dynamics of property cycles, analyzing markets, evaluating investments, and managing risk. It offers valuable insights from a renowned professor and experienced investor.
  6. “Emerging Real Estate Markets” by David Lindahl: Focusing on identifying and capitalizing on emerging real estate markets, this book provides a framework for understanding market cycles, conducting due diligence, and selecting profitable investment locations.
  7. “What Every Real Estate Investor Needs to Know About Cash Flow” by Frank Gallinelli: This book emphasizes the importance of understanding cash flow in real estate investing. It explains key financial concepts, such as net operating income (NOI), cash-on-cash return, and cap rates.
  8. “The Four Hour Workweek” by Timothy Ferriss: While not strictly a real estate investing book, it offers insights into lifestyle design, automation, and passive income, which can be applied to real estate investing endeavors.

Apartment Building Construction Loans Explained

Winston Rowe and Associates

Apartment building construction loans are financial products designed to provide funding for the construction of multi-unit residential properties. These loans enable developers or investors to cover the costs associated with constructing apartment buildings, including land acquisition, construction expenses, permits, and other related costs. Here are some key points to understand about apartment building construction loans:

  1. Purpose: Apartment building construction loans are specifically tailored for financing the construction of apartment complexes or multifamily properties. These loans are not intended for individual homes or single-unit properties.
  2. Loan Structure: Construction loans typically have a short-term structure, typically ranging from six months to three years. During the construction period, the borrower usually pays only interest on the funds drawn. After construction is completed, the loan is typically converted into a permanent mortgage or another long-term financing option.
  3. Loan-to-Cost (LTC) Ratio: Lenders evaluate the project’s financial feasibility and risk by considering the loan-to-cost ratio. This ratio compares the loan amount to the total project cost, including land purchase, construction expenses, permits, and other costs. Lenders typically finance a percentage of the project cost, often ranging from 70% to 90%.
  4. Draw Schedule: Construction loans are typically disbursed in a series of scheduled draws, based on the project’s progress. As specific milestones are reached, such as completing the foundation or finishing a floor, the borrower can request a draw from the loan amount to cover the incurred expenses.
  5. Interest Rates and Fees: Construction loans generally have higher interest rates compared to permanent mortgages, reflecting the higher risk associated with construction projects. Additionally, lenders may charge origination fees and other closing costs.
  6. Collateral: The apartment building being constructed, along with the land it sits on, serves as collateral for the loan. In the event of default, the lender may take possession of the property.
  7. Qualifications: Lenders evaluate various factors when considering a construction loan application, including the borrower’s experience, financial strength, creditworthiness, and the feasibility of the construction project. They may also assess the local real estate market and demand for multifamily housing.

It’s important to note that the specific terms and requirements of apartment building construction loans can vary among lenders. Working with a knowledgeable commercial real estate lender or mortgage broker can help you navigate the process and find the best financing solution for your apartment building construction project.

Fix ad Flip Loans Explained

Winston Rowe and Associates

Fix and Flip Loans are a type of short-term financing that is specifically designed for real estate investors who buy properties, renovate or “fix” them, and then sell them quickly for a profit, or “flip” them. These loans are typically used by investors who want to purchase distressed properties, such as foreclosures or properties in need of significant repairs, with the intention of improving the property’s value before selling it.

Here are some key features of Fix and Flip Loans:

  1. Short-term: These loans have relatively short repayment periods, usually ranging from a few months to a year or so. The idea is to complete the renovation and sale of the property quickly.
  2. Property-based: Fix and Flip Loans are typically based on the value of the property being purchased and renovated, rather than the borrower’s personal creditworthiness. Lenders assess the potential after-repair value (ARV) of the property to determine the loan amount.
  3. Higher interest rates: Since these loans are considered riskier than traditional mortgages, lenders often charge higher interest rates. The rates can vary depending on factors such as the borrower’s experience, the property’s condition, and the local real estate market.
  4. Renovation funds: Fix and Flip Loans may include funds for both the purchase of the property and the renovation costs. Some lenders may disburse the funds in installments based on the completion of specific renovation milestones.
  5. Collateral: The property being purchased and renovated typically serves as collateral for the loan. In the event of default, the lender may take possession of the property to recover their investment.

Fix and Flip Loans can be a valuable tool for real estate investors looking to capitalize on opportunities in the housing market. However, it’s important to carefully assess the potential costs, risks, and expected returns before pursuing this type of financing. Additionally, it’s always advisable to consult with a qualified real estate attorney or financial advisor to ensure you understand the terms and conditions of the loan and the potential legal implications.

Passive Real Estate Income Explained

Winston Rowe and Associates

Passive real estate income refers to the earnings generated from real estate investments in which the investor has a limited or passive role in managing the property. It involves receiving regular income without actively participating in day-to-day property management or operations. Here’s an explanation of passive real estate income:

  1. Rental Income: One common source of passive real estate income is through rental properties. Investors purchase residential or commercial properties and lease them out to tenants. The rental income generated from the tenants becomes a passive source of income for the investor. The property management responsibilities, such as maintenance, repairs, and tenant interactions, are often outsourced to property management companies, reducing the investor’s active involvement.Real Estate Investment Trusts (REITs): Another way to earn passive real estate income is by investing in REITs. REITs are companies that own, operate, or finance income-generating real estate properties. Investors can buy shares of publicly-traded REITs on stock exchanges, similar to buying stocks. REITs pool the capital of multiple investors to invest in a diversified portfolio of properties. The income generated by the REIT from its properties, such as rental income or mortgage interest, is distributed to shareholders in the form of dividends.Real Estate Crowdfunding: Real estate crowdfunding platforms allow investors to pool their funds to invest in real estate projects. Investors can participate in projects such as residential or commercial developments, rental properties, or real estate loans. The platform manages the investment and handles property management, while investors receive passive income in the form of rental income, interest payments, or profit-sharing.Real Estate Syndications: In real estate syndication, a group of investors pools their funds to invest in larger-scale real estate projects, such as apartment buildings, shopping centers, or office complexes. The syndication is typically led by a sponsor or experienced real estate operator who manages the project and makes investment decisions. Passive investors contribute capital and receive a share of the income generated by the project, often through rental income or property appreciation.

Passive real estate income provides investors with the opportunity to generate regular cash flow while minimizing active involvement in property management. However, it’s important to note that passive investments still require initial due diligence and ongoing monitoring to ensure the investment aligns with the investor’s goals and risk tolerance.Additionally, tax implications, such as rental property deductions or tax treatment of REIT dividends, should be considered when evaluating the potential returns and overall profitability of passive real estate income investments. It’s recommended to consult with a tax professional or financial advisor to understand the specific tax implications based on individual circumstances and local regulations.

Private Capital Explained

Winston Rowe and Associates

Private capital refers to investment funds or financing that comes from private sources, rather than from public markets or traditional financial institutions such as banks. It represents the investment or capital provided by private individuals, high-net-worth individuals, institutional investors, private equity firms, venture capital firms, and other non-public entities.

Private capital can take various forms, including equity investments, debt financing, mezzanine financing, and other structured financial instruments. It is often used to support the growth, expansion, or acquisition activities of privately-held companies or start-up ventures that are not publicly traded.

Here are a few key aspects of private capital:

  1. Private Equity: Private equity firms raise capital from institutional investors and high-net-worth individuals to invest in privately-held companies. They typically acquire a significant ownership stake in the target company and work closely with management to improve operations, drive growth, and eventually exit the investment at a profit.
  2. Venture Capital: Venture capital (VC) is a subset of private equity that focuses on early-stage, high-growth companies with significant growth potential. VC firms provide funding to start-ups and emerging companies in exchange for an ownership stake. They often provide not only capital but also mentorship, industry expertise, and business networks to support the company’s growth.
  3. Angel Investors: Angel investors are individual investors who provide early-stage funding to start-ups in exchange for equity. They typically invest their own personal funds and may offer guidance, industry connections, and mentorship to the entrepreneurs.
  4. Private Debt: Private debt refers to non-bank loans provided to companies by private lenders or institutional investors. It can take the form of senior secured debt, subordinated debt, mezzanine financing, or other structured debt instruments. Private debt is often used by companies to finance growth, acquisitions, or other strategic initiatives.
  5. Infrastructure and Real Estate: Private capital is also prevalent in infrastructure projects and real estate development. Private investors or funds may provide capital for the construction, operation, or improvement of infrastructure assets such as roads, airports, energy projects, or telecommunications networks. In real estate, private capital is commonly used for property acquisition, development, and value-add strategies.

Private capital investments often have a longer-term horizon compared to public market investments. Investors in private capital typically seek higher returns to compensate for the illiquid nature of their investments and the additional risks associated with private investments. These investments are not publicly traded, so the exit options for investors are often through secondary sales, initial public offerings (IPOs), or acquisitions.

Overall, private capital plays a vital role in funding innovation, driving economic growth, and providing alternative investment opportunities beyond traditional public markets.

Glossary of Financial Terms

Winston Rowe & Associates

  1. Asset: Anything of value owned by an individual, company, or organization, such as cash, stocks, bonds, real estate, or equipment.
  2. Liability: A financial obligation or debt owed by an individual, company, or organization to another party.
  3. Equity: The ownership interest in a company or property after deducting liabilities.
  4. Income statement: A financial statement that shows a company’s revenues, expenses, and net income or loss over a specific period of time.
  5. Balance sheet: A financial statement that provides a snapshot of a company’s financial position at a specific point in time, showing its assets, liabilities, and shareholders’ equity.
  6. Cash flow: The movement of money into or out of a business or individual’s bank account. It can be categorized into three types: operating cash flow, investing cash flow, and financing cash flow.
  7. ROI (Return on Investment): A measure of the profitability of an investment. It is calculated by dividing the gain or loss from the investment by the cost of the investment and expressing it as a percentage.
  8. Dividend: A distribution of a portion of a company’s earnings to its shareholders as a return on their investment.
  9. Bond: A fixed-income security issued by a company, municipality, or government, representing a loan made by an investor to the issuer. The issuer agrees to pay back the loan with interest over a specified period of time.
  10. Stock: A share in the ownership of a company. Owning stock represents a claim on a portion of the company’s assets and earnings.
  11. Mutual fund: An investment vehicle that pools money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities.
  12. Interest rate: The percentage of the principal amount charged by a lender to a borrower for the use of money over a specific period of time.
  13. Capital gains: Profits earned from the sale of an asset, such as stocks, bonds, or real estate, at a higher price than the original purchase price.
  14. Capital loss: The loss incurred when selling an asset for a lower price than the original purchase price.
  15. Diversification: Spreading investments across different assets or asset classes to reduce risk. It aims to minimize the impact of a single investment’s poor performance on the overall portfolio.
  16. Inflation: The rate at which the general level of prices for goods and services is rising, eroding purchasing power.
  17. Liquidity: The ease with which an asset can be converted into cash without significant loss of value.
  18. 401(k): A retirement savings plan sponsored by an employer that allows employees to contribute a portion of their salary to a tax-advantaged investment account.
  19. Hedge fund: A private investment fund that uses various strategies to generate high returns for its investors, often by employing more complex and riskier investment techniques.
  20. IPO (Initial Public Offering): The first sale of a company’s stock to the public, allowing it to raise capital by issuing shares.

Interest Rates Explained

Winston Rowe and Associates

Interest rates refer to the percentage charged or earned on a loan, investment, or debt instrument over a specified period. They represent the cost of borrowing money or the return on investment.

Interest rates can be categorized into two main types:

  1. Fixed Interest Rates: Fixed interest rates remain constant throughout the loan or investment period. This means that the borrower or investor will pay or receive the same rate of interest for the entire duration, regardless of any fluctuations in the market.
  2. Variable/Adjustable Interest Rates: Variable interest rates can change over time, usually in response to changes in the market or economic conditions. These rates are often tied to an underlying benchmark, such as the prime rate or the London Interbank Offered Rate (LIBOR). The interest rate can increase or decrease based on changes in the benchmark rate.

Interest rates have a significant impact on various aspects of the economy, including borrowing costs, investment decisions, and monetary policy. Central banks, such as the Federal Reserve in the United States, use interest rates as a tool to regulate economic growth and control inflation. By adjusting interest rates, central banks can influence borrowing and spending behaviors, which can, in turn, affect economic activity.

It’s important to note that interest rates can vary across different types of loans or investments and can differ between countries or regions. Factors such as inflation, economic indicators, central bank policies, and market conditions can all influence interest rate levels. Therefore, it’s crucial to refer to current financial news and consult with relevant financial institutions for the most up-to-date information on interest rates.

