Welcome to episode 13 of the recap podcast. The guest this week is Eric Smith. He's been with Deutsche Bank for a year now. Before that, it was 27 years with Wells Fargo. All 28 years have been as a CNBS loan originator. So our conversation covers everything that you'll need to know about the CNBS market, how it works, the right deal types, what the pricing is like today. If you have any questions after listening, please send them in email at
[email protected]. For context to give people a little bit of your background, and I know you've been in the CNBS world since the 90s, but could you just quickly recap how you got started in commercial real estate and what your experience so far has been? Well, hey, thank you, Brandon, for inviting me to be on your podcast. I wanted to give you a compliment. I was talking to somebody in our scuritization group, and they mentioned that he'd follow you on LinkedIn, and they love your content. That's actually pretty high praise somebody on the East Coast. Yeah, thank you. Following your LinkedIn account. So in my background, it's really not too exciting. I started in the Commercial Mortgage Banker Association internship program in the late 80s, and actually worked for a mortgage banking firm. Yes, Merriman and Suns, at a great foundation, Paul Schrader was my boss. I highly recommend anybody going in a commercial real estate learning from insurance companies. We were mortgage banker representing insurance companies. I think you really learn real estate the right way. I did that job. I was ready to move into a position as an originator. Kind of my mid to late 20s. I took a job with Union Bank, who had a mortgage banking group representing insurance companies. I didn't have any clients, so I thought I'd go to Union Bank and kind of work off their construction base, Union Bank was a premier construction lender in California. Of course, that was like 1989-90 hit. Probably the worst real estate recession that I've seen personally. The SNLs had blown up. There was a big commercial real estate liquidity event. It was really difficult to get alone for a few years. We had some pretty good correspondence who had capacity. It kind of worked through that period. It did fairly well. Then Union Bank decided to get out of that business in '93. I instead of continuing mortgage banking, I jumped to a term lending group at Bank of America. I give Bank America a lot of credit back then. In California, they provided a lot of liquidity in the market, especially loans that insurance companies weren't doing on anchored retail, shadow retail, things like that. Did that for a couple years? My boss went to Union Bank. I went over there. Their term lending group had a small bucket of non-recourse, mostly recourse lending. The NCMBF was really starting to pit gel, got recruited to Wells Fargo by Jim McDevitt, who I competed with in the Northern California market and did 27 years at Wells Fargo. In '24, they consolidated shutdown in San Francisco office. Last February, I jumped to Deutsche Bank. I'm working for a calling card house who worked for me at Wells Fargo and opened up the San Francisco office for Deutsche Bank. Pretty much 28-year career in CNBS. I think I've done over, calculated over 1,300 loans during that time frame. That's amazing. You've been in CNBS really from the beginning when CNBS got introduced in the '90s. Before we jump into CNBS 1.0 versus where it is today, there are certain amount of people listening to this that have not been in commercial state for a very long time. There's contingent of students or new analysts. For those that are not familiar with what a CNBS loan is, could we just take a quick 60 seconds to describe what CNBS is before we dive into it? So essentially, we are securitizing our loans. We're making a loan on a commercial real estate property. If it's conduit, it's getting aggregated with whatever the number may be, 50 to 70 loans, in maybe just $7,800, $900,000,000 pool, maybe $1,000,000 pool. We're essentially turning those loans into bonds and those bonds are getting rated entrenched so that investors come in and can buy anything from the AAA piece all the way down to unrated. Then there's the single asset, single borrower segment of the market where those are large loans or large portfolios where that loan or that portfolio is the entire transaction. But essentially, it's the same process. You're your trunching risk and selling risk to bond investors back by commercial real state. Got it. Then how would you determine either the size or the complexion of the pool, whether it's a function of one asset type or a diversification of properties, what's the thought process that goes in as these pools are being created and structured? The key to risk is diversity. I think you want to be aware of having a diverse pool from a standpoint of property type. Some not all larger loans get put into the SASB structure so there can be some pretty large loans and therefore they get chopped up and put into multiple conduit pools and there's parapet sue risk. Those loans should exceed 10% of the pool going back to that same issue of diversity. They're trying to create for the investors a very diverse portfolio of loans. Is any of that influenced by the bond investors themselves? Are they talking to your capital markets desk for example, say, hey, we really want to see five-year loans in the next pool or we really want to see less retail, more multi-family or whatever it might be. I'm just wondering if they have any influence on what you guys are trying to pull together? I think we're constantly talking to investors and that's why something like CREFCE is so important. The investor interests reflect the sentiment in the commercial real estate market. They've been periods of time where in a pre-pandemic where they didn't even see a very high percentage of retail. Retail was going through its issues with the internet and we've seen a lot of retail bankruptcy use and post-pandemic office was really in the target because of all the remote work. I think we're cognizant of that. I think it's also reflective of the v-buyer that has special control over the pools and what they want to see. They can quickly demonstrate their objection by kicking loans or asking for restructuring on loans. I think it is a two-way situation. I would say that I think the pools today are more balanced than they've ever been. I think we've seen the highest concentration of multi-family than we've seen historically. I think that's something that we're always aware of and trying to make a pool marketable. As we're just talking about multi-family for a second and it being a larger portion of the pools today, is there anything specific that's driving more multi-family owners to go the CNBS route than they have in the past where maybe typically they might have been an agency borrower or a life company. Why are more groups going to CNBS route today on the multi-family side? I think it's a confluence of different issues. I think there's a lot of product defendants in the pandemic. Multi-family became kind of a product darling and there was a lot of development. There was a lot of renovation, reposition. There was a lot of bridge debt and I think that law that's coming to market. I think the agencies really dominate that business when I am 1.0. There were certain CNBS originators that did a lot of multi-family. For example, I remember Wacovia would almost kind of do loss-liter pricing on multi-family because they wanted to get Freddie Mac to buy the bonds and they needed a 30% concentration of multi-family.
