Despite decreasing commercial real estate transactions and tightening lending requirements, the Ten-X platform remains very active. With recent increases in interest rates, stricter lending requirements and changes to capital markets, we wanted to share some insights regarding financing on the Ten-X platform, how it works best, trends we observed in 2022 and guidance for 2023.

What does it take to buy on Ten-X?

Before diving into how to finance the purchase of a commercial real estate property transacted on the Ten-X platform, we must first outline the buying requirements. To bid and buy, Investors must fully register to bid. The registration process is simple and includes accessing the Bidder Registration Form through either Ten-X, LoopNet, or CoStar, confirming your contact information, identifying your buy-side broker (if applicable), and finally, providing Proof of Funds. For a more in-depth overview on how to register to bid, please visit Registering to Bid.

Proof of Funds are evidence of liquidity such as bank and brokerage statements, and 1031 Exchange funds. The verification of Proof of Funds documents is completed by Ten-X’s Bidder Registration Team and is an important step in our process. It ensures a fair auction process and that all Investors are qualified to bid on properties they are interested in. Ten-X provides a 10% cushion to Investors, setting bid limits at 110% of their verified funds. If an Investor’s bid limit is surpassed in the auction, they will no longer be able to place a bid until additional funds are provided and verified.

All Ten-X transactions are non-contingent. The Proof of Funds requirement protects both Investors and Sellers by ensuring Investors can close the transaction.

Having established the baseline on what it takes to buy on Ten-X, let’s talk about the financing nuisances knowing that a key benefit of investing in commercial real estate is the use of leverage.

What does Financing Available mean on a Ten-X Listing?

Select properties on the Ten-X platform will have a “Financing Available” banner. Financing Available is a designation used on the listing page to alert Investors that the Broker has coordinated with a lender to provide financing and, typically, an extended closing period. It is important to remember that the Purchase and Sale Agreement is non-contingent, and a financing contingency is not offered even if a property is advertised as Financing Available.

On deals where financing is offered, the Broker will upload a term sheet to the Ten-X Data Room. This term sheet is provided by an independent third party and includes the lender’s contact information, loan closing time requirements, loan to value ratios, and interest rates. Investors interested in financing their acquisition through this lender must contact the lender for pre-qualification. After being pre-qualified, the lender will provide the investor with a Lending Commitment which can be uploaded as Proof of Funds. Example – If a bidder provides $5M in liquid funds and a loan commitment of $5M, their Proof of Funds would be $10M for that particular property.

Can financing be used on Ten-X transactions when the Financing Available banner is not displayed?

Yes – Investors on Ten-X have successfully closed transactions when financing was not made available and Investors can actively seek financing while simultaneously underwriting the real estate. This is more complex and requires established lending relationships so early lender involvement is crucial to reducing Investor risk. Again, the properties sold on Ten-X do not offer financing contingencies. The key questions Investors should consider are:

• Has my lender reviewed the opportunity and the due diligence documents in the Data Room?
• Can my lender close in the allotted closing time specified in the PSA?
• Am I able to close the transaction using other means should my lender decide not to fund the loan?

How many transactions successfully close with Financing?

Having established Ten-X buying requirements and the process for buying with and without financing made available, let us look at acquisitions that closed with financing. In 2022, roughly 30% of transactions traded on Ten-X closed with financing. These properties had an average loan size of $3.5M and average LTV of 72%. Lenders varied across all types, including Debt Funds, Regional Banks, Community Banks, hard money and private lenders.

For 2022, we saw that hospitality properties made up the largest proportion of financed deals at roughly 36%, followed by Retail and Office at 23% and 20% respectively. Lastly, the average closing time for deals that used financing was ~ 71 days. This is substantially longer than non-financed transactions; however, the sellers on Ten-X benefit from non-refundable earnest money deposits which ensures Investor performance.

What to watch as the capital markets evolve?

The Federal Reserve has indicated that they will continue to increase interest rates until a target inflation rate of 2% per year is achieved. Recent data including job reports and the pending impact of OPEC production cuts, have been inflationary indicators; therefore, the Federal Reserve once again raised rates by .25bps in May 2023. The continued rate increases makes valuing commercial real estate difficult as Investors do not know their true cost of capital. Investors will likely price in higher interest rates and therefore, have demonstrated offering lower pricing on properties.

The availability of debt had been of minor concern in 2022 but is becoming a larger issue for Investors. With recent bank failures, banks and lending institutions are tightening their underwriting standards and reevaluating their existing loan pools. Banks are concerned with having adequate liquidity and potential regulation or capital controls. If the lending institutions pull back, there will be less debt available and increased loan costs for Investors. This again results in lower CRE pricing.

Change in Commercial Real Estate Loan Origination

Based on the latest Federal Reserve data, loan originations decreased for the first time since the beginning of the COVID pandemic. It is yet to be seen how the bank liquidity problem will be addressed, and until direction is provided, we, at Ten-X, are anticipating lower LTV ratios and sales prices.

The good news is that Ten-X transactions do not rely on debt dependent Investors. In fact, our Investor pool has ample liquidity as evidenced by submitting proof of funds of $42B in 2022 $5B in Q1 2023. Sellers looking to monetize their investments lower their risk by reaching only qualified investors that can transact during this time of financial uncertainty.