What Causes A Recession

Winston Rowe and Associates

A recession is typically caused by a combination of factors that lead to a significant decline in economic activity. These factors can vary from one recession to another, but here are some common causes:

  1. Economic imbalances: Imbalances in the economy, such as excessive borrowing, high levels of debt, or overvalued assets, can create vulnerabilities that eventually lead to a downturn. For example, a housing bubble fueled by easy credit and speculative buying can burst, triggering a recession.
  2. Tight monetary policy: Central banks often raise interest rates to combat inflation or cool down an overheating economy. If the tightening of monetary policy is too aggressive or occurs abruptly, it can reduce borrowing and spending, dampen investment, and slow down economic growth, potentially leading to a recession.
  3. Financial crises: A severe financial crisis can have a profound impact on the economy and trigger a recession. For instance, the global financial crisis of 2008 was sparked by the collapse of the subprime mortgage market in the United States, which then spread throughout the global financial system, causing a deep recession.
  4. Decreased consumer spending: Consumer spending is a vital component of economic activity. When consumers become uncertain about the future, lose their jobs, or experience a decline in wealth, they tend to reduce their spending, which can lead to a contraction in economic output and a recession.
  5. Decline in business investment: Businesses may become cautious during uncertain times and reduce their investment in new projects, equipment, and hiring. This decline in business investment can decrease overall economic activity and contribute to a recession.
  6. External shocks: External events, such as natural disasters, geopolitical conflicts, or major disruptions in international trade, can have a significant impact on the economy. For example, an oil price shock or a sudden disruption in global supply chains can cause a recession by increasing costs, reducing consumer purchasing power, or disrupting production.

It’s important to note that recessions are complex phenomena influenced by multiple interconnected factors. The specific causes and triggers can vary, and often it is a combination of several factors that ultimately leads to an economic downturn.

How Do You Calculate Opportunity Cost in Economics

Winston Rowe and Associates

In economics, opportunity cost is calculated by comparing the benefits or gains of the next best alternative option with the chosen option. It involves analyzing the trade-offs and quantifying the value or utility of each alternative. The calculation of opportunity cost can vary depending on the context and the specific factors involved. Here are a few approaches to calculating opportunity cost in economics:

  1. Monetary Opportunity Cost: When the alternatives involve financial gains or losses, the opportunity cost can be calculated by comparing the monetary returns. For example, if you have two investment options: Option A that yields $500 and Option B that yields $300, the opportunity cost of choosing Option A would be the forgone $300 from Option B.
  2. Production Possibilities Frontier (PPF): The PPF illustrates the different combinations of goods or services that an economy can produce given its resources and technology. The opportunity cost of producing one additional unit of a particular good is calculated by examining the trade-off with the other goods. It is the ratio of the decrease in the production of one good relative to the increase in the production of the other good.
  3. Time Opportunity Cost: When considering how to allocate time, the opportunity cost can be calculated based on the value or utility of the alternative uses of time. For example, if you have the option to either work overtime or spend time with family, the opportunity cost of working overtime would be the enjoyment or quality time with family that is forgone.
  4. Social Opportunity Cost: In some cases, opportunity cost is assessed in terms of its impact on society. For example, if a government decides to allocate funds to a particular program, the opportunity cost could be the foregone benefits or services that could have been provided with those funds.

It’s important to note that calculating opportunity cost in economics often involves subjective judgments and assumptions. Quantifying and comparing the value or utility of different alternatives can be challenging. Therefore, it’s crucial to consider various factors, including financial returns, time, utility, and societal implications, when calculating opportunity cost in economic analysis.

Opportunity Cost Formula Explained

Winston Rowe and Associates

The formula for calculating opportunity cost is relatively straightforward. It involves comparing the benefits or gains of the next best alternative option with the chosen option. The general formula for opportunity cost can be expressed as:

Opportunity Cost = Benefits of the Next Best Alternative – Benefits of the Chosen Option

To calculate opportunity cost, you need to quantify and compare the benefits or gains associated with different options. It’s important to note that opportunity cost is typically measured in terms of value or utility, and the specific calculation will depend on the context of the decision being made.

Here are a couple of examples to illustrate how opportunity cost can be calculated:

Example 1: Opportunity Cost of Time Let’s say you have the choice between working overtime at your job or attending a social event. The overtime pay you would receive from working is $50 per hour, and the social event provides enjoyment worth $30. The opportunity cost of attending the social event would be calculated as:

Opportunity Cost = Benefits of Overtime Pay – Benefits of Social Event Opportunity Cost = $50 – $30 Opportunity Cost = $20

In this example, the opportunity cost of attending the social event is $20, representing the potential earnings you would forgo by choosing not to work overtime.

Example 2: Opportunity Cost of Investment Suppose you have $10,000 that you can either invest in stocks or put in a high-yield savings account. The potential return from investing in stocks is estimated at 10% per year, while the interest rate for the savings account is 2%. The opportunity cost of choosing the savings account would be calculated as:

Opportunity Cost = Benefits of Stock Investment – Benefits of Savings Account Opportunity Cost = ($10,000 * 10%) – ($10,000 * 2%) Opportunity Cost = $1,000 – $200 Opportunity Cost = $800

In this example, the opportunity cost of choosing the savings account over investing in stocks is $800, representing the potential additional earnings that could be obtained from the stock investment.

It’s important to note that opportunity cost calculations may involve various factors, such as financial returns, time, enjoyment, or utility. The specific formula and calculations will depend on the context and the particular benefits or gains associated with each alternative option being considered.

Opportunity Cost Definition

Winston Rowe and Associates

Opportunity cost refers to the value of the next best alternative that must be foregone or sacrificed when making a decision or choosing one option over another. It represents the benefits or opportunities that could have been gained by choosing an alternative course of action.

In simple terms, opportunity cost is the cost of what you give up when you choose one option over another. It is the value of the benefits, profits, or utility that could have been obtained from the best alternative use of the resources (time, money, or other assets) involved in the decision.

Here are a few key points to understand about opportunity cost:

  1. Trade-offs: Whenever a decision is made, there are trade-offs involved. Choosing one option means sacrificing the potential benefits or opportunities of the alternative options.
  2. Subjective Value: The value of the next best alternative is subjective and can vary from person to person. What may be the best alternative for one individual or organization may not be the same for another.
  3. Time and Resources: Opportunity cost applies to various resources, including time, money, labor, and other assets. For example, the time spent on one activity means that other activities cannot be pursued during that time.
  4. Decision-Making: Recognizing and considering opportunity costs is essential in decision-making, as it helps evaluate the true cost and benefits of different options. By comparing the potential gains and losses of each alternative, individuals or businesses can make more informed choices.
  5. Economic Concepts: Opportunity cost is a fundamental concept in economics and is closely related to the concepts of scarcity, choice, and trade-offs. It helps explain the concept of cost in broader terms beyond monetary expenses.

To illustrate opportunity cost, consider a simple example: You have $100, and you must decide whether to spend it on a concert ticket or invest it in a stock. If you choose to buy the concert ticket, the opportunity cost is the potential return or profits that could have been earned from investing the money in the stock. On the other hand, if you choose to invest in the stock, the opportunity cost is the enjoyment or experience of attending the concert.

Understanding opportunity cost helps individuals and businesses make more informed decisions by considering the value of the alternatives they give up. It allows for a more comprehensive evaluation of the benefits and drawbacks of different choices and supports effective resource allocation.

Cost Benefit Analysis Definition

Winston Rowe and Associates

Cost-Benefit Analysis (CBA) is a systematic process used to assess the economic feasibility of a project or policy by comparing the costs incurred with the benefits achieved. It is a decision-making tool that helps evaluate the potential gains and losses associated with different options or investments.

In a cost-benefit analysis, the costs and benefits of a project or policy are quantified and compared in monetary terms to determine whether the benefits outweigh the costs or vice versa. The analysis aims to provide a clear understanding of the economic implications of a decision and help stakeholders make informed choices.

Here are key elements and steps involved in conducting a cost-benefit analysis:

  1. Identify the Project or Policy: Clearly define the project or policy being analyzed and establish its objectives and goals.
  2. Identify Costs and Benefits: Identify all the relevant costs and benefits associated with the project or policy. Costs include both initial investment costs and ongoing expenses. Benefits include positive outcomes or impacts that result from the project or policy.
  3. Assign Monetary Values: Assign monetary values to the identified costs and benefits. This involves converting both tangible and intangible factors into monetary terms. Tangible factors include direct financial costs and revenues, while intangible factors may include factors like improved quality of life, environmental impacts, or social benefits.
  4. Timeframe and Discounting: Determine the timeframe over which costs and benefits will occur. It’s common to discount future costs and benefits to reflect the time value of money, as a dollar received in the future is typically considered less valuable than a dollar received today.
  5. Calculate Net Present Value (NPV): Calculate the net present value by subtracting the total discounted costs from the total discounted benefits. A positive NPV indicates that the benefits outweigh the costs, while a negative NPV indicates the opposite.
  6. Sensitivity Analysis: Conduct sensitivity analysis to examine the impact of varying assumptions, such as changes in cost estimates or discount rates, on the results. This helps assess the robustness of the analysis and evaluate the potential risks and uncertainties associated with the project or policy.
  7. Decision Making: Based on the results of the cost-benefit analysis, stakeholders can make informed decisions about whether to proceed with the project or policy. If the benefits outweigh the costs and the NPV is positive, it suggests that the project or policy is economically viable.

Cost-benefit analysis is widely used in various sectors, including government, business, and nonprofit organizations, to evaluate the economic feasibility of projects and policies. It helps decision-makers weigh the potential benefits against the costs and make informed choices that maximize societal welfare or organizational goals.

Loan to Cost Ratio Explained

Winston Rowe and Associates

The Loan-to-Cost (LTC) ratio is a financial metric commonly used in real estate development and construction financing. It measures the proportion of a project’s total cost that is being financed by a loan. The LTC ratio compares the loan amount to the total cost of the project, including land acquisition, construction, development expenses, and other related costs.

The formula for calculating the Loan-to-Cost ratio is as follows:

LTC = (Loan Amount / Total Project Cost) * 100

Here are some key points to understand about Loan-to-Cost:

  1. Project Financing: The LTC ratio is primarily used by lenders to evaluate the risk associated with providing financing for a real estate development or construction project. It helps lenders assess the borrower’s equity investment in the project and the extent to which they rely on debt financing.
  2. Risk Assessment: A higher LTC ratio indicates a greater reliance on debt financing and a potentially higher risk for lenders. Conversely, a lower LTC ratio suggests a higher level of equity investment and may be viewed as less risky. Lenders often have specific requirements regarding the maximum LTC ratio they are willing to finance based on their risk tolerance.
  3. Equity Requirement: Lenders typically require borrowers to provide a certain percentage of the project’s total cost as equity. The remaining portion is financed through a loan. The LTC ratio helps determine the amount of equity required from the borrower.
  4. Construction Financing: The LTC ratio is particularly relevant in construction financing. During the construction phase, lenders disburse funds in stages based on the progress of the project. The LTC ratio is monitored at each stage to ensure that the borrower maintains an acceptable equity investment as construction progresses.
  5. Limitations: The LTC ratio does not consider other financial aspects such as interest rates, loan terms, or cash flow projections. It focuses solely on the relationship between the loan amount and the total project cost. Therefore, it’s important to conduct a comprehensive financial analysis and consider other factors when evaluating a real estate development or construction project.

The Loan-to-Cost ratio is an essential metric in real estate development and construction financing. By comparing the loan amount to the total project cost, it helps lenders evaluate the borrower’s equity investment and the level of risk associated with the project. Borrowers need to understand the specific requirements and guidelines of lenders to determine the financing options available for their project.

Loan to Value Explained

Winston Rowe and Associates

Loan-to-Value (LTV) is a financial ratio used in real estate and mortgage lending to assess the risk and collateral value of a loan. It compares the loan amount to the appraised value or purchase price of a property. The LTV ratio is expressed as a percentage and is calculated by dividing the loan amount by the appraised value or purchase price of the property and multiplying the result by 100.

The formula for calculating the Loan-to-Value ratio is as follows:

LTV = (Loan Amount / Property Value) * 100

The property value used in the calculation can vary depending on the context. It can be based on the appraised value determined by a professional appraiser, the purchase price of the property, or sometimes the market value.