When I was at Wells, we actually had great support nation levels without multi-family. So I think when we hit the financial crisis and CNBS actually shut down for a year or so, the government stepped in and backed Fannie Mae and Freddie Mac and they just kept going. And I think Fannie Mae and Freddie Mac, I'm not 100% sure of these numbers. I think they were maybe 35% of the market and then they became 75, 80% of the market. I think they have limits and they have an allocation. They've actually up their allocation this year, but they're focusing more on affordable emission product. They're getting tougher on some issues related to verification of income rent and digging deeper into their borrowers. And I think there's a lot of issues there that are starting to drive people towards CNBS. I think also for the past couple of years, especially a couple of years ago when rates were higher, we could do rate buy downs. There were some multi-family deals done with five or six point buy downs. The agency has limited that to a certain level. So I think part of its leverage, we can do student housing. We can do some concentrations, for example, military. Frankly, we can do luxury apartments that is a segment that's not really consistent with their emission. So I think there's these niches that are developing in the market. I think there's just a lot of product telling me the market and a lot of it is trying to solve the leverage issue because a lot of these deals were underwritten at a much lower interest rate period on much lower debt yields. And there's a leverage gap. And you made the comment that when rates were a little bit higher, you could do a large buy downs, like a five point buy down. Are you saying that you can't do that today, where rates are today, or is that still an option for borrowers? Oh, it's definitely still an option for borrowers. It's-- the buy downs are not as extreme because rates have come in. Spreads and treasury has come in. But definitely, that's still a product that we're doing. Maybe we're doing one or two point buy downs at this point. But definitely, definitely, that's an advantage. And going to maybe a 130 interest only debt service coverage, everyone keeps talking about 125. If you really look at the tapes, it really hasn't been too much done at 125 I/L. But 130 I/L compared to the A/C's at 125, the advertising gives us a slight advantage. No, that makes sense. So you can get higher proceeds via the CNBS market. And potentially, is there more flexibility on underwriting? If the A/C's, for example, are maybe focused on a T3 income and a T12 expenses, and potentially for certain deals, that doesn't get them to the proceeds level that they're looking for. Can the CNBS market look at the underwriting any differently, where maybe you're looking at the current rent roll, or some other nuance to a way that could squeeze out a little bit more proceeds as well? The great equalizer is that we have the rating ages who's especially Fitch, who's highly focused on training operations. So there has to be a pretty good story. It could be new construction. That's an area that we've excelled at, where you can underwrite a T1. But there has to be a pretty good story on why you're diverging from some training operations. I mean, ideally, we'd be underwriting to a T12, but we've supported a shorter training period. I think we're fairly on the same page. I mean, Freddie Mac is a securitization product for the most part. So they have their rules. They're probably not too dissimilar from what we do in a CNBS conduit pool. Right. And you mentioned Fitch, which makes you want to take a quick step back to talk more about the mechanics of a securitization and the role of the rating agencies. Can you talk about Fitch in the different agencies and ultimately what they're doing for each securitization and maybe certain kind of guidelines that you need to follow to make sure that it's going to get rated appropriately? Yeah. So the rating agencies are really going to determine our pricing because they're going to determine any given loan. How much of that loan goes into the different tranches. Obviously, we want as much of that loan to go into AAA because that's the lowest priced bucket. But yeah, any given conduit deal, any CNBS deal, you're going to have three rating agencies review your underwriting and rate the loan. And they're going to take the lowest rating of those rating agencies with a heavy emphasis on Fitch. The investors want Fitch on every conduit pool. If you get up into the large loan, the SaaS we pull, you can get levels from different rating agencies and go with one of the other agencies. But there's a real emphasis on Fitch. And so when we're trying to size our loans up front, there are all these guidelines. And what to use for vacancy and various expenses. And we all kind of know the guidelines. But kind of the art of the deal is trying to see where the gray areas are, what we can support, and push in the Fitch rating to get the best pricing possible. So it's a very important part of the process. It's kind of being a CNBS region, you're kind of fighting like a three-headed dragon, because you've got the Fitch. And you're competing with other originators who may be pushing the Fitch assumption. Fitch rating system today is valuation based. So we're using these kind of artificial Fitch cap rates. And somebody might propose that they can get a lower cap rate. They eventually go to Fitch. There's ratings, AB. They might think that they're going to get an A versus a B. There's some subjectivity. And for example, retail, if you're financing what's essentially an unencored retail center, but it's across the street from a grocery store, is that shadow anchored, or is that really unencored? If you have kind of a weak anchor, is that really more of a shadow or unencored retail, or is that really anchored? So there's some subjectivity. And if somebody's pushing those assumptions, it could cause an issue when you finally get your final feedback from the rating agency. And then the other piece to this is the B buyer. And the B buyer has certain controls over the pools. And I can kick loans, kick loans out of the pool. They have the right to do that. They