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COVER STORY, SEPTEMBER 2005
STANDING OUT FROM THE LENDING CROWD
Complexity spurs creativity in western commercial lending.
Lara Fuller
Lending used to be a relatively methodical industry, with groups of banks or conventional lending companies offering similar loan terms. Now, however, in order to make a name for themselves, lenders have gotten creative, offering clients a wider range of lending solutions.
With thousands of lending companies located in the western United States, it is more important than ever for lenders to differentiate themselves from the competition. And as the real estate market becomes more complex and becomes inundated with new players, lending companies are often specializing or choosing to offer services outside the traditional lending lines. Western Real Estate Business recently spoke with several lending firms to find out what makes their companies unique and how they have found a niche in an ever-expanding market.
Pacific Security Capital
Beaverton, Oregon-based Pacific Security Capital (PSC) succeeds where others can’t for several reasons, one of the primary ones being the firm’s coverage area. “We work in all major markets and many secondary markets in all the western states,” says Mike Myatt, executive managing director with PSC. Because the company provides permanent financing, bridge financing, interim financing and structured financing, PSC can handle almost any deal that comes its way. A recent Phoenix transaction exemplifies Pacific Security Capital’s ability to finance any kind of loan. “We were engaged to help engineer a financing solution that would allow our client — a large national developer — to acquire a large multifamily property in need of repositioning with the closing having to occur within a very short timeframe,” says Myatt. In addition to the tight deadline, there were several additional challenges the company had to tackle. “The transaction required coordination of multiple capital partners including a joint-venture equity partner and a mezzanine provider,” says Myatt. “Also, the property being acquired was not stabilized. The equity, mezzanine and senior debt had to be coordinated and funded inside of 30 days.”
PSC was able to handle the challenges with ease — the company provided a float-to-fixed first mortgage with a competitive spread in the short timeframe required by the client. By doing so, PSC afforded the client the ability to purchase the property and reposition it.
Wrightwood Capital
Wrightwood Capital provides multiple loan types, including structured financing, mezzanine and joint-venture equity financing. Lately, however, the Chicago-based company has seen an increase in the popularity of several loan products. “We are experiencing strong demand for bridge loans for value-added business plans for office, multifamily and retail projects with some income in place,” says Jason Choulochas, Wrightwood Capital’s regional director for the West. “Also, our non-recourse construction loan product is attracting a lot of interest from developers of industrial and retail properties.”
The increasing popularity of some of these loan products is evident in a recent office/industrial transaction. Wrightwood’s client needed funds to finance the construction of 35 free-standing office/industrial buildings on 19.1 acres in Anaheim, California. Wrightwood Capital was able to provide $42.9 million, even though the park was a large project being developed on a speculative basis in an area undergoing redevelopment, says Choulochas. The developer chose Wrightwood as the lender because they needed a creative firm that would be able to close the loan quickly. “Our experience in financing industrial real estate in Southern California enabled us to quickly understand the business plan and get comfortable with the location and product in order to make a high-leverage construction loan,” says Choulochas.
The experience Wrightwood used in order to handle the loan in California is what makes the company unique. “Experience is the key and when the inevitable downturn in the market comes, we believe that having quality real estate backing our deals and 25 years of helping customers succeed will position us to weather any storm,” says Choulochas.
IXIS Real Estate Capital
IXIS Real Estate Capital, based in New York, is known for providing its clients the loans and services they need — for office, retail, multifamily, student housing, industrial, hospitality, medical office and self-storage properties — by using an innovative investment structure. This ability is apparent in one of the company’s recent loan transactions. IXIS made an $18 million preferred-equity investment in the 1.8 million-square-foot California Market Center, located in the fashion district of Los Angeles. “The asset has a somewhat unusual use and over 800 different tenants,” says Anthony Jaffe, managing director with IXIS. “The preferred-equity investment was subordinate to an $82 million loan (provided by IXIS to the former owner.) The preferred equity provided the buyer with the leverage necessary to complete the acquisition of the property without having to refinance the existing senior mortgage loan.”