Here are some key points to understand about Loan-to-Value:

  1. Risk Assessment: The LTV ratio is a crucial factor that lenders consider when evaluating a loan application. It helps assess the risk associated with the loan by comparing the loan amount to the value of the property. A higher LTV ratio indicates a higher loan amount relative to the property value, which is seen as riskier for lenders.
  2. Collateral Protection: The LTV ratio is used to determine the level of collateral protection for the lender. In the event of default or foreclosure, the lender can sell the property to recover the outstanding loan balance. A lower LTV ratio implies a greater equity cushion and reduces the risk of the lender not recouping the loan amount in case of default.
  3. Mortgage Requirements: Lenders often have specific requirements regarding the maximum LTV ratio they are willing to accept for different types of loans. For example, conventional mortgages typically have a maximum LTV ratio of 80%, meaning the borrower must provide a minimum down payment of 20%. Government-backed loans, such as FHA loans, may allow higher LTV ratios, providing more accessible financing options for borrowers with lower down payments.
  4. Private Mortgage Insurance (PMI): When the LTV ratio exceeds a certain threshold, lenders may require the borrower to obtain Private Mortgage Insurance (PMI). PMI protects the lender in case of default by transferring some of the risk to an insurance company. PMI is an additional cost for the borrower and is typically required when the LTV ratio exceeds 80%.
  5. Property Valuation: The property value used in the LTV calculation can vary depending on the lender’s requirements. In some cases, lenders may use the appraised value determined by a professional appraiser. In other cases, such as when refinancing, lenders may use the current market value or the purchase price.

The Loan-to-Value ratio is an important factor in mortgage lending and real estate financing. It helps lenders assess the risk associated with a loan and determine the amount of equity or down payment required from the borrower. For borrowers, understanding the LTV ratio can help in determining the financing options available and the potential requirement for mortgage insurance.

Gross Rent Multiplier Explained

Winston Rowe and Associates

The Gross Rent Multiplier (GRM) is a real estate investment metric that is used to analyze the potential profitability of a rental property. It is a simple ratio that relates the property’s market value to its gross rental income. The GRM is calculated by dividing the property’s purchase price or market value by its gross annual rental income.

The formula for calculating the Gross Rent Multiplier is as follows:

GRM = Property Value / Gross Annual Rental Income

The resulting number represents the number of years it would take to recover the property’s purchase price through rental income alone, assuming that the gross rental income remains constant.

The GRM is primarily used to compare different investment properties and evaluate their relative value. It can help investors quickly assess the income-generating potential of a property and make informed decisions about whether it’s worth further consideration.

Here are a few key points to understand about the Gross Rent Multiplier:

  1. Gross Rental Income: The GRM uses the gross annual rental income, which refers to the total rental income received before any expenses or vacancies are deducted. It does not account for operating expenses, such as property taxes, insurance, maintenance costs, or property management fees.
  2. Market Value: The property’s market value is the estimated worth of the property in the current real estate market. It can be determined through various methods, including appraisals, comparable sales, or market analysis.
  3. Limitations: The GRM is a simple metric and has its limitations. It does not consider operating expenses or financing costs, which are crucial in determining the actual profitability of a rental property. Additionally, it assumes a constant rental income, which may not always be the case in real-world scenarios.
  4. Comparative Analysis: The GRM is most useful when used as a comparative tool. By comparing the GRMs of similar properties in the same area, investors can quickly identify properties with higher income potential or better investment opportunities.
  5. Location and Market Factors: The GRM varies depending on location and market conditions. Different neighborhoods or cities may have different average GRMs based on supply and demand dynamics, rental market trends, and other local factors. It’s important to consider these factors when using the GRM for analysis.

While the Gross Rent Multiplier provides a quick and straightforward way to assess rental property investments, it should be used as a starting point in the evaluation process. It is advisable to conduct a more comprehensive analysis, including consideration of operating expenses, cash flow projections, financing costs, and other factors, to make a well-informed investment decision.

Property Manager Role Defined

Winston Rowe & Associates

A property manager is a professional responsible for the day-to-day operations and management of real estate properties on behalf of property owners or investors. Their primary role is to ensure the efficient and profitable operation of the properties while maintaining tenant satisfaction and compliance with relevant laws and regulations. The specific responsibilities of a property manager may vary depending on the type of property they manage, such as residential, commercial, or industrial properties. Here are some common duties and functions of a property manager:

  1. Tenant Relations: Property managers are responsible for finding and screening prospective tenants, negotiating lease agreements, and collecting rent payments. They handle tenant inquiries, address concerns or complaints, and enforce lease terms and regulations.
  2. Property Maintenance: Property managers oversee the maintenance and repair activities of the property. This includes scheduling and coordinating maintenance work, conducting regular inspections, and ensuring that the property is well-maintained and meets safety standards. They may also hire and supervise maintenance staff or contractors.
  3. Rent and Financial Management: Property managers handle rent collection, ensuring that tenants pay on time. They may also be responsible for setting rental rates, conducting market research to determine competitive pricing, and preparing financial reports for property owners, including income statements, expense reports, and budgets.
  4. Marketing and Advertising: Property managers promote vacancies and attract potential tenants by creating and implementing marketing strategies. This includes advertising vacant units, conducting property showings, and utilizing various marketing channels to maximize occupancy rates.
  5. Lease Administration: Property managers handle lease agreements and enforce lease terms. They ensure that all lease documents are accurate, up-to-date, and compliant with applicable laws. They may also handle lease renewals, lease terminations, and eviction processes if necessary.
  6. Legal and Regulatory Compliance: Property managers stay updated on relevant laws and regulations governing real estate and property management. They ensure compliance with fair housing laws, building codes, safety regulations, and other legal requirements. They may also handle legal issues or disputes that arise with tenants, contractors, or other stakeholders.
  7. Financial and Record Keeping: Property managers maintain detailed records of income and expenses related to the property. They handle financial transactions, such as paying property-related bills, managing operating accounts, and providing regular financial reports to property owners.
  8. Risk Management: Property managers assess and manage risks associated with the property. This includes obtaining appropriate insurance coverage, conducting inspections to identify potential hazards, and implementing safety measures to protect tenants and property assets.

Overall, the role of a property manager encompasses a wide range of responsibilities related to the operational, financial, and tenant management aspects of real estate properties. They act as the liaison between property owners and tenants, ensuring that the property is well-maintained, tenants are satisfied, and the investment is profitable.

Commercial Mortgage Broker Defined

Winston Rowe & Associates

A commercial mortgage broker is a professional who specializes in assisting individuals or businesses in obtaining financing for commercial real estate properties. They act as intermediaries between borrowers (property owners or buyers) and lenders (banks, financial institutions, or private lenders) to facilitate the mortgage loan process.

The primary role of a commercial mortgage broker is to connect borrowers with the most suitable lenders based on their specific financial needs and property requirements. They have in-depth knowledge of the commercial real estate market and the various loan options available, allowing them to offer expert advice and guidance throughout the loan application and approval process.

Commercial mortgage brokers typically have access to a wide network of lenders and financial institutions, enabling them to shop around for competitive loan terms and interest rates on behalf of their clients. They assess the borrower’s financial situation, creditworthiness, and the property’s value to determine the most appropriate loan options. They also help with the preparation of loan applications, gathering necessary documents, and coordinating with lenders for underwriting and approval.

Once the loan is approved, the commercial mortgage broker assists with negotiating terms and conditions, ensuring a smooth closing process. They may also provide ongoing support and act as a liaison between the borrower and the lender, addressing any concerns or issues that may arise during the loan term.

In summary, a commercial mortgage broker plays a crucial role in connecting borrowers with lenders, guiding them through the mortgage loan process, and securing the best financing options for commercial real estate properties.

Types of Interest Defined

Winston Rowe & Associates

Interest refers to the amount of money paid or earned for the use of borrowed or invested funds. It is a crucial component of financial transactions and can be classified into several types based on different criteria. Here are some commonly defined types of interest:

  1. Simple Interest: Simple interest is calculated based on the original principal amount or the initial investment. It does not take into account any accumulated interest over time.
  2. Compound Interest: Compound interest takes into consideration both the principal amount and the accumulated interest. It is calculated based on the initial principal and the interest earned over a specific period. The interest earned is added to the principal, and future interest calculations are based on this new total.
  3. Fixed Interest: Fixed interest, also known as a fixed-rate, is an interest rate that remains constant over the entire duration of the loan or investment. It provides predictability in terms of interest payments or earnings.
  4. Variable Interest: Variable interest, also called a variable rate, fluctuates over time based on changes in a reference interest rate or market conditions. The interest rate may increase or decrease, leading to corresponding changes in interest payments or earnings.
  5. Nominal Interest: Nominal interest, also known as the stated interest rate, is the rate specified in a loan or investment agreement. It does not consider the impact of compounding or other factors.
  6. Effective Interest: Effective interest, also referred to as the annual percentage rate (APR), reflects the true cost or yield of a loan or investment. It takes into account compounding and other fees or charges associated with the transaction.
  7. Floating Interest: Floating interest is an interest rate that adjusts periodically based on changes in a reference rate, such as the prime rate or a benchmark interest rate. It is commonly used in variable-rate loans or adjustable-rate mortgages.
  8. Simple Discount Interest: Simple discount interest is a type of interest deducted upfront from the principal amount when a loan or investment is made. The borrower or investor receives the net amount, and the interest is not paid separately.
  9. Precomputed Interest: Precomputed interest is calculated and added to the principal upfront. The borrower repays the total amount, including the interest, through regular installment payments.
  10. Annuity: Annuity refers to a series of equal periodic payments or receipts. It often involves compound interest calculations and is commonly used in retirement plans or structured settlements.

These are some of the common types of interest defined in financial contexts. It’s important to note that specific terms and definitions may vary depending on the country, financial institution, or legal jurisdiction involved.

Mortgage Forbearance Agreement Explained

Winston Rowe and Associates

A mortgage forbearance agreement is a temporary agreement between a borrower and a lender that allows the borrower to pause or reduce their mortgage payments for a specified period. It is typically implemented during times of financial hardship, such as a job loss, medical emergency, or natural disaster.

Here are some key points to understand about a mortgage forbearance agreement:

  1. Purpose: The primary purpose of a forbearance agreement is to provide temporary relief to homeowners who are struggling to make their mortgage payments. It is designed to help borrowers avoid foreclosure and stay in their homes.
  2. Eligibility: Borrowers must demonstrate a valid financial hardship to be eligible for a forbearance agreement. This can include situations like unemployment, significant medical expenses, or other circumstances that impact their ability to make mortgage payments.
  3. Terms: The specific terms of a forbearance agreement can vary depending on the lender and the borrower’s circumstances. Typically, it involves the temporary suspension or reduction of mortgage payments for a predetermined period, such as three months, six months, or longer.
  4. Repayment Plan: During the forbearance period, the borrower may not have to make full mortgage payments or may be allowed to make reduced payments. However, the missed payments are not forgiven but rather postponed. The agreement usually includes a plan for repaying the deferred amount, such as adding the missed payments to the end of the loan term, spreading them out over a specified period, or negotiating a loan modification.
  5. Credit Impact: Entering into a forbearance agreement may have an impact on the borrower’s credit score, but it generally carries less negative consequences than foreclosure or defaulting on the mortgage. It is crucial to clarify with the lender how the agreement will be reported to credit bureaus.
  6. Application Process: To request a mortgage forbearance agreement, borrowers typically need to contact their lender directly. The lender will assess the borrower’s financial situation and determine if they qualify for forbearance. Documentation, such as proof of hardship, may be required during the application process.

It’s important to note that specific details and requirements of mortgage forbearance agreements can vary based on the lender, the type of mortgage, and local regulations. It is advisable for borrowers to reach out to their lender or a housing counselor to understand the terms and potential implications of entering into a forbearance agreement.

What is Fractional Lending

Winston Rowe and Associates

Fractional lending, also known as fractional reserve banking, is a banking system where banks are required to hold only a fraction of customer deposits as reserves and are allowed to lend out the remainder. It is a key aspect of modern banking and the creation of money in the economy.