can ask for modifications to loan, to take it into the scaredization. Or say the third head is dealing with the market in general and the competition, and who's doing what. And it may not be another CNBS regionary might be competing against a bank or an insurance company. You don't have a lot of control over that. But it's a balancing act between all these three constituents. Got it. And I do have questions about the BP buyer, but before moving on from the rating agencies, because you have Fitch, S&P, Moody's, Morningstar, and potentially, I'm sure there's others. Is there any specific reason why Fitch is the focus over everybody else? Did that change over time? Or why is that the primary underwriting guidelines that people are following? We always talk about how the sausage is made. And CNBS is a very complicated sausage. And I'm really actually just the cashier. But so it's all kind of just based on what I hear. But I feel like in the financial crisis, the S&P and Moody's really heard the reputation, the bonds, especially AAA bonds, didn't hold up to the extent that they should and really kind of open the door to the emergence of Fitch. And I think they've done a very good job post-financial crisis. And I think it became a credibility issue. Got it. And so for the bond investors, they're saying, hey, we want to make sure that these bonds have been rated by Fitch and meet their guidelines because they've built up the best reputation over the past 15 plus years. Right. Coming out of the financial crisis, their methodology was debt service coverage driven, which kind of makes sense. And frankly, we had so much stimulus rates were so low. We didn't have inflation. We rarely looked at debt service coverage and sizing a deal or closing a deal. It's kind of very much an afterthought. And so their methodology was, OK, we're essentially rating these based on debt service coverage. And they would use the higher of the actual rate of closing or these artificial rates.
you know, like four and a half maybe multifamily, I can try to recall, but you know, maybe upwards of five and a half, maybe even six percent for hotels and what happened in the period coming out of the pandemic, when we had that, you know, the inflationary period and rates were really running, is that we started exceeding the artificial rates, right? We started exceeding the five percent. And so it was the only period that I recall where an increase in the treasury was actually increasing the spread because the increase in the treasury was decreasing the debt service coverage. And so, but you needed that number, you needed that all in level to determine your spread, right? So it was a very circular process, like it was almost like an algebra problem with too many variables. And that was a really difficult period of time, you know, I think that was mostly 2000 and 22. And then they changed their, I think, you know, eventually they saw that that was a problem and they changed their methodology to evaluation with these artificial cap rates. It's been much easier. - Got it, I know that's very interesting. And so the moving from the rating agencies to the BP buyers, can you first of all just describe what you mean by BP and a securitization and what the BP is within the securitization? - Yeah, so the BP is the, they're buying the unrated piece, you know, it can extend to the single B double B. But they're actually buying the first lost piece. And so any losses in that pool first go to the B buyer, you know, it's historically been a yield of maybe 20, plus percent, although those requirements have come in from what I understand, maybe 17, 18 percent these days, you know, and in 1.0, the B buyers were generally the special servicers which, you know, still can be the case today. And really their main motivation in 1.0 was to be in control of the pools. You know, I'm kind of shifting into a kind of a special servicert conversation here. But the B buyer on the front end has a lot of control over the composition of pools that, like I said, previously they can actually say we're not comfortable with the risk of this loan and ask the issuer to remove that from the pool or, you know, they can ask for some type of modification. In most cases today, you know, most of the issuers are checking in with the B buyer on the front end to kind of get their approval on the loan, just to make sure that they're gonna take it. So, you know, it does add a complexity to the process and I think, you know, in 1.0, I think, there was some of that going on. I mean, I think for the most part, you know, the segment when I was at Wells Fargo, I actually focused on a lot of moderate to low leverage. You know, we kind of rarely had kickouts and so it wasn't as big a process today. You know, I think everybody's kind of checking in unless, like I said, this is a really easy deal. So, it just, it adds a complexity to that whole process. - Yeah, interesting. But, you know, maybe shifting from there throughout my career over the past 13 or 14 years, when people are talking about the CNBS market and how pricing has been changing, they're often referring to what's going on with triple A's or where's the spread for triple A's today. What's, I don't know if there's a common reason or historical reason, but why are the triple A's the focus when market participants are talking about the trajectory of CNBS pricing? - It's just a simple index. So, you know, triple A is gonna be 70% of any given conduit pool. So, you know, what's happening in triple A is very meaningful. I mean, in some cases, you know, I always kind of monitor, you know, triple A down through, you know, I might look at triple B, triple B minus just to see what's happening in the, you know, the lower part of the stack, but yeah, you're right, triple A is what everybody talks about. It's just an indication of where spreads are going, you know, how much they're in, how much they're out on any given day or week or year. - Yeah, and according to today's commercial mortgage alert, they're at 67 basis points. It looks like it's worth it today. And the 52-week average is 78. So, it sounds like spreads are compressing slightly compared to where they've been over the past 12 months. - Yeah, that's