Day

Good real estate loans are tricky in the current economy. “Very few transactions today are straightforward, so creativity is critical,” says Jeff Day of Berkshire Mortgage Capital. Rising to the occasion, lenders have updated their products to offer what their clients need in the changing economy. Berkshire, for example, recently introduced mezzanine and bridge loan programs, which are popular in the current lending environment. Additionally, borrowers are seeking floating loans now because of the low rates for LIBOR and Prime, according to Roscoe “Buzz” Walker of Johnson Capital.

Lower interest rates have also kept lenders busy during the economic slowdown and the low rates continue to generate business for top lenders and intermediaries across the West. “The first half of 2002 was very slow due to a combination of a sluggish economy and the aftereffects of September 11, 2001,” says John Loshbaugh of LaSalle Bank N.A. “The second half [of the year] was very busy as rates plummeted. That pace quickened throughout the second half of 2002 and into 2003. Now, as rates are rising, the second half of 2003 should be a cool-down period.”

Thomas Sherlock of Buchanan Street Partners says today’s lending environment is similar to last year’s. However, he adds, “With the prospect for broad-based economic recovery increasing, lenders are slightly less cautious than they were 1 year ago.”

Diaz

Marcia Diaz and Mike Jameson of Prudential Mortgage Capital say lenders are paying more attention to certain deals, particularly those ranging between $15 million and $30 million.

It isn’t easy to complete these deals, though. “Lending in 2003 has been challenging to the extent of keeping loan-to-values and debt service coverages in sync,” says Andrew Fawer of CIBC World Markets. “In addition, with slipping fundamentals, we had to take great care in analyzing the market risks.”

Walker agrees that there have been challenges in the lending business during the last year. “Underwriting is difficult because of underlying fundamental weaknesses in most property types, such as vacancy and the credit-worthiness of tenants,” he says. “It is difficult to complete deals because most markets are experiencing higher-than-normal vacancies. Rates, however, are very attractive, and well-located, well-occupied properties are getting financing as long as leverage levels are not pushed.”

Davis

The low rates have been key to financing real estate. “Rates in the first half of 2003 were actually lower than in 2002,” says John Davis of Collateral Mortgage Capital. He adds, “Lenders have increased allocations to real estate investment as it is a preferred asset class of chief investment officers.”

Leading Lenders

Lenders in the West have closed complex loans, overcoming many challenges in the last couple of years, and they offer unique products targeted to every aspect of commercial real estate.

ARCS Commercial Mortgage

Levine

Calabasas Hills, California-based ARCS Commercial Mortgage finances commercial properties across the West, with a focus on multifamily properties. The company offers Fannie Mae DUS and securitized commercial financing in first, second and mezzanine loans.

Recently, ARCS closed on a $15.3 million loan in 3 days to make a 1031 exchange deadline. David Levine, senior vice president, explains, “The borrower came to ARCS when its initial lender failed to meet the time requirements for a 1031 exchange. In order for the borrower to avoid major penalties, the loan needed to close in less than 3 full days from that first meeting. ARCS’s production, underwriting, legal and closing (acting simultaneously) locked the loan in 2 days and completed financing before the deadline.”

The 10-year loan has a 30-year amortization at 5.99 percent. It was originated by ARCS’s Calabasas Hills branch, through the Fannie Mae DUS program, to finance the purchase of the 200-unit Aventine Apartments in La Quinta, California.

Berkshire Mortgage Finance

Boston-based Berkshire Mortgage Finance is a nationwide lender that focuses on multifamily properties. The company is a Fannie Mae DUS lender, a Freddie Mac seller/servicer and an FHA lender. Berkshire also provides bridge and mezzanine financing through a proprietary in-house fund.

“With the low interest rate environment, long-term fixed rate mortgages have been the bulk of our volume over the past year,” says Jeff Day, executive vice president/managing partner – Irvine platform. “Because the yield curve is especially steep, a 10-year loan with a 9-year fixed-rate term converting to a 1-year adjustable has been quite popular. This structure allows the loan to be priced at the interpolated 9-year Treasury vs. a 10-year Treasury, often saving the borrower 12 to 20 basis points over the fixed-rate portion of the term.”