Here’s how fractional lending typically works:

  1. Reserve Requirements: Central banks, such as the Federal Reserve in the United States, set reserve requirements that dictate the minimum percentage of customer deposits that banks must hold as reserves. The rest of the deposited money is available for lending.
  2. Deposit Creation: When a customer deposits money into a bank, the bank is required to hold a fraction of that deposit as reserves, usually in the form of cash or deposits with the central bank. The remaining portion of the deposit can be loaned out to borrowers.
  3. Lending Process: Banks make loans to individuals, businesses, and other borrowers using the funds they have available beyond the reserve requirement. This allows banks to earn interest on the loans and generate revenue.
  4. Money Supply Expansion: When a bank makes a loan, the borrower receives the loan amount as newly created money in their account. This expands the money supply in the economy, as the borrower can use the loaned funds for spending or investment. The deposited funds are typically spent or redeposited in other banks, allowing the process to repeat, further expanding the money supply.
  5. Reserves and Stability: Banks are required to maintain a sufficient level of reserves to meet withdrawal demands from depositors. However, since only a fraction of the total deposits needs to be held as reserves, it can lead to potential issues if many depositors attempt to withdraw their funds simultaneously, as banks may face liquidity challenges.

Fractional lending allows banks to facilitate economic growth by providing credit and liquidity to borrowers. However, it also carries inherent risks related to liquidity management and potential financial crises if there is a widespread loss of confidence in the banking system.

It’s worth noting that banking regulations and reserve requirements may vary between countries and can be subject to change over time.

Commercial Lending

Winston Rowe & Associates

Commercial lending refers to the process of providing financing to businesses for various purposes, such as expansion, working capital, purchasing equipment, acquiring real estate, or financing other commercial activities. Commercial loans are typically offered by banks, credit unions, and other financial institutions to meet the specific needs of businesses.

Here are some key aspects of commercial lending:

  1. Types of commercial loans: Commercial loans come in various forms, including term loans, lines of credit, commercial mortgages, equipment financing, trade finance, and SBA (Small Business Administration) loans. Each type of loan serves different purposes and has specific terms and conditions.
  2. Application and underwriting process: When applying for a commercial loan, businesses are required to provide detailed information about their financials, business plans, collateral, and other relevant documentation. Lenders evaluate the creditworthiness of the business, its ability to repay the loan, and the viability of the proposed project.
  3. Loan terms and interest rates: Commercial loans typically have longer terms compared to consumer loans, ranging from a few months to several years. The interest rates can be fixed or variable and are based on factors such as the creditworthiness of the borrower, loan amount, collateral, and prevailing market rates.
  4. Collateral and personal guarantees: Commercial loans often require collateral to secure the loan. Collateral can be in the form of real estate, equipment, inventory, accounts receivable, or other valuable assets. In some cases, personal guarantees from the business owners may also be required, making them personally liable for loan repayment.
  5. Credit evaluation: Lenders assess the creditworthiness of a business by examining factors such as its financial statements, cash flow, credit history, industry performance, and business plans. A strong credit profile and a healthy financial position increase the chances of obtaining favorable loan terms and rates.
  6. Relationship with the lender: Building a relationship with a lender can be beneficial for businesses seeking commercial loans. Establishing a good rapport, demonstrating a track record of responsible financial management, and regularly updating the lender on the business’s performance can enhance the chances of loan approval and may lead to better terms in the future.
  7. Regulatory considerations: Commercial lending is subject to various regulatory requirements and oversight. Lenders must adhere to applicable laws and regulations regarding lending practices, consumer protection, anti-money laundering, and compliance with lending standards.

When considering commercial lending, it’s important to carefully evaluate the specific financing needs of your business, compare loan terms and rates from different lenders, and assess the impact of the loan on your cash flow and overall financial health. Consulting with financial advisors or professionals experienced in commercial lending can provide valuable guidance throughout the process.

Investing in a duplex

Winston Rowe and Associates

Investing in a duplex can be a lucrative real estate investment strategy. Here are some key considerations and steps to guide you:

  1. Research the Market: Conduct thorough market research to identify areas with high demand for rental properties, including duplexes. Consider factors such as population growth, employment opportunities, rental vacancy rates, and neighborhood amenities.
  2. Financial Analysis: Evaluate the financial aspects of the investment. Calculate the potential rental income by researching rental rates in the area and estimating the occupancy rate. Consider expenses such as property taxes, insurance, maintenance costs, and property management fees. Determine your cash flow projections and potential return on investment.
  3. Financing Options: Explore financing options for purchasing the duplex. Options include traditional mortgages, loans specifically for investment properties, or even partnerships. Consult with lenders to understand the requirements, interest rates, and terms available to you.
  4. Property Inspection: Conduct a thorough inspection of the duplex before purchasing. Hire a professional inspector to assess the condition of the property, including the structure, systems (electrical, plumbing, HVAC), and any potential issues that may require repairs or renovations. This helps you understand the investment’s true cost and identify any potential red flags.
  5. Property Management: Decide whether you want to manage the property yourself or hire a professional property management company. Managing a duplex involves tasks such as tenant screening, rent collection, maintenance coordination, and addressing tenant concerns. If you opt for professional management, factor in the associated costs in your financial analysis.
  6. Legal and Regulatory Considerations: Familiarize yourself with local landlord-tenant laws, zoning regulations, and any specific requirements for rental properties in the area. Ensure you understand your rights and responsibilities as a landlord to avoid legal issues in the future.
  7. Tenant Selection: Develop a tenant screening process to attract reliable and responsible tenants. Perform background checks, verify employment and income, and check references. Selecting reliable tenants can help minimize vacancies, ensure timely rent payments, and protect the value of your investment.
  8. Long-Term Strategy: Define your investment goals and long-term strategy for the duplex. Are you looking for ongoing rental income or planning to sell the property for a profit in the future? Consider the potential for property appreciation and the local real estate market trends when making these decisions.
  9. Risk Management: Assess the risks associated with investing in a duplex. Consider factors such as market fluctuations, potential vacancies, property maintenance and repair costs, and changes in local regulations. Diversify your investment portfolio to mitigate risks.
  10. Ongoing Management and Monitoring: Regularly review the financial performance of the duplex, including income, expenses, and overall profitability. Stay updated on market conditions and property values in the area. Continuously evaluate and make adjustments to your investment strategy as needed.

Remember, investing in real estate, including duplexes, involves risks and rewards. It’s crucial to conduct thorough due diligence, seek professional advice when needed, and carefully consider your financial situation and investment goals before making a decision.

CMBS Loans Explained

Winston Rowe and Associates

CMBS stands for Commercial Mortgage-Backed Securities, and CMBS loans are a type of commercial real estate loan that is securitized and sold as an investment product in the form of bonds. Here’s an explanation of CMBS loans and how they work:

  1. Loan Origination: CMBS loans are originated by lenders, typically commercial banks or investment banks. These loans are provided to finance the purchase, refinancing, or development of income-generating commercial properties such as office buildings, shopping centers, hotels, or industrial properties.
  2. Securitization: Once a pool of CMBS loans has been originated, they are bundled together and transferred to a trust. The trust then issues bonds or securities that represent ownership in the pool of loans. These CMBS bonds are sold to investors in the capital markets.
  3. Loan Characteristics: CMBS loans are typically non-recourse loans, meaning that the borrower’s personal assets are not at risk in the event of default, and the lender’s recourse is limited to the collateral property. The loan terms can vary but commonly have fixed interest rates and amortization periods of 25 to 30 years. They may also include balloon payments or interest-only periods.
  4. Loan Servicing: Once the CMBS loan has been securitized, a loan servicer is responsible for collecting loan payments from borrowers and distributing the cash flows to the bondholders. The servicer also handles any modifications, extensions, or workout arrangements for troubled loans.
  5. Risk Assessment: CMBS loans are evaluated and rated by credit rating agencies based on their risk characteristics. The ratings reflect the creditworthiness of the underlying loans and determine the interest rates investors require to purchase the CMBS bonds. Higher-rated tranches have lower default risk but offer lower yields, while lower-rated tranches offer higher yields but come with higher default risk.
  6. Investor Appeal: CMBS bonds appeal to investors seeking exposure to commercial real estate debt with the potential for higher yields compared to other fixed-income investments. The bonds provide a way for investors to diversify their portfolios and access income from a pool of commercial mortgages.
  7. Prepayment Risk: CMBS loans often have prepayment penalties or lockout periods during which the borrower cannot refinance or sell the property without incurring a penalty. This is to protect bondholders’ interests, as prepayments can affect the expected cash flows from the loans.
  8. Market Liquidity: CMBS loans offer liquidity to lenders by allowing them to sell the loans as bonds in the secondary market. This provides lenders with the ability to free up capital and redeploy it for new lending activities.

CMBS loans play a significant role in commercial real estate financing by providing a means for lenders to distribute risk and access additional capital. However, they were also associated with the financial crisis in 2008 when the default rates on CMBS loans increased significantly. As a result, CMBS lending practices have evolved and become more stringent since then.

Hard Money Loan Explained

Winston Rowe & Associates

A hard money loan is a type of short-term financing typically used in real estate transactions. Unlike traditional bank loans, hard money loans are funded by private investors or lending companies that specialize in this type of lending. Here’s a breakdown of how hard money loans work:

  1. Collateral-based lending: Hard money loans are primarily based on the value of the collateral, typically real estate. The property being purchased or renovated serves as security for the loan. The lender assesses the property’s value and condition to determine the loan amount.
  2. Short-term and quick funding: Hard money loans are designed for short-term use, often ranging from a few months to a few years. They are commonly used by real estate investors and house flippers who need quick access to funds to finance a property purchase, renovation, or other real estate projects.
  3. Flexible approval process: Unlike traditional loans that heavily consider the borrower’s creditworthiness, hard money lenders focus more on the collateral’s value and the project’s potential profitability. While credit history is considered, borrowers with poor credit may still be eligible for a hard money loan if the collateral is deemed valuable enough.
  4. Higher interest rates and fees: Hard money loans typically carry higher interest rates and fees compared to conventional loans. This is because hard money lenders take on higher risks due to the short-term nature of the loans and the potentially higher default rates associated with real estate investments.
  5. Speed and convenience: Hard money loans are known for their quick approval and funding process. Since they involve private lenders or lending companies, the decision-making process can be faster compared to traditional bank loans. This makes hard money loans appealing to borrowers who need immediate financing to seize real estate opportunities.
  6. Repayment options: Hard money loans usually have flexible repayment terms. While some loans may require monthly interest payments with a balloon payment of the principal at the end, others may have interest-only payments throughout the loan term. It’s essential to understand the specific repayment structure and timeline before taking out a hard money loan.
  7. Exit strategy: Hard money lenders often focus on the borrower’s exit strategy. They want assurance that the borrower has a plan to repay the loan. This could involve refinancing the property with a conventional mortgage, selling the property, or using other sources of funds to repay the loan.

It’s important to note that hard money loans are not regulated in the same way as traditional loans, and the terms can vary significantly between lenders. Due to their higher interest rates and shorter terms, hard money loans are typically considered as a last resort or a temporary financing option for borrowers who cannot qualify for traditional loans or need quick funding for time-sensitive projects.

How To Get A Commercial Loan

Winston Rowe & Associates

To obtain a commercial loan, you will typically need to follow a series of steps. Here’s a general outline of the process:

  1. Identify your loan requirements: Determine the purpose of the loan, the amount you need, and the repayment term you can manage. This will help you understand what type of commercial loan to pursue.
  2. Research lenders: Look for banks, credit unions, online lenders, and other financial institutions that offer commercial loans. Consider factors such as interest rates, repayment terms, fees, and the lender’s reputation.
  3. Prepare your documentation: Lenders will require various documents to assess your creditworthiness and the viability of your business. Common documents include business and personal tax returns, financial statements, business plan, bank statements, and legal documents like licenses and permits.
  4. Review your credit profile: Lenders will evaluate your credit history and credit score, so it’s essential to review your credit report beforehand. Make sure it’s accurate, and take steps to improve your credit score if needed.
  5. Create a loan proposal: Craft a detailed loan proposal that outlines your business’s background, financial information, the purpose of the loan, and how you plan to use the funds. It should also include your repayment plan and potential collateral.
  6. Approach lenders: Reach out to selected lenders and schedule meetings to discuss your loan proposal. Provide them with the necessary documentation and be prepared to answer any questions they may have about your business.
  7. Evaluate loan offers: Once you receive loan offers from multiple lenders, compare them based on interest rates, repayment terms, fees, and any additional conditions or requirements. Choose the offer that best fits your needs.
  8. Complete the application process: After selecting a lender, complete the loan application provided by the institution. Be thorough and accurate when providing information.
  9. Collateral assessment and underwriting: Depending on the loan type and amount, the lender may evaluate the collateral you’re offering to secure the loan. They will also review your application, credit history, and financial documents during the underwriting process.
  10. Loan approval and closing: If your loan application is approved, the lender will provide a loan commitment letter outlining the terms and conditions. Review it carefully, and if you agree, sign and return the letter. The lender will then finalize the loan documents, and you’ll proceed to the loan closing.