the 10 year triple A. - Yep. - For the five year. Yeah, no, they're in. I mean, I think that's what I have, you know, that's what I'm seeing. And really, I think that's kind of a, last year, even though I started in February, was a really active year at a really great year. I mean, CJ Cardhouse, always has a great year. And, you know, it's happy to contribute toward that. But we were really busy, but we, you know, we had liberation day, we had some funkiness in there, right? We had a period where spreads got really tight and then started drifting off with kind of all the, you know, issues that are happening in the world. And look, you know, it's, you know, whatever your political views are, it's hard to be a CNBS originator with Donald Trump in the White House. And we, we, and I noticed this in 1.0 because there's just a lot happens and a lot of sad and there's a lot of, you know, global reaction and, you know, spreads are very sensitive to risk on, risk off. And, but, you know, I will say that a lot of money, institutional money has been moving into CNBS. You know, that started happening in 2025, not so much in 2023 and 2024. So investors are putting money to work. So that's a risk on side and that's a very positive development. Right. And you mentioned CNBS 1.0. It might just be a good time to talk about the difference between 1.0 versus 2.0 because you got started in the, kind of late 90s when the CNBS world seemed to come into existence. How did CNBS 1.0 compared to where CNBS is today? And I'm assuming it ended at the GFC. And I guess maybe 2.0 is kind of coming out of the GFC. Is that how you think about the kind of breakdown between the two? Yeah, I mean, over the years, I think, you know, there was a time in prior to the GFC where the subordination level, you know, kind of changed for AAA from 20% to 30% then people started calling that 2.0. And I know some people have been on the 4 or 5.0. But I consider, yeah, 1.0, 2.0, the break to be the GFC. So my experience was probably very different than many because, you know, I really, you know, I came off of my portfolio lending job at Union Bank. I really did not want to do CNBS. I, it seemed too complicated. I know who wanted to have funded reserves and all that structure. But, you know, Wells Fargo in the early days, by the way, Wells Fargo in the very early days, did a securitization, I'm gonna say maybe it was 94. And it was kind of a disaster. They lost a lot of money. This is kind of old San Francisco, old California, Wells Fargo. They did way too much California real estate. It was way too much retail. And they actually did slider prepayment delays or step down prepayment delays. So that was really bad bond structure. And they had a whole bunch of product behind it. A lot of applications out in process. And they had to go back and actually change those applications or they're gonna lose more money. And that was actually probably was one of the first big retreats in CNBS and anybody saw. But, you know, Wells recovered from that. Actually, it's reputation for holding spreads was great. You know, during the entire 1.0 period when I worked there, especially through the really big blow up, you know, the kind of that Russian rubble Asian flu period, in 1998 where we lost Namur, Namur securities blew up in Creamy May. So anyway, it was Dave Hoyt who started the group, you know, CNBS was coming off of really, it's a product that was developed to kind of repackage loans out of the savings and loan failure resolution trust corporations started using it, you know, Ethan Penner steps in. He's kind of the father of CNBS and starts actually creating a product for new origination. But, you know, Dave Hoyt said, you know, let's, let's brand a different product. Let's try to do more low to moderate leverage. Let's give, but to do that, we're gonna give, you know, let's actually do a,
analysis on our borrowers, like have a higher screen on our borrowers related to defaults and bankruptcies and foreclosures. But let's give our clients a little more freedom on not having all the funded reserves and structure. I think I probably did whatever, 7,800 loans in 1.0 and I really did deposit a count cash management and maybe on a single tenant deal. So it was kind of fun. We were really taking market share from insurance companies and especially in the early days, people kind of viewed it as a Wells Fargo product. We fully disclosed what it was and it was really fun. Wells Fargo had converted basically its balance sheet documents. They had gone through 300 sets of loan documents, looked at where people were negotiating common things and kind of created a middle ground and the documents were pretty easy. It was a note and a deed of trust. Got a lot of compliments on those documents. I think, frankly, I know for a fact, when Countrywide started their group, they kind of pirated our documents because they were well regarded, especially for small loans. And yeah, we were cranking. I could do your number of years that would do over 100 loans a year. So that was just a different time. And our loans sold really well. We set all these poor nation levels because we had really good quality product. We had really good sponsors and we had moderate to low leverage. So we were setting so many different subordination records with, you know, when our partners with bare stirrns and, you know, principles and other great, very knowledgeable real estate lender and, you know, credential and Morgan Stanley. So those were pretty good times. I really liked that period of my career. And then, yeah, we hit the financial crisis, but also, you know, things changed a Wells Fargo. And the group was always running out of San Francisco. Ed Blakey was a division manager, really great leader, really great manager, just had a lot of vision. But he started moving up in the bank and they moved the management to New York and then, you know, our note and D to Trust got replaced by 120 page loan agreement. So things started to change. But the management still, you know, they were good people. They, you know, they had spent enough time at Wells Fargo to kind of get the concept of Wells Fargo in the way we did business. But, you know, it changed a