Berkshire recently financed a 700-unit apartment complex near Honolulu. The 27-acre, 25-building Moanalua Hillside apartment complex was constructed in 1968. It has 144 one-bedroom and 556 two-bedroom units. Many units have panoramic views of the harbor, Diamond Head and Honolulu. The property is also convenient to the freeway and is a 10-minute commute from Honolulu.

“The customer acquired the property with the intent to obtain $55 million in tax-exempt financing and complete nearly $8 million in rehabilitation,” says Day. “The total project costs, including closing costs and cost of issuance, equaled $57.5 million, making the loan request 95 percent of total cost. The customer was willing to post additional collateral during the lease-up and stabilization period, but naturally wanted to minimize that amount. The loan request was further complicated by a number of factors including the fact that the subject property is in Hawaii, a relatively thin rental market. Also, the rental market in Honolulu is dominated by condominiums held for rent, and the military and tourism both have a substantial impact on the market.”

Berkshire allowed for the entire $55 million bond issue to be enhanced at issuance. The customer posted an $11 million letter of credit, which could be reduced to zero in two steps depending on the economic performance of the property, as well as the progress and completion of the rehabilitation. To obtain the necessary approvals, Berkshire performed extensive due diligence about the market, the submarket impact of for-rent condominiums on the market and any impact that military employment and tourism might have. “The resulting transaction was the largest, single-project, tax-exempt bond credit enhancement ever done by Berkshire and was the first of its kind in the state of Hawaii,” says Day.

Buchanan Street Partners

Sherlock

Buchanan Street Partners finances office, retail, multifamily, industrial, hospitality and mixed-use properties across the West. The company, which has offices in Los Angeles, San Francisco and Newport Beach, California, provides equity and debt financing for permanent, construction, bridge and mezzanine loans and also provides joint venture equity. “Demand is strong for all types of capital,” says Thomas Sherlock, senior vice president.

Buchanan Street Partners recently provided $41.7 million in debt and equity for the redevelopment of the 369,000-square-foot Country Club Mall in Sacramento, California. “The mall was functionally obsolete and was losing sales to newer centers in the area,” says Sherlock. Buchanan Street Partners invested $10.7 million in joint venture equity from its Buchanan Funds and arranged $31 million in bridge/construction financing from a third-party lender to facilitate the redevelopment.

Significant in the transaction was the complete repositioning of the mall: converting it to a configuration that opened up the mall and provided improved access and visibility to the tenants. Developer Arizona Partners demolished a major portion of the center and is adding 110,000 square feet of new space with as little disruption to the existing tenants as possible.

“Arizona Partners chose Buchanan Street due to its ability to handle both the equity and the debt — offering a solution for the total capital structure for the project. Additionally, we have been retained to pursue similar opportunities with the client,” says Sherlock.

CIBC World Markets Corporation

New York City-based CIBC finances all major property types — multifamily, office, retail (anchored and unanchored), industrial, hospitality, manufactured housing parks, self storage and mixed-use — across the West.

Fawer

“CIBC is one source for construction, bridge and permanent loans,” says Andrew Fawer, managing director of CIBC World Markets Corporation. “One group originates these products, ensuring consistency in service. We have variations on these themes, including fully funded construction loans (a construction loan and permanent loan rolled into one product), fixed-rate bridge loans with earn-outs and rehab loans.”

“Permanent loans have been very popular with low long term rates,” he adds. “In addition, we have been providing fixed-rate loans with certain earn-out features, enabling the borrower to lock rates without forgoing the additional dollars that can be achieved at full stabilization.”

CIBC recently provided financing to a client acquiring a multifamily property. The property had been offering concessions in the previous 12 months. To complete the deal, CIBC “structured seasoning reserves and guaranties that can burn off after achieving predetermined hurdles,” Fawer explains.