Remember that the specific requirements and processes may vary between lenders and loan types. It’s advisable to consult with the chosen lender directly to understand their specific application process and requirements.

REIT Real Estate Investment Trust Explained

REITs historically have provided investors of all types regular income streams, diversification and long-term capital appreciation.

REITs, or Real Estate Investment Trusts, are companies that own or finance income-producing real estate in a range of property sectors.

These companies have to meet a number of requirements to qualify as REITs.

Most REITs trade on major stock exchanges, and they offer a number of benefits to investors.

A REIT is a company that owns, operates or finances income-producing real estate.

REITs historically have delivered competitive total returns, based on high, steady dividend income and long-term capital appreciation.

Their comparatively low correlation with other assets also makes them an excellent portfolio diversifier that can help reduce overall portfolio risk and increase returns.

Modeled after mutual funds REITs provide all investors the chance to own valuable real estate, present the opportunity to access dividend-based income and total returns, and help communities grow, thrive and revitalize.

Types of REIT’s

Equity REITs

A company that owns or operates income-producing real estate

Mortgage REITs (MREITs)

Provide financing for income-producing real estate by purchasing or originating mortgages and mortgage-backed securities and earning income from the interest on these investments.

Public Non Listed REITs

PNLRs are registered with the SEC but do not trade on national stock exchanges.

Private REITs

Offers that are exempt from SEC registration and whose shares do not trade on national stock exchanges.

REITs must pay out at least 90 percent of their taxable income to shareholders and most pay out 100 percent.

REIT owned real estate, located in every state, is an important part of the U.S. economy and local communities.

What interest rate hikes mean for multifamily property investors

As the Fed continues to ramp up interest rates, find out how increases could impact real estate investors.

Inflation—and rising interest rates—are at the center of the American economic conversation. And for good reason. In 2022, the Federal Open Market Committee (FOMC) raised rates by 75 bp four consecutive times between June and November.

In December 2022, the Fed raised rates by 50 basis points, bringing the target federal funds range to 4.25% to 4.50%.

While inflation has slowed in recent months, it remains near 40-year highs. Combined with historically tight labor markets that are driving higher wages, “we’re in uncharted territory,” said Ginger Chambless, Head of Research for Commercial Banking at JPMorgan Chase. “As a result, the Fed is currently tightening monetary policy as rapidly as ever.”

Rate hikes may not impact all financing structures

Interest rate hikes may impact short-term and adjustable rate loans more than long-term, fixed-rate ones.

“The Fed’s actions on short-term rates don’t directly translate to a like effect on fixed rates underlying commercial real estate mortgages. After any Fed rate hike, it’s possible that fixed rates might rise or fall depending on circumstances,” said Mike Kraft, Commercial Real Estate Treasurer for Commercial Banking at JPMorgan Chase.

For investors with fixed-rate loans, you may also want to keep an eye on the Treasury yields, which help determine mortgage rates. The Treasury yield is viewed as a sign of investor sentiment about the economy. Yields are driven by the market and aren’t directly under the Fed’s control. “Treasury yields depend on long-term inflationary expectations, on the market’s assessment as to whether an economic downturn is impending,” Kraft said.

As of December 2022, yields are near the low end of that range. “While they will certainly continue to move about, they are not likely to take off in the immediate future,” he said.

What interest-rate hikes mean for multifamily investors

“As one of the most sensitive sectors in the economy to changes in interest rates, housing activity has weakened significantly in the last few quarters of 2022,” Chambless wrote in her 2023 Outlook. “However, demand for multifamily housing has held up amid tight single-family home supply and affordability challenges, with multifamily housing starts still close to the highs of the cycle.”

The Fed anticipates more increases in early 2023. While multifamily property owners and investors may feel the negative effects of rising interest rates, there may also be some offsets.

Higher interest rates could price would-be homebuyers out of the single-family housing market, causing them to remain renters for longer. Inflation, along with rising costs and construction delays may increase existing properties’ rents. 

Multifamily property owners and investors with fortress balance sheets in particular can benefit from the current economic environment, offering an opportunity to grow their portfolio at a lower cost.

Looking beyond interest rates

For those looking to purchase a multifamily property or refinance their apartment complex, there’s more to look at than interest rates. Consider other factors, including:

Supply, demand and demographic shifts: The housing inventory—especially affordable housing—is low, with demand outpacing supply. Likewise, more people have moved to the center of the country and are seeking workforce housing. Investors may also want to weigh the merit of a shift from suburbs to cities.

Local market: Real estate is a largely local business, so investors may want to take a close look at the specifics of the market before purchasing or refinancing. It’s also important to evaluate each property individually, including its capitalization rate, which generally goes up when interest rates increase.

What’s next for interest rates, inflation and the economy

“While inflation is likely to remain somewhat elevated through the end of 2023, we see signs that a moderation is already underway and that this cooling will become more prominent over time,” Chambless said.

Interest rate fluctuations could correspond. “The Fed’s own projections indicate that the target would top out at 5.25% by the end of 2023,” Kraft said. “Markets have treated this forecast with skepticism, with futures implying a maximum 5.00% target by May. Shortly after that, markets imply a ‘pivot’ by year end—at some point, the Fed could begin easing to accommodate a possible economic downturn. The Fed itself doesn’t project such a pivot, maintaining that it will be necessary to hold rates at a higher level for a while to bring inflation in check.”

Unexpected national and international geopolitical uncertainties may continually arise, resulting in market volatility and interest rate fluctuations.


Commercial Loan Programs

Here’s a summary of the residential investment and commercial mortgage programs we offer through our capital sources.

For more information, please contact Frank Vogel President of Winston Rowe and Associates at 248-246-2243 or email at

The ensuing loan programs loan to value is a maximum 75%, after repair value maximum 80%. MSA’s only no rural areas.

Conventional loan programs are 65% loan to value for refinance, 80% loan to value for purchase.

Construction Financing $5,000,000. to $100,000,000.

Loan amounts from $250,000. to $25,000,000.

Minimum FICO 650

A commercial loan application must be completed to receive a lender quotation. Pricing is on a case-by-case basis due to market volatility.

One to Six Unit Residential

Fix and Flip

Apartment Buildings

Office Buildings


Mixed Use


Industrial / Warehouse


Construction Financing

USA Only

1] Alternative to hard money loans.

Designed for real estate investors seeking lower payments on a long-term, fixed-rate loan with no balloon payment.

Key Features

30-year fixed rate.

Interest-only payments up to 10 years.

Great for qualifying self-employed investors and small business owners.

Based on property value, not personal income.

No business tax returns option.

2] Short-term interest-only loan program.

Designed for investors seeking short-term financing with no prepay penalties.

Key Features

An interest-only, 24-month term provides lower monthly payments.

Available for purchase or cash-out refinance.

Perfect for acquiring or leveraging real estate holdings.

A higher LTV than hard money options.

No business tax returns option.

3] After Repair Value [ARV]

The best short-term solution for acquiring and improving property value.

Designed for “fix-and-flip” investors who are seeking a short-term, interest-only loan to acquire and improve a property based on its “as repaired value” (ARV).

Key Features

Allows borrowers to finance improvements.

Great for borrowers who need a quick close.

An interest-only 1-year term provides lower monthly payments.

A higher LTV than hard money lenders.

No business tax returns option.

4] Less Than Good Credit

A low LTV loan with easy credit requirements.

The Less Than Good Credit Loan is designed for investors with derogatory credit issues and high equity seeking quick and easy credit qualification.

Key Features

Streamlined underwriting.

No seasoning of ownership required.

Available as a 3-year-fixed or 30-year-fixed loan, each amortized over 30 years.

No business tax returns option.

5] Fixed Term Fully Amortized Commercial

For conforming commercial loans from $500,000 to $25,000,000.

Key Features

Non-recourse with standard bad boy carve outs

Available as a 5, 10 or 30-year fixed loan, amortized over 30 years.

Full documentation

MSA’s only.

Refinance loan to value 60% to 65%

Purchase loan to value 70% to 75%

6] Construction Financing

Key Features

Loan to Value 50% to 60%

Interest Reserve

Free and Clear Land Can Be Used as Equity

$5,000,000 to $100,000,000

Ground Up, Rehab, Completion

Most Commercial Property Types

MSA’s Tier 1 and Tier 2

7] SBA 7A AND 504 Financing

Key Features

SBA 7(a) Loan Program

The 7(a) Loan Program, SBA’s most common loan program, includes financial help for small businesses with special requirements. This is the best option when real estate is part of a business purchase, but it can also be used for: 

Short- and long-term working capital 

Refinance current business debt 

Purchase furniture, fixtures, and supplies 

The maximum loan amount for a 7(a) loan is $5 million. Key eligibility factors are based on what the business does to receive its income, its credit history, and where the business operates. Your lender will help you figure out which type of loan is best suited for your needs.

SBA CDC/504 Loan Program

The CDC/504 Loan Program provides long-term, fixed rate financing for major fixed assets that promote business growth and job creation.

504 loans are available through Certified Development Companies (CDCs), SBA’s community-based partners who regulate nonprofits and promote economic development within their communities. CDCs are certified and regulated by the SBA.

The maximum loan amount for a 504 loan is $5 million. For certain energy projects, the borrower can receive a 504 loan for up to $5.5 million per project, for up to three projects not to exceed $16.5 million total.

8] Unsecured Business Line of Credit

Key Features

The unsecured business line of credit is to benefit both startup businesses and established profitable businesses. If your business cannot presently show income, we have stated income products available to quickly grow your business into a profitable powerhouse. If your business has already experienced growth and profit, we have full doc products totaling over $500,000 or more, allowing your business to leverage unsecured funds to continue expansion.

What Happens When The Fed Raises Interest Rates

The Federal Reserve’s mission is to keep the U.S. economy humming—not too hot, not too cold, but just right. When the economy booms and “runs hot,” distortions like inflation and asset bubbles can get out of hand, threatening economic stability. That’s when the Fed steps in and raises interest rates, which helps cool down the economy and keep growth on track.

Interest Rates and the Federal Reserve

Job number one for the Fed is managing monetary policy for the United States, which means controlling the supply of money in the country’s economy. While the Fed has multiple tools at its disposal for the task, its ability to influence interest rates is its most prominent and effective monetary policy tool.

When people talk about the Fed raising interest rates, they’re referring to the federal funds rate, also called the federal funds target rate. At its regular meetings, the Federal Open Market Committee (FOMC) sets a target range for the federal funds rate, which acts as a reference for the interest rates big commercial banks charge each other for the overnight loans.

Banks borrow overnight loans to satisfy liquidity requirements set by regulators, including the Fed. The average of the rates banks negotiate for overnight loans is called the effective federal funds rate. This in turn impacts other market rates, like the prime rate and SOFR.

Thanks to this somewhat indirect arrangement, the federal funds rate is the most important benchmark for interest rates in the U.S. economy—and it influences interest rates throughout the global economy as a whole.

What Happens When the Fed Raises Rates?

When the Fed raises the federal funds target rate, the goal is to increase the cost of credit throughout the economy. Higher interest rates make loans more expensive for both businesses and consumers, and everyone ends up spending more on interest payments.

Those who can’t or don’t want to afford the higher payments postpone projects that involve financing. It simultaneously encourages people to save money to earn higher interest payments. This reduces the supply of money in circulation, which tends to lower inflation and moderate economic activity—a.k.a. cool off the economy.

Let’s look at how this applies to a 1% increase in the fed funds rate and how that might impact the lifetime cost of a home mortgage loan.

Take a family shopping around for a $300,000 30-year, fixed-rate mortgage. If banks were offering them an interest rate of 3.5%, the total lifetime cost of the mortgage would be approximately $485,000, with nearly $185,000 of that accounting for interest charges. Monthly payments would clock in around $1,340.

Let’s say the Fed had raised interest rates by 1% before the family got a loan, and the interest rate offered by banks for a $300,000 home mortgage loan rose to 4.5%. Over the 30-year life of the loan, the family would pay a total of more than $547,000, with interest charges accounting for $247,000 of that amount. Their monthly mortgage payment would be approximately $1,520.

In response to this increase, the family in this example might delay purchasing a home, or opt for one that requires a smaller mortgage, to minimize the size of their monthly payment.

This (very) simplified example shows how the Fed reduces the amount of money in the economy when it raises rates. Besides mortgages, rising interest rates impact the stock and bond markets, credit cards, personal loans, student loans, auto loans and business loans.