bit, you know. And I had people who came back, you know, into 2.0 after the financial crisis and saw the 120 page loan agreement and said, you know, thank you, but no, thank you, you know, I love you, but I'm going to go do something else. So there was a change, but it was still a very good product. And I just think, you know, the, the B buyers changed. I think the B buyers in 1.0 were more bond people and, you know, it was kind of ironic that we were kind of a contrarian, like doing kind of low leverage, low structure. For the most part, you know, the bond people feel, you know, kind of structure solves all. You know, my philosophy is like I'll take, you know, a, you know, a lower leverage, better quality property and a better location over structure. And that was kind of the mentality started changing. And I think, I think just, you know, the documentation and the requirements, you know, especially under the deposit account cash management process became more universal. And, you know, I think I did just think it, everybody started wearing a little bit more about liability and representation and it got harder. Unfortunately, but, but it was still a great period. I mean, I did over 500 loans and, you know, up until we hit the pandemic and, you know, I think there was still very much a need for, for, for CNBS in the market. I still, obviously there still is. I mean, it's a last year was 155 billion dollar business. And so after the pandemic did anything notable change or, I don't know, is it CNBS 3.0? Now or would you feel like the time period before and after the pandemic are similar? Yeah. Now, there's always change, right? And I think we saw property cash flows go to zero, right? And we saw hotels cash flow go to zero, you know, you know, 20 years from now, we probably would have been in the same place or 10 years from now on remote work. And those may be it's coming back, but it was kind of an existential event for office. Right. And I think it's a shame because, you know, some people, you know, for example, hotel borrowers, I do think the combination of the master and special services tried to be accommodative, realizing this is an extraordinary event. But you know, there were, there were people alone hotels where the cash flow went to zero. And then all of a sudden you're spring, you know, deposit account cash management on them. And there's no really cash flow to, you know, to control. And so I just think certain people have bad experiences. And I think, you know, unfortunately, they may carry that with them. I think it made us be smarter about how we structure our loans. You know, I think the last thing I want is somebody to call me up where there's some structure that's being put in place that's really not warranted based on the risk of the property. And I think I think we learned a lot. I mean, I, we learned a lot on the origination side. You know, I, I hope the brokers and the borrowers learned. I think it was overall a very educational period of time in the market. From my perspective, talking to borrowers when they're evaluating different options, whether it's, you know, life company or banks or, or CNBS. One of the challenges of the CNBS world was the perception that once a loan closes, they no longer really have their relationship manager to help with anything that comes up. Is that changing at all in the CNBS world where maybe it's a little bit more kind of bar where friendly post closing? Look, I think it's almost like a financial trade. And I think people get upset when the trade doesn't work to their advantage. And they want to do something different, which is not really, you know, what they're doing, you know, when they're, when they're investing their money and, and whenever stocks, bonds, options. So there's, there's a, there is a little nuance there. But look, I, you know, things have changed a little bit. You know, Wells Fargo. When I said Wells Fargo, I had really good connectivity with all the asset managers. I could get you there quicker than anybody. You know, we could give some background. We could kind of have some involvement at the end of the day, the decision making processes with the special services. But, you know, they, they, they sold that business, right? Now that's Trimon or they've disconnected that. And so really, you know, nobody has a hundred percent connection to the master serviceer. But when you're, you're at a Deutsche Bank and you've done so much business over the last whatever 20 years and you've, like, we use Midland a lot. We'll, we'll use Trimon to some degree. But, you know, we have a liaison at Midland. You know, we, we've, we've had outreach. We've, we've kind of tried to influence, you know, an outcome. And I, I think that's really important. And, you know, I've always put a lot of emphasis on that. And I think that's part of kind of a full service relationship. You know, early in my career, I worked for a guy named Tom Doer and, you know, he was great. And very philosophical guy. And he always talked about needs versus wants, right? And you know, as a broker, like we spend a lot of time dealing with wants and, you know, the borrower wants this and they want that. But I think of any product, you know, loan product in the market, I think CNBS deals with needs, right? Like I need leverage, you know, pay off alone or to close a purchase transaction. I need interest only because I have to, for my investors with this level of return, you know, whatever I might need alone that only CNBS can do on a structured basis where a balance sheet lender may not be able to do it. I might need non-recourse from a taxation standpoint that can many times just be a want. But I think that's where we come into play is when there are real needs. And, you know, if you're a good CNBS originator, you recognize that and you recognize it early. And we all just have enough, you know, our biggest resources time and time allocation. And, you know, if we get a sense that CNBS is a really good fit, you know, for, for a loan, and that, you know, we have some, especially we have some connectivity, then, then we're going to really go after it hard. Got it. And I like to give people a sense of, you know, what deal profiles are actually.
