Loan Comps are Useless, but Financing Comps are not
The real estate industry relies heavily on comparable properties (“Comps”) to underwrite and value properties.

The two most common types of comps are sales comps and lease comps.

* Sales comp - the price of a consummated sale transaction on an absolute, per square foot, per unit, or cap rate basis for a property that can be considered comparable to the subject property.
* Lease comp - the rental rate and leasing terms of a space or unit that can be considered comparable to the subject.

Less commonly, comps may be used to estimate the potential *expenses* of a property, though third-party Expense Comps are less common and harder to find. Therefore, companies with larger asset management or property management portfolios usually mine their own data to determine a potential expense load on a building. Smaller investors and operators without this type of portfolio data usually rely on local property management companies to help estimate expense loads for a given property.

Even less commonly available would be Loan Comps or Financing Comps. However, I have seen a few real estate tech companies advertise Loan Comps as a feature recently, either by showing loan history information from comparable properties as a feature for users, or by claiming their platform uses “AI” to derive value from loan history information, such as feeding that data into an algorithm to suggest the right lender.

As one of the leading tech-enabled commercial real estate financing platforms today, I want to be really clear: loan comps are really not useful in that way. Knowing that another asset of similar size nearby was financed at a particular rate and leverage by some particular lender is *not* the type of information that enables an algorithm to suggest the best lender match. That type of loan comp is useless, and I’ll explain why.

## Why loan comps alone are useless

Let’s say that a real estate investor is considering the acquisition of a multifamily property in Los Angeles. Interest rates are rising, and they are not sure how to find the right lender, balancing rate, and leverage.

At first glance, you may think looking at loan comps in the area would provide some useful insight. Knowing that a specific regional bank financed another multifamily in the same neighborhood last year means you can call that lender and get a good quote. Here’s where it falls apart:

### Markets change

As I write this blog in October 2022, typical commercial mortgage rates have shifted dramatically since the beginning of the year. Multifamily agency rates are up 215-268 basis points. Banks and credit unions are up 212-292 basis points. What works today is different than what worked 90 days ago, let alone last year. The shifting spread between commercial mortgage rates and cap rates, in general, does funny things to commercial mortgage underwriting on specific properties. What was the “best” available loan for the *same* property six months ago can be dramatically different than today because every balance sheet lender has their own custom underwriting constraints relying on different loan metrics (LTV, DSCR, Debt Yield), income stress tests, and cost of capital considerations. If lenders never changed their criteria, market forces would still push capital one way or another.

### Appetites change

But lenders don’t keep their underwriting criteria constant, do they?

As market winds blow, lenders tailor their criteria accordingly. If property values are in danger of falling, LTV limits will be lowered. If certain types of properties are in danger of losing income, DSCR or Debt Yield constraints will be adjusted. But this doesn’t happen uniformly across different types of lenders, or even across specific lenders that you might consider “similar”.

### Comparable loans for comparable borrowers

A subject property’s similarity to another property is not the full story as to whether the *deal* was similar. For that, we need to understand whether the *borrower* can be considered similar as well. A borrower can be considered similar across two separate dimensions: financial, and experience.

### Balancing the sheet

For “balance sheet lenders” in particular, those who intend to keep loans on their own books rather than securitize or sell those financial assets, diversification is a key consideration even when the market is stable. Diversification can be across asset classes (not too much office or retail), different borrowers, different locations, and different deal scenarios. Diversification spreads around risk. A local lender already lent on a similar property across the street? That may be a reason they will be less interested in doing it again, as it would concentrate their risk.

## The type of financing comps that can actually be helpful

What an investor needs to know is not exactly what lender transacted on a similar property nearby last year. What an investor needs to know is *how their type of deal was executed elsewhere* and *who can do that now.*

### How a similar deal was structured

Understanding the structure of a financing deal starts with a senior lender term sheet. Look beyond the loan amount. What was the loan size *relative to the property value at the time* (LTV)? Was the entire amount funded upfront, or were there holdbacks? How about fees? Recourse?

Accessing previous loan knowledge becomes *much* more helpful when you understand the terms, not just the loan amount and rate.

But the senior lender is not the end of the story. As the market tilts towards a potential major recession and rates rise, there is an increasing prevalence of structured capital stacks. In addition to getting a senior loan, many developers and investors are seeking mezzanine debt, preferred equity, C-PACE, ground leases, or whatever capital can fill in gaps and make their deal come together.

Knowing that a similar value-add multifamily deal was executed with a non-recourse senior loan at 65% (with exact terms) and then a 15% slice of preferred equity, and understanding how that affected the common equity returns, is a real financing comp.

### Who can execute?

Once you understand the actual financing market context, only then does it become an issue of who can execute. That certainly includes senior lenders, but that also includes other sources of capital.

The final two pieces in a valuable financing comp would be:

1. Did the capital source honor their terms? Did they close on time? If the answer to either of these is No, you have more digging to do.
2. Do multiple pieces of the capital stack I’m pursuing work together? For instance, only certain senior lenders can allow C-PACE financing in the capital stack. Others can or cannot support mezzanine debt via an inter-creditor agreement. Understanding what a capital source *won’t* do puts parameters on the “Who can execute?” question that looking at a map with the names of lenders can never provide.

As always, savvy investors consider what activities are the best use of their time, and pass off the work for anything that isn’t their highest and best use. We're seeing an increasing amount of investors and developers strike up conversations with Capital Advisors to clear the market when their direct relationships are pulling back.
[{"id": "iun0qxu", "text": "Nice post Tim!", "replies": [], "depth": 1}, {"id": "iun58o9", "text": "What are your thoughts on Delaware statutory trusts?", "replies": [{"id": "iuq2ntu", "text": "They\u2019re extremely fee-heavy. And while years ago they were buying decent multifamily, due to cap rate compression, now and days it seems like a lot of DSTs are buying riskier and riskier assets.", "replies": [], "depth": 2}], "depth": 1}, {"id": "iunzjox", "text": "Totally agree, Tim. It\u2019s about having actually been involved in the deal and knowing the true story. Seems like that would favor the biggest name brand platforms touching the most deals and having the most real time comps.\n\nAre you with Lev?", "replies": [], "depth": 1}, {"id": "iuo159k", "text": "Loan $/SF seems like the only reliable loan comp based on publicly available knowledge (i.e. CMBS). Its really hard to get an apples to apples approach due to the potential complexity around structure.", "replies": [], "depth": 1}, {"id": "iuri7j9", "text": "This is a great idea in theory, but I\u2019d imagine the majority of debt brokers and lenders aren\u2019t going to be willing to share their \u201csecret sauce\u201d. Also problematic, because these comps don\u2019t give insight into a sponsor\u2019s liquidity profile, which plays a significant role in loan structuring/terms", "replies": [], "depth": 1}]