What a week to be in London!
I find myself in London on this historical election night. I am attending the annual European conference of the Commercial Mortgage Securtization Association (CMSA), and the excitement around the U.S. election is intense.
I did not think I could find a place that was more Pro Obama than Northern California (or my wife), but Europe (or at least London) beats even liberal California — with the Europeans favoring Obama by it seems like a 4- or 5-to-1 ratio.
I am headed to the home of a close friend (and an investor in the company) in Notting Hill to watch the returns, which start coming in at midnight with all the East Coast reporting by 1:00 (we are plus 5 hours from New York). Hopefully, we will witness people “jumping in the fountains” celebrating a big Obama win. If McCain wins, maybe they will burn the place. Will report in tomorrow.
Back to business
I participated in a session on the E-IRP (European Investor Reporting Package) today. The CMSA is tying to get Version 2 of the E-IRP accepted. Version 1 (the current E-IRP) is based on Version 3 of the US IRP (2003 standard — we are on U.S. IRP v5 in the U.S.).
The discussion and the history highlighted to me that the European CMBS market has more fundemental problems than the U.S. market does. I don’t say that from a real estate fundamental point of view, but rather from a CMBS reporting standards point of view. The main problem: CMBS loan documents were not standardized here like they were in the States. Basically, in the States, you know every borrower agreed to provide current, certfied operating statements and rent rolls four times a year.
In Europe, it seems like each loan document was negotiated separately.
I think part of the reason for that is the CMBS market really stated over here (in Europe) after 2000 when there was plenty of access to liquidity. The CMBS programs had to aggressively compete against local balance sheet lenders. So, to win the business, they often relaxed mortgage terms, including reporting requirements.
In the U.S., the CMBS market was born out of a lack of liquidity from the RTC / S&L debacle. The original “standard” documents contained favorable terms for the lenders. The borrowers said yes becaues they needed the capital, and the loans were non-recourse. And, even while terms did get very agressive with regard to proceeds and spread, very rarely, if ever, did the reporting requirements get negotiated away.
Also, and this should not be discounted, there is a greater sense of privacy in Europe than in the U.S.
Also, and this should not be discounted, there is a greater sense of privacy in Europe than in the U.S. Even the attendee list for the conference does not list any contact information for the particpants. Just name and company. No email or phone.
In contrast, the Miami CMSA Investor conference, which is open only to CMBS investors and members of the CMSA, posted the attendee list online with full contact information. So, if the industry conference in London, which only had about 200 delegets attending, can not even share phone numbers, you can imagine it is going to be hard to get rent rolls and operating statements from European borrowers.
U.S. still faces challenges
Even though tenant level data is required in mortgage documents, IRP 5 does not require the disclosure of tenant level data. Also, the master servicers, who collect the rent rolls, do not have them in an electronic format — because there is no standard format for the borrowers to submit in.
Despite this, I bet we get this fixed before Europe because all we are missing is the technology. The loan documents and the culture, thanks to Google and CoStar, have made information more wide open in the U.S.
No matter where you source your data, if you are a leasing broker in any major market, you know the terms of all the leases in your market. That is your job. And, I bet it is the same way in Europe. While the outside image is more closed, the players know. That is their job.
Either way, rent rolls can not remain secret. At least the economic terms need to be passed through to investors. Lets get them more transparent.
Off to see who wins the election. …
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Jim Flaherty is CEO of CMBS.com and the creator of the Backshop loan origination system. He is a trained credit professional with experience installing enterprise underwriting systems for commercial real estate lenders, rating agencies and investors.