good fit for CNBS over other lender types. Could we just maybe, and I have a series of questions here, but could we maybe just start with what the most common asset types are that you're seeing go CNBS? Well, like I said, surprisingly multifamily was, I kind of actually have some stats here, was 2005 was 27% of all, at least conduit. Number two, which may be surprising, maybe not, is office at 22%, retail 18%, industrial 7%, the other categories 13%. So I think multifamily this year will be a bigger share of what we do. I mean, we did the Skyline SaaS BDL, CJ, the Skyline SaaS BDL, I think it was 420 million, 76 properties, floating rate deal. But outside of that, we did a number of multifamily deals. I think that's going to be a good product for us going forward. And I think we're going to get pushed. I think the allocations are up with Fannie Mae and Freddie Mac. And so I think we're going to get kind of pushed to kind of work through some glitches, deals that may not be the great best fit for Fannie and Freddie. I mean, that's why we're structured lenders. So I think multifamily, look, I think the office market has a lot of potential. It's going to be conservative on that. We're going to be looking at price per pound, but we did a number of office deals in 2025. We've got our teams kind of set up to kind of do some early screening and try to get in front of the buyers early and kind of see what their issues are. But I think that's going to be a good product. You know, retail, frankly, is always a good product. I would say we'd love to do the, you know, the safe way doing it in a bucks a square foot. You know, we, by the way, we closed a Walmart grocery anchor shopping center in the North Bay where they were doing about a thousand dollars a square foot toward the end of the year on an acquisition. But you know, a lot of the stuff we're going to be doing is going to be, you know, maybe, you know, kind of a secondary type anchor. You know, with good sales and or, you know, shadow anchor retail or, you know, the unanchored retail, you know, all well located. You know, there's a good case to be made for, you know, good, good retail these days. So I think those are good products. I did a lot of self storage this year. And kind of what we're doing there is like, look, if you bring it to us and it has a, you know, certain, you know, higher debt yield, then we're going to get very flexible on kind of traditional structure, you know, especially if it's got really strong operating history, you know, we did, we did one deal in a central coast that was like a, I think it was a 15 debt yield. We didn't really have really much structure at all. So, so I'll get 30 some percent LTV, very strong quality asset. So, and then, you know, industrial, I think industrial, right, everybody wants to do industrial, who doesn't want to do industrial. So I think, you know, we'd love to do straight up multi tenant industrial or warehouse distribution, especially, you know, we're pretty good at doing maybe the higher finish flex, which is, you know, a lot of what we see here in the Bay Area. I think we're good at potentially doing a single tenant. There's got to be a really good story and really good structure. And then of course, hotels, I think hotels are, that's a limited service hotels are really, you know, great CNBS product. We'll continue to do that product. Product and anything on the senior housing side? You know, we don't write that everybody has different definitions like, you know, we, if there's a, if there's a licensing requirement, then that's not really something that we do. You're starting to get into the congregate care or whatnot. But I think you're just asking about age restricted multi family. I think that's that product is fine. I think that's, you know, it's definitely something that we would do. Got it. And there's really no max loan size in the CNBS world that seems, but is there a, you know, a typical minimum size or sort of like a sweet spot for these individual conduit transactions? Yeah. I was looking at numbers, you know, the numbers that I always, you know, because it was far ago, I always had a great small loan program. It was a lot more work, but you know, something that I, that actually enjoyed doing. I don't know, that's, you know, usually, usually everybody, you know, all my peers are hunting big game. And, you know, I always kind of looked at expected value, you know, I thought like a $5 million loan. If I, if I knew the sponsor and was a good fit for us, might have, you know, 80% chance of making a $50 million loan that was getting shopped to the world, might have a 2% chance of making the expected value of that $5 million loan was better. So, because that's just a lot more work. I don't know. I think, you know, looking back like 2012, I think the average conduit loan size was around $15 million. Today, I think it's somewhere in the low 20s, maybe 22 million. I, when I was between Wells Fargo and Deutsche Bank, I was talking to a lot of different CNBS lenders and actually doing a little bit of brokerage and some of them are saying that CNBS will not do below $10 million, just because of the, the be buyers that the time and effort associated with going to do the site inspections and all that. And so, unless it was like in New York City or some, you know, major gateway market. And when I came to Deutsche Bank, you know, we, we were doing a couple of deals, you know, eight or nine million dollars. So I think CJ has been really open to it. I think really, you really have to question whether you're going to do a deal under $5 million. I mean, if it's, if it's a relationship, you know, I just signed up a $4 million loan, but it's a, it's a self storage deal and it's a relationship, then, you know, then we'll do it. But I think, you know, I also have to question, you know, from the cost structure standpoint, whether that makes sense for the sponsor. Right. So in most cases, it's kind of 10 million up, but there are certain exceptions to that rule where within a relationship or certain other reasons, specifically to the deal, why you guys might dip below 10 million a little bit. Yeah. Yeah. Yeah. Yeah. You