IXIS, which offers fixed- and floating-rate mortgage debt and mezzanine financing, was able to service the loan by drawing on its experience in the lending world. The creative investment structure used satisfied the seller, the buyer and the holder of the senior loan. “IXIS’ Los Angeles office was able to provide the necessary expertise to both understand the asset and structure a complex transaction,” says Jaffe.
USA Capital
Las Vegas-based USA Capital has found its place in a market flooded with lenders. The company is a private bank, and for that reason, can be more flexible in its lending guidelines. USA Capital is often approached with challenging loans that are outside the traditional lending parameters. “We can offer financing for deals that do not qualify at your standard institutions,” says Andy Hantges, vice president with USA Capital. “Whether it is acquisition of raw land, rehabilitation of a dilapidated apartment complex, the re-tenanting of a retail center or even the funding of a new high-rise condo development, USA Capital is the answer.”
A challenging loan the company was recently faced with involved Marlton Square, a 22-acre mixed-use redevelopment project in central Los Angeles. The borrower had purchased the former Santa Barbara Plaza and intended to demolish the building to make way for 140 single-family homes, 150 condominiums, 180 senior housing units and 116,000 square feet of retail space, all of which were going to be developed by separate developers. “Our loan of more than $30 million consolidated the 35 existing parcels and enabled the borrower, supported by the city of Los Angeles, to move forward with the project,” says Hantges. Because USA Capital was able to use speed and creative financing, they were able to handle a loan that others couldn’t.
Buchanan Street Partners
Southern California, Phoenix, Denver and Las Vegas are a just a few of the markets on which Newport Beach, California-based Buchanan Street Partners focuses its lending attention. Las Vegas, in particular, is where Buchanan Street recently tackled a big transaction, one of the largest industrial acquisitions in the state. CIP Real Estate was purchasing a 420,000-square-foot, multi-building industrial park next to McCarran Airport. Though it was a hot market, with significant rent growth anticipated, there were several challenges Buchanan Street Partners faced. “We had to secure an appropriate bridge loan in the face of near-term tenant rollover, negotiate loan guarantees, holdbacks and pricing,” says Stephen Blue, vice president with Buchanan Street Partners. The company was able to service the $38 million transaction by handling the debt on its advisory-side, which then enabled the client to move forward with its purchasing plan. “We won the business because of our relationship as an advisor with the client, CIP,” says Blue.
Love Funding Corporation
Love Funding Corporation has been able to distinguish itself from other lenders in several areas. The firm is ranked in the top five FHA lending companies in the United States. This designation is important in attracting new clients in the multifamily, affordable housing, condominium development, healthcare, hospitality/recreation, retail, office and light-industrial development property types. Proving itself a reputable lender, the company has taken on a range of challenges. “Anyone can get the anchored shopping center done on the street, or the “B” quality apartment building,” says Neal Leviton, vice president with Love Funding Corp. in Los Angeles. “My focus is on centers with operating problems in the past that can be corrected with good management or deals with leasing issues. I also handle a number of conduit deals with construction components.”
One of the more difficult lending situations that Love Funding recently handled was the Catalina Village Shopping Center in Tucson, Arizona. “The deal had lots of moving parts. An anchor tenant’s lease expired a few months after close, a good portion of the center is educational use with a community college and a high school — which are not exactly normal retail tenants — and the deal was a busted center in the 1990s that was repositioned and re-leased, so the deal had a TIC structure and the center had significant vacancy,” says Leviton. Love Funding was able to tackle the multiple aspects by working closely with the buyer and seller to ensure that the large amount of vacant space could be quickly leased. In addition, the company did a lot of due diligence for the funding source on both the high school and community college by working up detailed analyses of the historical issues, says Leviton.