Impact on Stocks

Higher market interest rates can have a negative impact on the stock market. When Fed rate hikes make borrowing money more expensive, the cost of doing business rises for public (and private) companies. Over time, higher costs and less business could mean lower revenues and earnings for public firms, potentially impacting their growth rate and their stock values.

“If the cost of borrowing money from a bank increases, the opportunity to expand investment in capital goods by a corporation stalls,” says Dan Chan, a Silicon Valley investor and a former pre-IPO employee of PayPal. “The interest rate may be so high that many companies will not be able to afford to grow.”

More immediate is the impact Fed rate increases have on market psychology, or how investors feel about market conditions. When the FOMC announces a rate hike, traders might quickly sell off stocks and move into more defensive investments, without waiting for the long, complicated process of higher interest rates to work their way through the entire economy.

Impact on Bonds

Bonds are particularly sensitive to interest rate changes. When the Fed increases rates, the market prices of existing bonds immediately decline. That’s because new bonds will soon be coming onto the market offering investors higher interest rate payments. To reflect the higher overall rates, existing bonds will decline in price to make their comparatively lower interest rate payments more appealing to investors.

“When prices in an economy rise, the central bank typically raises its target rate to cool down an overheating economy,” notes Chan. “Inflation also erodes the actual value of a bond’s face value, which is a particular concern for longer maturity debts.”

Impact on Savings Accounts and Bank Deposits

While higher interest rates might be bad for borrowers, they’re great for anyone with a savings account. That’s because the fed funds rate is also a benchmark for deposit account annual percentage yields (APYs). When the FOMC raises rates, banks react by increasing the amount you earn from deposit accounts.

That means the APYs you earn on savings accounts, checking accounts, certificates of deposit (CDs) and money market accounts rises higher as well. Typically online savings accounts react more rapidly to Fed rate changes because there is much more competition among online banks for deposits. APYs offered by conventional brick-and-mortar banks respond much more slowly to rate increases and generally don’t get very high even in the best of times.

Fed’s Own Economist Warns of “Severe Recession” From Chair Powell’s Rate Hikes

On Thursday, following reports that the Federal Reserve would likely soon jack up the federal interest rate again — this time by 0.75 percentage points — Chair Jerome Powell tried to allay fears that the Fed’s strategy would cause an economic downturn, insisting that another rate hike was unlikely to cause a deep recession.

The interest rate hikes, which nominally serve as a way for the Federal Reserve to tamp down inflation, are also a way to put economic power back in the hands of the very rich by driving up unemployment, since higher interest rates make it more expensive for banks to loan people money, leading to scarcer investment and therefore fewer jobs.

Powell downplayed the effect the Federal Reserve’s moves were likely to have on working people. “We think we can avoid the very high social costs that Paul Volcker and the Fed had to bring into play to get inflation back down,” Powell said, referring to the period in the 1980s when the Fed similarly hiked interest rates and engineered a recession.

The Fed’s own research suggests otherwise. Powell’s remarks reflect an attitude common among financial elites that the Fed can execute a “soft landing” in which enough pain can be inflicted on the economy to reduce inflation but not so much that the economy slides into recession. But an extraordinary yet little-noticed Federal Reserve study undercuts the exact case Powell is trying to make — published while he was making it. The study warns that the Fed’s aggressive interest rate hikes this year echo a strategy it undertook a century ago that led to a depression because the Fed did not account for how quickly unemployment can spike in response to rate hikes.

“Strong (tight) labor markets can become weak (slack) faster than policymakers may anticipate,” the authors write. “Indeed, our results demonstrate that labor demand reacted sharply and quickly to the tightening of monetary policy, at a speed which can outpace policymakers’ abilities to track current economic conditions.”

The study, published July 27 by the Federal Reserve Board of Governors, looks at the depression of 1920, the circumstances of which are eerily similar to today. The Federal Reserve Board, the main governing body of the Fed, has over 400 economists who conduct research for consideration by other economists, a board spokesperson, Joseph Pavel, explained.

The U.S. had just come out of a pandemic — the Spanish flu — that killed 657,000 Americans. Since many of those who died were workers, this meant that there were more job openings than workers to fill them, granting the surviving workers more bargaining power. “A tight labor market naturally led to high employment and rising real wages,” the study notes. (Though the study doesn’t mention it, labor strikes were also proliferating, spurred by the low unemployment rate.)

Like today, consumer spending was also recovering — then because World War I had ended; now because the disruptive effects of the coronavirus pandemic are wearing off. Despite the strong job market, inflation was also relatively high, and for similar reasons. “At the end of World War I, the United States was experiencing strong growth and unruly inflation, driven in part by an expansionary fiscal policy and an accommodative monetary policy,” the study observes.

In March 2020, the U.S. government likewise responded to the plunging economy brought on by the pandemic with an unprecedented financial stimulus package in the form of the $2 trillion Coronavirus Aid, Relief, and Economic Security Act — “expansionary fiscal policy,” to borrow the study’s words — while the Fed kept interest rates at historic lows — “accomodative monetary policy.” Together, these policies averted an economic downturn.

While the Fed’s aggressive policy in 1920 did succeed in tamping down inflation, the study found that it also had a devastating effect on workers. “In 1920, the Federal Reserve Banks hiked their discount rates to tame inflation, and the U.S. economy entered a severe recession, now known as the Depression of 1920,” the study says, drawing on labor market data that was only systematically assembled in recent years. The result was that “labor demand sharply contracted, with manufacturing and other industrial sectors leading the way with large reductions in job vacancies.”

Asked how the Fed squares its rate hikes with the contrary findings of its own study, Pavel, the spokesperson for the Fed Board of Governors, pointed to a disclaimer on the study that states, “The analysis and conclusions set forth are those of the authors and do not indicate concurrence by other members of the research staff or the Board of Governors.” The study’s authors, Jin Wook B. Chang, a Federal Reserve Board of Governors senior economist, and Haelim Anderson, a Federal Deposit Insurance Corporation economist, did not respond to requests for comment.

Though the authors of the study aren’t opposed to Fed interest rate hikes wholesale, they caution against using rate hikes in rapid succession — as the Fed is currently doing — due to the delay it takes for the economic effects of rate hikes to register.

In December 1919, the Federal Reserve Bank of New York hiked interest rates from 4 percent to 4.75 percent and then, in June 1920, all the way up to 7 percent. The study explains what happened next: “As the Federal Reserve Banks were increasing rates, a sharp, deep recession began in 1920 lasting until 1921,” the study says. “Up to that point, the recession was one of the deepest measured and is still often referred to as the Depression of 1920. Manufacturing production declined by 22 percent, and unemployment rate rose by 11 percent, from 5.2 percent to 11.3 percent.”

“The Federal Reserve miscalculated the lag times inherent in monetary policy changes, leading the central bank to raise interest rates during the early stages of a recession,” the authors continue. “While it is important for the Federal Reserve to tighten monetary policy and manage inflation, it is also important to adjust policy rates at an appropriate pace.”

The warning seems prudent in light of the fact that the U.S. gross domestic product just contracted for a second consecutive quarter — the traditional definition of a recession.

The Federal Reserve has hiked rates four times this year so far: in March, May, June, and July, cumulatively bringing the federal interest rate from 0.25 percent to between 2.25 percent and 2.5 percent. These represent the first rate increases since 2018; the hike in June was the largest rate hike since 1994. During his closely watched annual address at the Jackson Hole Economic Symposium late last month, Powell indicated that the rate hikes would continue. “Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions,” the Fed chair said. “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation.”

By contrast, the Federal Reserve hiked rates in smaller increments of 0.25 percent on seven occasions between 2017 and 2018, reaching 2.25-2.5 percent by December 2018 — the same rate levels we’re at today. Then-President Donald Trump responded by launching a relentless pressure campaign to get the Fed to lower rates, going so far as threatening to fire Powell. By August 2019, the Fed began to reverse course, gradually slashing interest rates until March 2020, when it rapidly dropped the rate to nearly zero, where it remained until earlier this year.

Powell has been plenty candid about his intentions, declaring his desire “to get wages down and then get inflation down.”

President Joe Biden has shown no such willingness to publicly criticize the Fed, an institution that, much like the Supreme Court, has historically styled itself as above the political fray. In May, Biden vowed “never interfere with the Fed’s judgments, decisions, or tell them what they have to do.” Biden came under criticism by progressives for reappointing Powell, a registered Republican first appointed Fed chair by Trump. Sen. Elizabeth Warren, D-Mass., opposed Powell’s renomination, calling him “a dangerous man to head up the Fed.”

“Renominating you means gambling that for the next five years, a Republican majority at the Federal Reserve, with a Republican chair who has regularly voted to deregulate Wall Street, won’t drive this economy over a financial cliff again,” Warren told Powell while he testified before the Senate Banking Committee in September 2021.

Powell has been plenty candid about his intentions, declaring his desire “to get wages down and then get inflation down” at a press conference in May. As Powell sees it, worker pay is too high. “Wages are running high, the highest they’ve run in quite some time,” Powell said. “And they are one good example of — or good illustration, really — of how tight the labor market really is, the fact that wages are running at the highest level in many decades.”

Anxiety among financial elites about the tight labor market — i.e., workers having some relative leverage — has scarcely been concealed. Also on Thursday, Larry Summers, a top economist in both the Obama and Clinton administrations, said that tackling inflation “will likely require a significant recession.” In recent months, Summers has also called for a 10 percent unemployment rate — a figure that would mean putting millions of Americans out of work.

In a corporate earnings call last month, the CEO of the multibillion-dollar real estate company Douglas Emmett remarked that a recession could be “good” for the commercial real estate business “if it comes with a level of unemployment that puts employers back in the driver seat,” as The Intercept reported. Though recessions can be bad for business in many ways, they’re great for crushing growing labor power.

While it’s true that inflation hurts workers by making consumer goods more expensive, inflation disproportionately hurts the rich and benefits debtors. The effects of inflation are not evenly felt across the board. For example, wage hikes are outpacing inflation in some of the lowest-paid jobs, like leisure and hospitality workers. What’s more, the minimum wage hasn’t kept pace with inflation for decades.

This summer, Warren again raised alarm about Powell, this time over the risks of the Fed’s rate hikes, warning that the decision to increase rates “risks triggering a devastating recession.”

According to the Fed’s own research, Warren is correct.

Commercial Lending to Hit Record $1 Trillion in 2022

There was an impressive 79 percent year-over-year jump in originations in fourth-quarter 2021, completing what MBA estimates was total volume of $900 billion for the year. 2022 is forecasted to be even higher.

Total mortgage borrowing and lending is expected to break $1 trillion for the first time, a 13 percent increase from 2021’s estimated volume of $900 billion. This is according to MBA’s new forecast released last month at our 2022 Commercial/Multifamily Finance Convention and Expo.

Commercial real estate lending volumes are closely tied to the values of the underlying properties. In 2021 those values rose by more than 20 percent, and those increases will fuel further demand for mortgage debt in the coming years. Continued increases in property incomes, and stability in the ways investors value those incomes, should also support solid demand for mortgage capital, even in the face of modest increases in interest rates.

One important item to note. MBA’s commercial real estate finance (CREF) forecast is updated this year to target total commercial real estate lending. In past years the forecast targeted lending by dedicated lenders, which excluded mortgages made by many smaller and midsized depositories. The lending volumes in this year’s forecast incudes those institutions.

For the office and industrial sectors, the final three months of 2021 show evidence of continued strong lending activity in 2022. Fourth-quarter originations jumped 122 percent and 113 percent (on an annual basis) for office and industry properties, respectively.

There are now 210 U.S. housing markets at risk of 15% to 20% home price declines, says Moody’s

We’re beyond questioning whether the housing correction will push home prices lower. Falling home prices are already here. Heading forward, there are just two big questions: How many regional housing markets will see home price declines? And how far will those markets fall?

Moody’s Analytics chief economist Mark Zandi tells Fortune he expects national home prices to decline up to 5% from peak to trough. That assumes no recession. If a recession hits, Zandi expects a 5% to 10% national home price decline.

But that’s nationally. In some parts of the country this ongoing home price correction—which Moody’s Analytics doesn’t expect to bottom out for another 12 to 18 months—is expected to be much steeper. In “significantly overvalued” housing markets, Moody’s Analytics expects 5% to 10% home price declines. If a recession hits, Moody’s Analytics expects home prices to decline between 15% to 20% in those “significantly overvalued” housing markets.