know, closer you can get the 10 million, you know, whatever, eight, nine million, you know, if you like the deal, then, then sure. I mean, I think we did a firm on that business last year. And then from a leverage perspective, is this our most deals in the kind of 70 to 75% range? Is that, would you say that's typical? I would say from a practical standpoint, that's probably not going to happen. I mean, unless you're buying something at a really good cap rate, right? Like the product types that we really want to get aggressive on, you know, maybe multi-family, self storage, right? Those industrial, like those are the property types, you know, manufactured housing mobile parks, like those are the property types that, you know, you probably really want to push leverage and, right, those are still property types that have fairly low cap rates. So by the time you try to target, you know, some minimum bet service coverage, that's probably going to be the constraining factor before LTV got. So I mean, I guess the answer is theoretically, yes. I mean, do you want to do a 75% loan to value office building? No. You know, so you do want to do a 75% LTV hotel, you know, probably not. So I think from a practical standpoint, I think most loans are kind of maxing out, you know, 65% just because of the overall metrics. And you know, if you look at the 2025 origination, you know, the issuer LTV average LTV was 57% which is, you know, really surprising to people, right? No, it's surprising to me. I assume to be higher. Yeah. So, but, you know, that's the interest rate environment or not. Going to the interest rate, and obviously it's going to vary depending on leverage and asset type and a lot of other variables. But should somebody think of it as typically, you know, like a 250 to 300 spread over a five year treasury as being sort of a typical range of what's being targeted? You know, multi family, you know, preferred property types and leverage plays a big role, right? I would say, you know, a five year deal can be in the low 200s, you know, 10 year spreads are going to back up, you know, whatever, you know, 30, 40 basis points from that. We did one with that low leverage self storage, you know, I was talking about like we did that sub 150 spread on a 10 year 10 year basis. So that was a 10 year aisle loan at, you know, 10 year treasury plus sub 150. [BLANK_AUDIO]
We are on the market tights at that point in time, but it was a really good execution. Yeah, so it can be a pretty wide range. And then so if I were to just try to summarize the pros and cons as borrowers are thinking about different lender types, for me, it feels like the potential benefits of CNBS are getting financing for deal types that other more conservative lenders might pass on. And what I mean by that is potentially tertiary markets, single tenant, non-investment grade tenants, strip retail hotels, assets of that nature, and financing those on a non-recourse basis where you can still get moderate to high leverage, not high leverage, but 60 to 70% leverage if it pencils. And getting a fixed rate loan five to seven or 10 years with I/O as well. Is that a fair characterization of the primary benefits or is there anything else you might add to that? Well, I mean, you know, the great thing about CNBS is we can pretty much look at anything. So I mean, that's generally pretty accurate. I mean, we can do, and we've done some really high quality properties with leverage. So that's been the other side of the niche. We'll lean in, you know, we did an apartment deal where the loan per unit was a million dollars. That was a CNBS loan, really high quality property, tremendous location. That's kind of an outlier there. But anyway, so yeah, I would say, look, we're open to anything, whatever the need is. And you know, we can, you know, it's a structured product. So, you know, we could try to structure for risk. And you know, if for some reason you want, you know, the interest only for cash on cash return and you want to do a low leverage deal, then I think we're completely open to pulling off the structure. I think a lot of people realize that right there, immediately go into the insurance company or, you know, somebody else, you know, bank or whatever. So yeah, it's a pretty broad range. And I've always thought of CNBS as a fixed rate product. You had mentioned that the skyline deal was floating rate. Is that floating rate to the boroughs where there's a floating rate CNBS product as well? Yeah, on the on the sasb side, most sasb's are floating rate. Okay, so that's only unique to sasb. So not for more traditional. No, no, condo. It's going to be fixed rate five, five or 10 years. Got it. Now, okay. So it's like 70. I don't know what the numbers are right now. I'm going to discuss like 70, 75% of the market is five year. And the funny story is when I was at Wells in 2022, right? We started seeing that big rate rise. And I would get calls from people with quotals and all of a sudden, you know, our base used to these 3% rates, 3, 4% rates, probably 3% rates for 10 years. And I quote 6% 6 plus 6% for 10 years, whatever. And it guys would come back and say, okay, I'll do 6% but I only want to do it for five years. I got I want to be locked in for 10 years that that rate everybody spoiled with the rates. And so I heard this so many times and I kept emailing and calling our desk and say, like the issue with doing a five year deal and a 10 year pool was you would have a term premium because you know, the duration was built around a 10 year deal. So if you did a five year deal, you almost have to make as much money on the five year deal. So we were putting five year deals in 10 year pools. Goldman had done a five year only pool a few years earlier but never did it again for some reason. We don't know. And so I kept saying, and why gosh, we should do a five year pool, you know, five year only pool. And I kept I kept emailing and kept calling. And it's time Bill Whalen. And a lot of people know Bill Whalen. Bill was a really great, uh, regenerator at Wells Fargo in Wacovia. He was my manager kind of a player coach and he came my office and he had a really big client who had