March may set another record for CMBS issuance

Commercial real estate debt is cheap; it's just not quite as cheap as last month.

Five- and 10-year interest rates sprang higher in recent weeks and now range from 5.20 percent to 5.60 percent, according to the Barron's/John B. Levy & Co. National Mortgage Survey.

Aggressive underwriting still best characterizes the market, but commercial mortgage lenders and commercial mortgage-backed securities (or CMBS) buyers are yet unfazed.

Today, according to Moody's Investors Service, loans sold as CMBS are averaging 96 percent loan-to-value, despite the "underwritten" limitation of 75 percent to 80 percent.

Of course the market thinks Moody's standards, which if nothing else are consistent, are too conservative. As an example, March will set another volume record for CMBS issuance.

Congress will discuss terrorism insurance again as a sunset provision in the legislation requiring mandatory terrorism coverage by insurers expires at the end of 2005. The once hot issue has cooled off, but is something to track this year.

Speaking of legislation, House Bill 2455 sailed through the General Assembly this year and now sits on Gov. Mark R. Warner's desk for approval.

Introduced by Del. Terrie L. Suit, R-Virginia Beach, the legislation simply allows the Virginia Baseball Stadium Authority continued existence.

According to Suit, there was very little fanfare and virtually zero lobbying effort or debate surrounding the bill.

Originally created in 1993, the authority can collect certain state personal income tax, corporate tax and pass-through tax revenues that relate to a baseball stadium. Not only tax revenue sources related to the operation of the stadium can be collected, but also income taxes related to the development and construction of the facility.

In everyday language, Virginia personal income taxes collected from coaches, players, food-stand operators, parking garage owners, office personnel and even umpires are directed to the authority.

Additionally, certain sales taxes can be directed to the authority. The authority, in turn, can use the tax money to pay debt service on bonds, potentially issued to construct a stadium.

All this sounds fantastic -- a magic bullet -- created by the commonwealth to allow promising new stadiums, such as the one proposed in Shockoe Bottom, to get built.

Richmond could build a new stadium by combining the authority's income stream and related bond issuance with Community Development Authority bonds, which redirect real estate tax income to pay down bonds. So why is no one talking about how this bill will help the stadium financing efforts?

The problem with House Bill 2455 is that it changes the authority as it currently exists. The bill was specifically amended, in January, to exclude minor-league baseball stadiums. Once Warner signs the bill, the Virginia Baseball Authority will solely exist in the event major league baseball decides to come to Virginia.

"Facility" under the current authority provisions was defined as major league and minor-league stadiums. The bill in front of Warner has minor-league stadiums in the definition, only with a line through it.

Perhaps next year, Richmond will be a step closer to a new stadium in Shockoe Bottom. That will give time for the authority provisions to be amended again -- this time to reinstate minor-league stadiums.

Andrew Little is an investment banker with John B. Levy & Co. He can be reached at alittle@jblevyco.com