Every quarter, Moody’s Analytics assesses whether local economic fundamentals, including local income levels, can support local house prices. If a housing market is “overvalued” by more than 25%, Moody’s Analytics deems it “significantly overvalued.” Back in the first quarter of the year, 183 of the nation’s 413 largest regional housing markets were overvalued by more than 25%. But this week, we learned that that figure grew to 210 regional housing markets in the second quarter of 2022.*

Simply put, over half of the nation’s largest regional housing markets are vulnerable to home price declines of 15% to 20%. For perspective: Peak to trough, U.S. home prices declined 27% between 2006 and 2012.

These 210 “significantly overvalued” housing markets include places like Boise (overvalued by 72%), Charlotte (overvalued by 66%), Austin (overvalued by 61%), Las Vegas (overvalued by 59%), and Phoenix (overvalued by 57%).

The pandemic saw a perfect storm hit markets like Austin and Phoenix. Not only did these markets get blindsided by the pandemic’s work-from-home revolution, which attracted hordes of expats from California and New York, but they also saw a flood of investor buying. These investors, often flippers or landlords, wanted in on historically low mortgage rates and record home price appreciation.

Underlying housing fundamentals tell us that many locals, in places like Austin and Phoenix, were already priced out even before we entered 2022. But now that mortgage rates are spiking, many of the would-be WFH buyers—who were attracted to markets like Boise because of their relatively affordable real estate—are also priced out. Cue steep price cuts in markets like Phoenix.

Falling home prices might be exactly what housing markets like Las Vegas and Boise need in order to get going again. At least that’s according to Rick Palacios Jr., head of research at John Burns Real Estate Consulting.

“The longer that [mortgage] rates stay elevated, our view is that housing is going to continue to feel it and have this reset mode. And the affordability resetting mechanism right now that has to happen is on [home] prices. And so there are a lot of markets across the country where we’re forecasting that home prices are going to fall double digits,” Palacios tells Fortune.

*”The Moody’s Analytics housing valuation measure is the percent difference between actual house prices and house prices historically consistent with wages and salaries per capita and construction costs. The price of a house is ultimately determined by the value of the land upon which it resides which is tied to the opportunity cost of the land as measured by wages and salaries, and the cost to build the home.

Nationwide, approximately one-half of a home’s value is the land and the other half the structure, but this varies considerably across the country.  In San Francisco, for example, the land is far and away the biggest part of the home’s value, while in Des Moines, Iowa, it is the opposite. Our housing valuation measure accounts for these differences,” writes Moody’s Analytics chief economist Mark Zandi.

How To Make A Real Estate Investment Business Plan, And Why It’s Important

A real estate investment business plan is an important step if you’re looking to get started in the industry. A real estate development business plan can help you decide what form of real estate you’re looking to invest in. Real estate has a wide array of opportunities, so it’s important to narrow your focus. It’s very difficult to be successful in several different areas of real estate at the same time. A business plan can help you decide what it is specifically that you’re doing.

What Is A Real Estate Investment Business Plan?

Put simply, a real estate investment business plan is a document that lays out how a real estate investor intends to run their business. The plan should illustrate the investor’s goals for investing in real estate as well as business strategies and timelines they intend to implement to achieve those goals.

There’s not a specific format you have to follow to create a real estate investment business plan. Instead, you can pick and choose sections that are important to you. A business plan is primarily a document that can help you decide what your business is going to focus on, whether that’s rental properties, investment properties or flipping houses. You can also use a real estate investment business plan to help secure funding from investors or business partners.

Why Do You Need A Real Estate Investment Business Plan?

Having a plan is important because it can act as a blueprint or road map when starting a new business. It can also give it a sense of legitimacy when talking about your business with others. This is especially crucial when trying to attract business partners and investors or getting a small-business loan.

11 Essentials For A Real Estate Investment Business Plan

As we mentioned earlier, there isn’t a specific format you must follow when creating a real estate investment business plan. Plans can be as unique as each company they outline. Here are a few sections that you might consider including in a real estate investment business plan.

1. Executive Summary

An executive summary should illustrate things like the company’s mission and vision statement. Depending on how long your real estate investment business plan is, most people are not going to read the entire thing. So, an executive summary should sum up the investment company as a whole and provide a snapshot of the company’s financial plan, marketing plan and other key factors.

2. Company Description

A business plan should include a description and history of the company as well as the target market. This lets people who read the plan know basic information about the company as well as its principal members. The company description section is a great place to give biographical information about each member of the company’s leadership team.

3. SWOT Analysis

A SWOT analysis looks at a company’s strengths, weaknesses, opportunities and threats. Analyzing each of these categories is important to include in a business plan. This will help you make sure you’ve adequately considered each of these categories, and these are things that potential partners will definitely ask about before investing in your company.

4. Investment Strategy

Detailing a company’s intentions with investment properties is another important part of a real estate investment business plan. Real estate is a broad term that covers a wide variety of different activities. Each of these real estate activities is different and will take a different strategy to be successful. This section will stipulate if you intend to invest in rental properties, flip houses, etc.

5. Market Analysis

You’ll also want to include a market analysis in your business plan. This shows potential investors that you know the real estate market. The three most important words in any real estate plan are “location, location, location,” and including a market analysis will show what conditions are like in the areas where you’re looking to invest. Investing in a high-priced area like New York or San Francisco is much different than investing in a rural area with much lower market prices.

6. Marketing Strategy

Most business plans will also include a marketing strategy. The marketing strategy will show how and where you plan on marketing and attracting new clients. The specific area of real estate you’re focusing on will drive how much you focus on marketing. Someone looking to become a real estate property manager will need to do more marketing than someone who’s buying rental real estate to hold.

7. Financial Plan

Your financing strategy and financial plan might illustrate income and cash flow statements. This could include historical records like bank statements or profit and loss projections. You might also include a balance sheet showing the company’s assets and liabilities. The financial plan section is intended to give potential partners or investors a snapshot of the company’s overall financial health.

8. Organization And Management Structure

A business plan should also include a company’s organizational structure, management team and ownership details. These items are mentioned in the initial executive summary; in this section you can go into more detail about each member of the management team. One thing that is good to include here is a listing of the various qualifications, licenses and/or certifications that each member of the team holds.

9. Real Estate Acquisition Strategy

A business plan should include a strategy for acquiring investment properties, if that’s something that the company plans on doing. There are many different ways to buy real estate, so you’ll want to detail which strategy or strategies you plan on using in your real estate investment business plan. Some strategies may include going through a real estate agent or broker, as well as wholesaling and target marketing.

10. Goals And Timelines

A business plan should clearly state a real estate investor’s goals for their company. One way to show this is to make a 1-year, 3-year or 5-year plan. Detail your plans for the business over a variety of different timelines. You’ll also want to include some strategies and details for how you plan on meeting them.

11. Exit Strategy

Having an exit strategy is important for a business plan. This can include items such as knowing if and when to sell an investment property.

The Bottom Line

Having a real estate investment business plan is an important part of owning a business. Creating a written business plan when you’re starting a business will make your business feel more real.

Commercial Real Estate Mid-Year 2022: The Big Slowdown

Commercial Real Estate Mid-Year 2022: The Big Slowdown

To paraphrase Ernest Hemingway, distress in commercial real estate markets typically develops gradually, then suddenly. Perhaps that is because we spend a long time talking about trends, and then suddenly investors wake up to a more risky market and spreads instantly widen. In our 2022 outlook, we explored the hightened complexity within the real estate markets as economic dynamics alter the math in predicitng investment yield. Most importantly, we are transitioning from an artificial landscape of monetary and fiscal stimulus that inflated returns and asset values toward a market-based interest rate and pricing environment as both the federal government and the Federal Reserve withdraw. At the beginning of the year we knew interest rates would rise, but we didn’t know the pandemic would continue to unleash waves of new variants around the world, exacerbating global supply chain disruption. And we couldn’t know that the first major war in Europe in eighty years would erupt, causing unimaginable human tragedy, dislocating the energy markets, and intensifying already high inflation. What a difference six months has made. The magnitude and unpredictability of change has resulted in a riskier investment market for all asset classes and the accompanying requirement for higher risk adjusted returns.

The immediate impact of this more challenging investment environment, particularly the higher cost of capital, has been a slow down in transactions. Higher interest rates to real estate are like fire to a scarecrow. They reduce profit margins on new deals and can spoil the anticipated exit on existing deals. Accordingly, investors and their lenders are taking more time to model cash flows and valuations. The longer-term impact will bring both opportunity and pain. As the market transitions so will owners and investors, from the sprint of the last few years to a marathon. As we wrote in January, focusing on the longer-term horizon is not only an appropriate strategy in a period of volatility but healthy for the markets. In the next few years, as market participates adjust to the new reality, it will likely take more capital and sweat to achieve success in real estate investing.

Despite the economic volatility, most properties continue to outperform expectations. The fundamentals of real estate remain strong, creating somewhat of a disconnect between the property markets and the capital markets. Of course, real estate is a leveraged business, and each must exist with the other. The strength in market liquidity and property performance heading into this period of change will soften the blow of the newly emerging interest rate and inflation environment. This article will highlight the factors investors will need to consider in response to a new investment environment. While investors are currently taking a risk-off approach, long-term real estate investment opportunities remain.

The Exogenous Factors – Economic Volatility

The inflation caused by supply chain disruptions during the pandemic and exacerbated by the war in Ukraine has proven to be stubborn. The 7.5% annual Consumer Price Index (CPI) was expected to fall during the year but instead rose to 9.1% by June.1 The Wall Street Journal’s June Economic Survey indicated an average estimate of year-end inflation of about 7% (the lowest estimate was 4.5% and the highest 9.9%), twice the 3.4% estimated in January. Interestingly, the same group’s estimate for year-end inflation in 2023 is a relatively modest 3.26%, but the markets do not appear to be thinking that far ahead.

Inflation is often the real estate industry’s friend, enabling increases in rents that are hopefully higher than increases in operating costs. Hence the view that real estate is an inflation hedge, particularly for properties with short-term leases. But the sword cuts both ways as the market’s response to inflation has been significantly higher interest rates, both through the Fed’s aggressive remedies and the market’s anticipation of further Fed rate hikes. Recent fears of recession have tempered interest rate escalation. With first quarter Gross Domestic Product (GDP) down 1.6%2 and second quarter estimates hovering around neutral, the recession may already have arrived. The probability of a recession rose from 18% in January to 44% in June in the WSJ Survey. But not all recessions are alike, and whatever comes will likely be far more benign than our memories of the Great Recession fifteen years ago. Today’s buffers against a severe economic downturn are immense liquidity and a strong job market. At the same time, reductions in the Fed’s balance sheet and investor concerns have the potential to gradually, then suddenly, pull capital out of real estate.

The 10-year Treasury rate started the year around 1.6% and ended the second quarter around 3%, reaching a peak of 3.5% mid-June (awkwardly during the CRE Finance Council’s annual meeting, putting the group in a rather somber mood).3 At the time this article was written the rate had fallen to about 3.0%. Reflecting higher risk in the system, credit spreads have also widened, resulting in a cost of capital double whammy. According to data from Trepp, CMBS AAA spreads have widened between 70 and 90 basis points since the beginning of the year and BBB spreads have widened between 185 and 215 basis points, depending on the issuer of the bonds.

It is important to remember that real property performance, with the exception of hospitality, is far more correlated to job growth than GDP. The June job creation number surpassed analyst expectations. We are enjoying record low unemployment. There are over 11 million job openings nationally.4 As long as Americans have jobs and their wages grow more than long-term inflation, the performance of most property sectors should be sustained through a mild recession.

The higher cost of capital, rather than real estate fundamentals, is what is slowing down real estate investment. Of course, inflation and a recession could dampen demand for some property types; as discretionary spending decreases more people may stay home rather than spending money on retail and hotels. But overall, demographics and other demand generators are keeping occupancy up and rents high.

Multifamily and industrial continue to be the two most desired property types. The rapidly rising cost of owning a home is further fueling multifamily demand. The Case Shiller U.S. Home Price Index rose more than 20% year-over-year through April. On top of continued higher prices, the 30-year fixed rate mortgage rate rose from about 3.2% at the beginning of the year to 5.7% at the end of June.5 The upshot is that the National Association of Realtors Housing Affordability Index fell 24% between January and April, which does not reflect the steep rise in rates in June. Based on home prices, down payment requirements and mortgage rates, only a quarter of American households qualify for a mortgage on a medium-priced home.6

Multifamily demand is being further bolstered by new Gen Z household formation. A study by Cushman & Wakefield estimates that Gen Z will comprise over 30% of renting households by 2025, roughly equivalent to Millennials. Additionally, more Boomers are taking advantage of the hot market to sell their homes and rent for a while. Each of these factors has driven up apartment rents and pushed down vacancies. A recent analysis by Moody’s indicates that national rents are up about 17% in the last twelve months. As apartments become unaffordable, household creation is likely to slow. Rents will continue to grow, but at a slower pace.