Collateral Mortgage Capital LLC

Birmingham, Alabama-based Collateral Mortgage Capital is a national lender that provides financing for all property types. The company’s investor base includes insurance companies, conduits, pension fund advisors and commercial banks. A privately owned commercial mortgage banking firm, Collateral Mortgage Capital has a servicing portfolio of more than $4.5 billion and a 2003 projected lending volume of $1.6 billion.

The company is a Fannie Mae DUS lender, a Freddie Mac Program Plus seller/servicer lender and an active lender through FHA-insured loan programs. In addition, Collateral is the exclusive correspondent for its affiliate, New South Federal Savings Bank.

Permanent loans and bridge financing products are popular right now, according to John Davis, executive managing director.

Interest rates at 50-year lows in the mid-4 percent range have encouraged borrowers to execute permanent loan structures, he says. “These loans are typically written with 10-year terms and 20- to 30-year amortization schedules.”

As for bridge finanacing, Davis says, “These loans allow a borrower to reposition and carry a project until it has reached stabilization. The borrower can re-tenant, remodel or expand a building, and upon completion go back to the capital markets and secure permanent debt without incurring prepayment penalties. This debt carries personal guarantees, usually floats over Prime or LIBOR and has a term of 2 to 3 years.”

Collateral Mortgage Capital recently structured the financing of Courtyard Village Apartments, a 307-unit community in Las Vegas. The property has 35 three-story buildings totaling 358,780 square feet. The property had fallen into a state of disrepair under former ownership and occupancy suffered as a result. Collateral placed a $10.37 million interim loan to facilitate the acquisition and subsequent light rehabilitation of the property. The borrower will invest approximately $800,000 to improve the property’s marketability and has hired a local professional management company to restore occupancy and rents to market levels in an overall attempt to reposition the property. The loan carries an 18-month term with interest-only payments priced over the 1-month LIBOR. Upon completion of the rehabilitation and stabilization, Collateral will provide permanent financing for the property.

Johnson Capital, an iCap partner

Johnson Capital, based in Irvine, California, arranges financing for all types of commercial real estate. The company has a well-established foundation in the West with offices in Denver, Phoenix, San Diego, Salt Lake City, Los Angeles, San Francisco and Irvine, California.

Walker

The company is a partner with iCap Realty Advisors, a Chicago-based mortgage banking and investment sales company. “We are recognized out here as Johnson Capital, but we will eventually co-brand with iCap,” says Buzz Walker, principal with Johnson Capital.

The company is currently arranging financing for a tough loan. The loan involves the first phase of a three-phase project in which it is difficult to get lender approval of condo declarations and insurance issues.

Walker arranged a similar loan for a commercial condominium project on Bridge Street in Vail, Colorado. “These individual commercial condominiums were owned by one principal, and they all had high-end tenants occupying the spaces that fronted on this famous street,” says Walker. “The transaction was problematic because these units were valued at close to $1,000 per square foot and our loan was more than $300 per square foot. Normal high-end office buildings and shopping centers in our market usually don’t exceed $150 per square foot. The other interesting fact is that these commercial condos rarely, if ever, sell — so there weren’t many comps to study. We did this loan with Credit Suisse First Boston’s conduit and the execution was perfect.”

These loans are pooled with other commercial mortgages and sold to institutions as collateralized mortgage obligations, Walker explains. “This CMBS market has become a larger and larger factor in commercial real estate finance. Before the conduits appeared, loans like these were made by life insurance companies and savings and loan institutions. Most life companies that we deal with don’t make loans over $100 per square foot as a general rule, so the conduits have proven to be a new outlet for difficult or high per-square-foot loans.”

KeyBank Real Estate Capital

Cleveland-based KeyBank Real Estate Capital finances all property types in California, Nevada, Arizona, Colorado and Utah. The company provides construction and interim loans; syndicated financing; commercial mortgages; market-rate equity and mezzanine debt; investment banking and advisory services.

“Historically low interest rates have driven huge permanent finance activity over the past 12 months,” according to Kevin Meeks, central region manager. “Lending today faces the same challenges as 12 months ago — primarily a sluggish economy and weakening fundamentals in some markets.”

LaSalle Bank N.A.

