CDC Commercial Inc

February 2013 Monthly Letter

Happy Valentines! The heart is the most common symbol of romantic love.  Ancient cultures believed the human soul lived in the heart.  Others thought it to be the source of emotion and intelligence.  The heart may be associated with love because the ancient Greeks believed it was the target of Eros, known as Cupid to the Romans.  Anyone shot in the heart by one of Cupids’ arrows would fall helplessly in love. Well we want you to know we have our heart and our soul in our work and we hope that you are helplessly in love with us here at CDC Commercial!

Well as I reported last month, “Love is in the air”, and things are looking up.  To qualify that a bit let me say that things are firming up more so than picking up.  The trend of gradual but below potential economic growth seen in 2012 is expected to carry over and compound through 2013 and into 2014.

The housing sector is a bright spot, appearing to have bottomed and showing signs of moving forward.  Foreclosures have fall by 45% and home prices rose by 7.5% (the largest increase since 2006.)  Finally construction on new properties rose in December at the fastest clip in four years.  I have always said, “If you want to stimulate the economy give a dollar to a construction worker.”  Most importantly for the future is that positive consumer attitudes toward the economy and the housing market continue to gather momentum.

More good news, San Diego’s unemployment rate dropped to 8.1 percent in December – down from 8.4 percent in November and the 9 percent rate of a year ago. The big changes were:

–          Retail – up 5200 jobs (500 in home and garden reflecting upward movement in the housing market.)

–          Hotels, bars and eateries – up 2500 jobs.

–          Manufacturing – down 2200 jobs. Zero growth in aerospace and government contract work waiting for the fiscal cliff hurt most companies.

–          Healthcare – up 1700 jobs – the most reliable employer in the region.

–          Real Estate: – Mortgage & banking – up 1500 jobs – showing signs of revival.

–          Construction – up 1600 jobs – After losing almost 50% of their workers, construction companies have a long way to go (we need to add 38,000  workers to get back to 2005!)

Venture Capital funds flowed into more San Diego firms in 2012 than the previous year.  The main flow is into local biotech, medical device companies, as well as, software firms.  The “stealth” industry in San Diego is the UAV or “Drone” market.  San Diego is the dominant market for the design and manufacture of their pilotless aircraft.  The industry directly employs more than 2000 workers (indirectly 7000) and contributes $2 billion to our economy.  Better yet this niche is expected to double over the next decade.’

Unless you have been hiding under a rock for the past few months you know that Congress finally passed a bill to avert the dreaded “fiscal cliff”.  There is a lot of speculation of what it means for the average American but let me be clear: If you sell real estate in 2013, you will pay more in taxes! A California resident selling a $1Million investment property in CA potentially faces:

  • 20% Capital gains
  • 3.8% Medicare
  • 13% State tax in CA
  • 25% Depreciation recapture

Needless to say these higher taxes don’t make California the land of milk and honey (just ask Phil Mickelson) for property owners looking to sell.  However, there is a solution.  Investors & owners are going to turn more and more to 1031 tax deferred exchanges (and we are here to help you do it).  My motto has long been – “defer until you die and refi to live”.  This is still the ultimate tax deferred /free investment plan.

As the economy picks up and you consider a 1031 exchange I thought you might appreciate this lending trends update & recent quotes.


Major Lending Trends Update


CRE lenders are extremely active and continue to seek properties with predictable long term and stable cash flow.  Challenges occur with properties that are not 85% leased, have larger non credit tenants, have over market rents or have near term or lumped lease terminations.

Interest rates remain at historic lows

Life companies

  • 10 year rates from 3.5% to 4.5%
  • 15,20 or 25 year fixed rates are available
  • Early rate locks up to 12 months adds 3-5bps per month to the rate

Conduits are extremely active.

  • 5 or 10 year terms with 10 year rates in the low to mid 4%s


  • Most banks offer 3 to 7 year fixed rates from the mid 3%’s to the mid 4%’s.  Only a few offer 10 year fixed rates.

Fannie & Freddie

  • 10 year fixed rates are in the low 3%’s for lower leverage and below 4% for higher leverage.

Underwriting Ratios have remained relatively constant throughout 2012

Loan to Value

  • Life Companies maximum LTV remains low, around 50% to 60%
  • Conduits will lend to up 75% LTV (but usually limited by debt ratios to 70% LTV)
  • Banks maximum is typically 75% LTV (but usually limited by debt ratios to 65% LTV)

Debt to Loan Ratios

  • Debt Yield (loan amount to NOI): ideally lenders prefer this ratio to be over 11% but some of the more aggressive lenders will consider as low as 9.0%.
  • Debt Service Coverage: With the current low interest rates this ratio typically does not limit the loan amount.  Some lenders have a refinance test and use an implied refinance rate of 7% with 25 year amortization to a 1.25x limitation.


  • Life Company and Conduits are non-recourse lenders.
  • Banks are typically recourse lenders however a few will consider non-recourse for loans below 50% LTV.

Well as we at CDC Commercial continue to put our heart (and blood, sweat and tears) into our work for you, we hope that you appreciate our new motto this year; “Confidence = Contracts.” We wish you a Happy Valentine’s Day and the hope that you find true love…and we hope you enjoy the story.


True Love


As related by a hospital nurse. Many years ago, when I worked as a volunteer at a hospital, I got to know a little girl named Liz who was suffering from a rate & serious disease.  Her only chance of recovery appeared to be a blood transfusion from her 5 year old brother, who had miraculously survived the same disease and had developed the antibodies needed to combat the illness.  The doctor explained the situation to her little brother, and asked the little boy if he would be willing to give his blood to his sister.

I saw him hesitate for only a moment before taking a deep breath and saying, “Yes I’ll do it if it will save her.”  As the transfusion progressed, he lay in bed next to his sister and smiled, as we all did, seeing the color returning to her cheek.  Then his face grew pale and his smile faded.

He looked up at the doctor and asked with a trembling voice, “Will I start to die right away”.

Being young, the little boy had misunderstood the doctor; he thought he was going to have to give his sister all of his blood in order to save her.



Monthly Letter Signup

Enter your information above to be added to our Monthly Letter email list.