Industrial demand also remains strong. While there are risks of over-building in several markets, many companies are increasing product inventories to avoid supply chain disruptions and extending their reach toward customers through last mile distribution centers. According to Marcus & Millichap, a record 551 million square feet of industrial space was absorbed in the twelve months ending April 2022. Robust property performance is expected to continue.

Retail has been the problem child of the real estate industry for many years as oversupply is slowly and painfully wound down and retailers adjust to new consumer behaviors and preferences. The University of Michigan Consumer Sentiment Index fell from 67.2 in January to 50.0 in June, the lowest in the history of the index, and the Conference Board’s Consumer Confidence Index fell from 113.8 to 98.7 during the same period. These gloomy statistics are not surprising given the recent spike in inflation, particularly gas and food prices, and recession fears. Yet retail sales are holding remarkably well, with only a small decline in May. The good news is that online spending as a percent of all sales has been flat as consumers are eager for in-store shopping experiences with family and friends. Even malls have recently had more traffic. This recent in-store performance does not suggest retail real estate is poised for growth; a recession would put continued stress on retailers and the nation continues to be severely over-stored.

The office market continues to pose significant risks for investors and owners. The number of workers going back to the office is increasing every month. However, most workers no longer want to be in the office full-time, especially as gas prices increase the cost of commuting. Office tenants are listening to their employees and watching their checkbooks. Many are trying to renegotiate rent and reduce space prior to the expiration of their leases. Others will clearly reduce space and move to higher quality properties as leases turn. A recent tenant study by CBRE found that over 50% of respondents expect to reduce office space over the next three years.

Despite this, we read a lot about new office leases. Almost all companies need office space, and many of those new leases are companies moving to better quality space. The net effective rents achieved on new leases are not part of the press release, so rent trends are not clear. And national vacancy remains stubbornly high, particularly in gateway cities. According to CoStar, office availability in New York City has risen almost 40% since the beginning of 2020. Hemingway was not an office investor, but his adage holds particularly true for this segment of the market. Owners will go through the drip, drip of lease negotiations until suddenly, over a period of years, they run into trouble with their lenders. We are already seeing, very early in this process, a slight uptick in office loan delinquency. A recent study by New York University predicted an average 30% reduction in office values. The pain will be mostly felt in older, lower quality buildings that lack what tenants now demand: excellent design and floorplans, state of the art air flow, excellent light, building amenities, and environmental and wellness certifications.

Whenever the investment environment becomes riskier, investors differentiate assets and markets in the pursuit of rent growth. Sun Belt and Mountain markets continue to experience in-migration and above average job creation, and investment dollars will follow those trends. Around the nation suburban markets are outperforming the cities they surround as people work and play closer to home. Property users are more focused on environmental vulnerabilities and impact, as well as health and wellness. In a recession there is always a flight to quality, including higher quality properties. These and many other variables will be used to distinguish investment options for the foreseeable future.

Capital Flows and Valuations in an Upside-Down Market

Rent and cash flow growth is even more critical for successful investing as the cost of capital rises. Investors are currently faced with the unusual inversion of lending rates and capitalization rates, or negative leverage. Theoretically, cap rates reflect the aggregate of required returns of both equity and debt. But during the past decade a wave of capital, fueled by artificially low interest rates, compressed cap rates below their historical averages. Many investors believe that liquidity has made cap rates invulnerable to rising interest rates. However, when lending rates rise and yields fall, capital often seeks a new home in other asset classes. Real estate is always cyclical. The only way to deal with the current rate environment is through cash flow growth, which will vary greatly by property type and market and may be mitigated by a prolonged economic slowdown. Hence, the investors are pausing to re-evaluate their strategies.

The cost of debt becomes even greater when considering the higher cost of locking in rates. Many investors want the flexibility of mortgage prepayment and therefore prefer floating rate loans. Uncertainty in the rate market has blown out the cost of swapping from floating to fixed or buying interest rate caps. This is putting further pressure on transaction yields and making investment in transitional properties more difficult.

Of course, the other impact of rising cap rates, particularly without adequate rent growth, is a fall in valuations. This is perhaps the most alarming development for investors. We are currently in a period of price discovery where buyers are looking for deals and sellers are unwilling to reduce asking prices. It will take many months and many transactions to fully assess the impact on valuations, but anecdotal evidence suggests modest cap rate increases to date, with the resulting diminution in value.

Given these new dynamics, perhaps the most difficult part of the investment process is estimating the exit. Existing investment syndicates planning to improve and sell a property within the next few years may not be able achieve the expected exit price, reducing investor returns and sponsor promotes. And predicting exit prices on new deals is next to impossible. Hence, the major slow down in transaction volume ahead of us until rates and valuations find their new equilibrium.

Real estate lenders, which provide most of the capital that fuels the industry, are also slowing things down. With higher rates and recession concerns lenders have tightened underwriting, often reducing proceeds and adding structure to bolster credit. Lenders are particularly focused on debt service coverage given the potential for weaker cash flows and the certainty of higher rates. They are also laser focused on near-term maturities and the ability of borrowers to refinance the loans in a higher rate environment. Transitional lenders, particularly debt funds, are carefully monitoring the performance of their collateral, and requiring more frequent reporting from borrowers on their ability to achieve their business plans.

Not all transitional loans will make it. Despite the many tailwinds supporting property performance, the new interest rate regime is certain to result in pockets of distress. As mentioned, loans with near term maturities are the most vulnerable, but lenders will likely kick the can down the road for a while and see what happens before racking up defaults and impairments. Loans collateralized by retail properties offering the wrong product in the wrong market will continue to default. And office loans are waiting in the wings. The proliferation of debt funds in the last two years (Commercial Mortgage Alert listed more than 150 in a recent issue) have a tough road ahead. They are not only providing loans to fund property repositioning, but mezzanine loans at a time when values will likely fall. Unlike banks, the funds are reliant on warehouse lending to originate loans, and often refresh capital by selling loans into the commercial loan obligation (CLO) market. On the front end the borrowing rates on the lines have rapidly risen, and on the back end the CLO market is practically closed. Again, things are slowing down, and the more complex transactions will move particularly slowly.

Finding a New Path Forward

The suddenness of rate increases and recession concerns in the second quarter has left many real estate investors and operators in the doldrums. The Commercial Property Executive’s CPE 100 Quarterly Sentiment Survey in June revealed that 92% of respondents believed real estate performance will weaken in the next six months versus only 23% in their first quarter survey. Despite the gloomy outlook there are always opportunities. As we concluded in our January market review, investors need to work harder to navigate the uncertainty and risk in commercial real estate. Investors can no longer paint with a broad brush, but must differentiate by property and market, seeking quality in the path of growth.

The math in real estate investing has changed. Transitioning to higher interest rates and cap rates, lower valuations and less robust yields will be a painful process. Once things have settled down and investors are accustomed to the new reality, liquidity and transaction volumes will return. Patient investors with longer term horizons will win out, as long as they have short-term leases and long-term debt maturities, and have avoided the office sector. Above all, investors need to be nimble and rapidly adjust their strategies. We are entering a new real estate cycle, not because of real estate supply and demand but because of economic volatility and a regime change in government support for liquidity. The respective timing of rising cap rates, rising rents, lease renewals, and loan maturities will sort out the winners and losers.


Housing Market Collapse Steepens: New Home Sales Keep Plunging As Inventory Surges To Highest Level Since 2009

Winston Rowe and Associates

New home sales unexpectedly plunged much more than economists projected in July for the second month in a row, and amid the falling demand, rising home prices are starting to slow down—prompting experts to predict long-rising housing inflation could be due for a turnaround soon.

Housing Development Under Construction

Key Facts

About 511,000 new single-family houses were sold last month on a seasonally adjusted annual basis, plunging 12.6% below the June rate of 585,000 and coming in sharply below analyst projections of 574,000, the Census Department reported on Tuesday.

Despite the plunging demand, prices actually recovered: The median sales price of new homes climbed to $439,400 last month from $402,400 in June, when prices tumbled to the lowest level in a year after a record high $458,000 in April.

Meanwhile, the number of new houses for sale continued to creep up, climbing by 7,000 to an estimated 464,000—meaning it would take about 10.9 months to sell off the current supply of existing homes—the biggest glut since April 2009, notes Pantheon Macro chief economist Ian Shepherdson, who blames the plunging demand for a recent surge in inventories.

In emailed comments, Shepherdson said, “It’s reasonable to assume the steepest declines in sales are behind us,” as mortgage rates settle at about 5.7% (compared to roughly 6% in June), but he still believes they will fall “a bit further,” given that rates are still more than two percentage points higher than a year ago.

“For new home prices, however, the worst is yet to come,” he says, noting that month-to-month swings can be “wildly erratic” but that the downshift in year-over-year growth is clear and will become more pronounced as inventory continues to rise.

Prices rose 8% in July, compared to one year ago—down from an annual pace of 10.7% in June; also facing falling demand, the median existing home price fell from a record high of $413,800 in June to $403,800 last month.

Analyzing The Corporate Alternative Minimum Tax

Crucial Quote

“At the start of 2021, a lack of existing homes pushed buyers into the new home market and sent prices soaring, but now existing home supply is rocketing, too, as homeowners scramble to sell before prices fall too far,” says Shepherdson, explaining that this will in turn pressure home builders to cut new home prices. “We expect sharp month-to-month declines in new home prices for the foreseeable future.”

Key Background

A rash of data this summer has painted a challenging picture of the current housing market. Historically high savings and low interest rates drove record growth in home sales and prices during the pandemic, but the Federal Reserve’s attempts to reduce inflation by raising interest rates have abruptly curtailed demand this year—even as prices have kept creeping up. “We’re witnessing a housing recession in terms of declining home sales and home building; however, it’s not a recession in home prices,” National Association of Realtors economist Lawrence Yun said last week.

Surprising Fact

New home sales have plunged 39% from a yearly high of 839,000 in January.


The domestic economy will likely experience more declines in housing, says LPL Financial chief economist Jeffrey Roach, but he’s not worried of a collapse similar in magnitude to the housing crisis that spurred the Great Recession. He notes the banking sector is better capitalized now, and homeowners are generally not under water with loans that exceed their home values. Still, potential risks include the Fed slowing economic activity too much, consumer incomes falling as the job market weakens and inflation not cooling as much as investors expect.

Source: Forbes

Rising Interest Rates Are Creating Turbulence in the CRE Investment Market

Capital costs are rising, but fundamentals remain strong and real estate is also benefiting as a hedge against inflation.

After a long run of incredibly cheap capital, the commercial real estate industry is adjusting to a big jump in the cost of debt. In some cases, loan rates that were quoted around 3 percent six months ago are now in the mid to high 4s. Yet just how impactful those higher financing costs will be on deal flow, pricing and investment strategy remains to be seen.

Real estate investors agree that higher capital costs are putting upward pressure on cap rates, and there likely will be some near-term choppiness in the transaction market as both sellers and buyers adjust pricing expectations. At the same time, the market has to account for some counter forces, including strong fundamentals and a still sizable amount of dry powder. In particular, there is “high velocity” capital from closed-end funds that have deadlines to place capital that has already been raised.

Last week, the Federal Reserve raised the federal funds borrowing rate by another 50 basis points. The increase follows a 25-basis-point bump in March, which was the first rate increase since 2018. Although Fed rate increases are more closely correlated to short-term floating debt, many in the real estate industry also have been watching big moves in the long-term rate benchmarks.

The 10-year treasury yield has climbed sharply, rising about 140 basis points since early March to hover around 3.1 percent as of May 6. Layering on top of higher interest rates, many lenders have widened their spreads by 20 to 30 basis points to account for higher inflationary risk. The result is that loan rates being quoted by lenders are now 150 to 200 basis points higher than they were in first quarter.

One window into current financing rates is BBB or Baa corporate bonds that trade most closely with low leverage, long-term fixed-rate CRE debt. Those bond rates bottomed out around 2.22 percent in September of 2021, and as of early May were trading around 4.69 percent—a roughly 240 basis point increase