told him the same thing. Like, look, I'll do 6% for five years. I won't do it for 10 years. And he put together a call with our desk at Wells Fargo. They started really buying in like, yeah, we should do this. And uh, initially they said, we'll call it the Whalen bond, which kind of disappointed me. But Bill said, no, it's Eric's idea. So anyway, we started in earnest, like trying to aggregate five year product and did it with our pulling partners. And of course, you know, I'm, you know, I'm sending out my blast. Like here, you know, send us your five year deal. We'll price anyway. And CJ Cardhouse, it was not my boss at Deutsche Bank, got wind of it and kind of figured out what we were doing. And then called his desk in New York and said, this is what Wells is doing. And they jumped on it. And, you know, the thing about Wells is like, we never really completely believe we're going to do a five year only pool. So like we would price things with a little more premium. If we had to throw in a 10 year pool, we could still break even or not lose too much money. I think Deutsche Bank and his partners kind of bought in. And then they beat us to market on the five year pool. Made a lot of money on their first pool. We kind of came in second and didn't make as much money. And so anyway, I would always see CJ around town. I'd like, you should, you should thank me. I thought of that five year only pool. And, you know, he would joke that, you know, I guess Al Gore saying I invented the internet. And, but when I came to work for him, we were at a dinner and, you know, the guys were one of the brokerage shop say, it's kind of weird. You guys are working for the same company now again. And, and he said this guy invented five year CBS. So, so he admitted to me like, I got, I got it from you guys. And so the, the, the, the, what I'm telling you about this is the great story here is that it started in San Francisco. So, five year only pools or 75 plus percent of the market, right? And where would we be without it? I think eventually they would have figured it out. But they didn't, that didn't start in LA or, or New York, you know, surprise, and he didn't start in New York. It actually all started in San Francisco with Wells Fargo and Deutsche Bank. So, well, we have listeners all over the world and they just heard that you're the father five year CNBS. And so now it's official and it can't be taken back. I now have my gravestone marker. There you go. That's really funny. And here really quick, just to wrap up here, you, we both did just came back from the NBA. Any, no worthy takeaways from the NBA given the, you know, different brokers and other groups that you were meeting with there? There was just a lot of money chasing a lot of the same product. I mean, I think the good news is, I mean, the CLO market has grown dramatically group, group dramatically last year. I think there's money being put to work there for higher risk deals. I think, I think there's just, there's a lot of money chasing kind of a range. I think, you know, that's all good news. But I think it's going to be a very, very competitive year. You just have to have the product. I think, you know, my personal view is, you know, we've been playing as an industry kick the can for a really long time. And whether it's the CLOs, you know, kind of redoing their deals, modifying their deals or the banks, right? We've all been kicking the can for a long time, waiting for lower rates so that these loans can get refinanced. And, you know, now's a good time to test the water. Look, I see a BS. There's $7 billion of extended CNPS. You know, that was extended past maturity. That's a product that was never meant for that. So, you know, I think there's definitely a lot of product out there. Everybody's just trying to figure out, you know, the leverage gap. And in the early 90s, what would happen was the, the regulators came in and told, you know, Wells Fargo was one of the last ones to be told to stop doing commercial real estate lending. Their concentration was too high. But Bank of America and Union Bank, everybody was shut down. The problem got solved with, you know, big bulk sales, you know, just counted bulk sales, you know, kind of lenders creating good bank, bad bank, you know, clients and it all perched through the market. And, you know, we're seeing a little bit of that, but we really haven't seen that yet. So, and I think once that product, once that starts happening and lenders start to realize there's real losses there and they might as well just take them while times are good. And hopefully that free is free sub opportunities. And so that creates more deal flow. So, there's a higher supply of deals. I'm just trying to think about does that have any impact on lender pricing or leverage or structure when there's so many more deals to be financed? Maybe it becomes slightly less competitive because right now you have so much capital chasing a few deals. If you increase the volume of available deals, then maybe there's slightly less pressure on lenders to have to continuously reduce spread, increase leverage, reduce structure. Yeah. And look, I feel like, you know, the conduit market was $34 billion last year. And, you know, if you look back, that's kind of half where it was, you know, for example, 2014, 2015. And I don't know about this. This is just conjecture on my part, but the risk retention rules kicked in in 2016. There was the
definitely a noticeable drop in 2016. I can't recall exactly what else was going on in the world at that time, but there's capacity, right? And that's the beauty of CNBS. There's provided there's continued investor demand, I should say. There's kind of an unlimited capacity. But you're right, you're right. If you start flooding any market with supply and that starts exceeding demand, then you're going to have some pricing correction. Well, thank you very much, Eric. I appreciate you taking so much time to go through all this. Okay. Well, once again, I really appreciate all you do in LinkedIn. It's a really great formative information. So keep up the good work. Thank you. [BLANK_AUDIO]
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