SheridanFascitelli_2_150When one of the largest owners and managers of real estate in the United States sold through a subsidiary $660 million of 10-year commercial mortgage backed securities (CMBS) at an initial interest rate of 4.17%, the real estate world was surprised.

So was Michael D. Fascitelli, President, Chief Executive Officer of Paramus, N. J. -based Vornado Realty Trust, and a Trustee of the Urban Land Institute. “We were thrilled with the rate,” says Fascitelli. “When we started the process last year, we thought it would be in the mid 6 percent rate. We paid off the loan in November 2009 and went long. In the interim, the proceeds went up, and the debt yield requirements went down.”

The Vornado issue, industry insiders say, was a sign the CMBS market was stirring – and could signal more available credit down the line. Comprised of a $600 million fixed rate component and a $60 million variable rate part, the notes were cross-collateralized by 40 Mid-Atlantic strip shopping centers. “The issue was for $660 million,” Fascitelli, continues. “At the peak of the market in 2007 it would have been over $1 billion. Surprisingly, rates have gone down. If we did the issue today, it would probably be 10-15 basis points lower. Still, borrowing 10 year financing at 4 or 4.25 percent is an attractive rate in our business especially non recourse. It shows strong investor appetite for yield.”

The global real estate capital markets appear to be coming back, Fascitelli notes, adding there is more debt financing available now than in 2008. “The securitization market is slowly opening,” says Fascitelli. ”It’s getting better but it’s not nearly as good as it was at height of market, when you could get debt yields of 6-8 percent and 12-15 times cash flow. Now debt yields are 10-12 percent and its 8-10 times cash flow.”

Fascitelli predicts more companies will tap into the capital markets soon, “particularly if they can borrow against real estate at 5-6 percent on 7-10 year note. It bodes well for keeping prices steady. As long as underwriting is safe with conservative loan-to-value (LTV) and debt service ratios, companies will see more financing opportunities. But when rates rise, who knows what will happen? Until then, we’re going to see pretty good demand for paper.”

At the same time, proceeds are significantly lower. “The biggest problem in the system, which is challenging to many real estate owners today,” says Fascitelli, “is that the LTVs are reduced because underwriting has become stricter. But stricter underwriting standards are good for the industry long term, but painful short term.”

Fascitelli’s advice to those seeking to tap the capital markets soon:

Keep it simple. “A complicated financial structure isn’t good in today’s marketplace.”

Look ahead. “Finance the assets appropriately. Always have an equity cushion. You cannot get by on a shoestring. Allow for unforeseen circumstances and timing.”

Don’t get caught short. “Match the term of the financing with the asset business plan so you don’t get caught short. Don’t try to get a three-year loan on a five-year project. It will cause headaches down the road.”