Chicago-based LaSalle Bank N.A. finances all property types across the West, providing a range of products, including conduit facilities, fixed-rate, long-term (5, 7, 10 year terms) non-recourse loans. The company also offers amortizations up to 30 years and fully amortizing facilities up to 15 years as well as hybrid products like float-to-fixed loans, which offer floating rate debt for transitional properties nearing stabilization with a fixed rate (conduit) exit.

Loshbaugh

According to John Loshbaugh, senior associate of originations, “Conduit products have been very hot, particularly with Treasury rates so low. With the recent — and currently continued — run up in Treasuries, I expect the market to cool slightly as people will be less eager to refinance. However, acquisitions, especially in the Western region, should remain strong and therefore keep pipelines active. Further, the incredibly low Treasury rates had been pushing already low cap rates, particularly in Southern California, even lower, making some acquisitions difficult, as borrowers’ leverage expectations could not be matched. The uptick in Treasuries and corresponding rates should push cap rates up slightly and make borrower’s leverage expectations more reasonable.”

Prudential Mortgage Capital Company

Newark, New Jersey-based Prudential Mortgage Capital Company (PMCC) finances all property types all across the West, offering fixed- and floating-rate loans, mezzanine lending, structured financing, interim/bridge lending, affordable housing loans and forward commitments on behalf of Prudential’s general account, Fannie Mae, FHA, capital markets and institutional investors.

Jameson

Long-term fixed-rate loans are popular now, according to Marcia Diaz and Mike Jameson, principals based in the company’s Los Angeles and San Francisco offices, respectively. “Everyone wants to lock in low rates,” they say.

Prudential recently closed a $42.6 million Fannie Mae loan for a multifamily property in San Diego. “This was a highly competitive deal,” say Diaz and Jameson. “It had a great sponsor, and is a great property in a great market. We needed to provide maximum leverage, lowest pricing and ease of execution. We responded with an aggressive quote because we knew the borrower very well and we knew the market.”

In addition to giving a low quote, Prudential worked to close the deal. “We laid the groundwork the year before with a Fannie Mae loan with this borrower, who hadn’t done one in a long time. We had pre-negotiated waivers and loan documents so that when this deal came along, the borrower knew what PMCC could deliver,” Jameson and Diaz explain.

Predictions

Most lenders agree that rates have bottomed out and are on the way back up. Increasing rates may interrupt lending activity, which will increase competition amongst lenders. LaSalle Bank’s Loshbaugh, for example, thinks refinancing activity will subside with the rising rates. He adds, “Acquisition financing should continue to be fairly strong, but some acquisitions will also subside due to the rising interest rate market. Capital sources have enjoyed a very robust first half, and I would expect that competition should be very fierce for a more limited supply of financing opportunities.”

Day, with Berkshire, agrees rates will increase. He also says, “Acquisition velocity will likely slow down as the gap between bid and ask widens. Even though they remain at historically low levels, these higher rates will cause borrowers to pause and reconsider voluntary refinances. We also expect greater activity in shorter term, variable and/ or bridge financing for properties that will be repositioned, rehabilitated or held for a relatively short period of time.”

There is still plenty of money available for good deals, according to Buchanan Street’s Sherlock, who says, “Mortgage capital remains plentiful as lenders strive to achieve annual loan production goals. Underwriting standards have become more aggressive as lenders compete for new business. Borrower demand for floating rate financing is strong given the continued downward pressure on short-term rates.”

While Collateral’s Davis expects both debt and equity capital will remain available for real estate investment, he warns, “Continued interest rate increases if combined with no economic recovery, could lead to delinquency problems in properties which heretofore have been kept afloat by historic low interest rates.”

Fawer, with CIBC, expects fundamentals will begin to stabilize. He says, “Interest rates will probably remain at their current levels or higher, causing some dampening in demand for permanent loans. However, fundamentals should stabilize, making underwriting less challenging than in the past 24 months.”

Meeks, with KeyBank, expects slow growth, however, he notes, “Relative growth will depend on how the economy fares over the next 5 months.”

ARCS’s Levine sums up the competitive nature of the current market by saying, “There are fewer deals looking for dollars.”


©2003 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.