Everbank
EverBank, based in Jacksonville, Florida, is one of the country’s oldest and largest mortgage origination and banking institutions. Relying on this history and prestige, however, is not how EverBank Commercial gets and keeps its clients. The company strives to offer a range of products and programs for most major and mid-sized markets in the United States. EverBank finances multifamily, office, retail, warehouse/industrial, self-storage and mobile home parks. “We also provide permanent loans for income-producing properties, both fixed and floating rates,” say Jon Red and Connie Kelly, account executives with EverBank. “We are a par lender and do not charge any commitment fees.” Lately, due to the rising interest rates, Red and Kelly have seen an increase in fixed-rate loans among their clients.
When looking to finance a property, EverBank looks at several criteria. “We look for solid borrowers with experience and good credit scores, and stabilized or nearly stabilized income-producing properties,” say Red and Kelly. Over the coming year, EverBank will continue its mission to bring its clients the loans they need, whether $500,000 or $5 million, and do so in a timely manner. “Demand for commercial real estate is still strong, so loan demand should continue to remain high,” say Red and Kelly.
A Closer Look at the Western Market
While creating a niche and finding the appropriate loan for each client are crucial to a lending company’s success, the market, as always, influences much of what occurs in the lending world. There are few property types or cities that are hot across the board — most lenders look at each city and submarket individually. In Las Vegas and Seattle, retail and multifamily seem to be faring well, according to Red and Kelly with EverBank. Several cities in Arizona and Nevada are booming in the retail arena, say both Buchanan Street’s Blue and Leviton of Love Funding Corp.
And in regards to retail in many western cities, many lenders are seeing a continued trend of retail “break-ups,” or the splitting of strip centers and malls. “Retail break-up plays are popular right now, with shopping centers being parceled and sold off to users in pieces,” says Choulochas with Wrightwood Capital. “We see this in both Phoenix and Southern California in particular.”
In terms of property types that are lagging, office and industrial often seem to be at the top of the list, with some notable exceptions. Choulochas sees a continued strength in the for-sale and for-lease industrial market in Southern California. And in Northern California, there appears to be more investor interest in office properties, he adds.
Jaffe with IXIS also sees a brighter future for the office market. “Vacancies remain high in certain office markets — Denver, Silicon Valley, Phoenix — but assets there are trading. This presents some interesting lending opportunities.”
One reason office and industrial get a bad rap in some cities is that they are often overlooked by investors. “Las Vegas has experienced a boom in new construction close to the Strip, and that gets a lot of press,” says Choulochas. “What people overlook in Vegas is a strong industrial market and good opportunities on traditional for-rent apartments. Supply for both products is fairly constrained in the face of good demand.”
While the office and industrial market is looking up, there is one property type that is undergoing some changes. The multifamily metamorphosis may have lost momentum. “A sector that warrants some concern is this recent wave of condo conversions,” says Hantges with USA Capital. “Entrepreneurs have been purchasing apartment complexes with the desire of selling each individual unit to the consumer. In the end, we have seen heavy volume transfer to the condominium visionary, but have not seen these units sell with much frequency to the consumer.”
Choulochas agrees. “Capital market interest in condominium conversions appears to be waning across the board,” he says.
And in California, where the markets are often very different from other areas in the West, housing remains hot and land continues to be extremely valuable. “The West Coast is seeing a heightened demand for median-priced housing. This synergy has also created a demand for land acquisitions, but in the end, it is getting harder for deals to pencil with the heightened prices,” says Hantges.
Adds Leviton, “The California market has gotten so overpriced that deals are a lot tougher to find.”
The Outlook
For the coming months, most lenders continue to predict a rise in interest rates, though they will still remain lower than they have been in previous decades. “Short-term rates will continue to rise, although we are still in a historically low period for rates,” says Choulochas. “Increasing rates will put upward pressure on cap rates, but strong demand on the investor side will keep cap rates in check.”
Blue at Buchanan Street agrees. “Higher interest rates will cause cap rates to rise, however, not back up to historical levels.”
Leviton, like most others, sees an increase in rates, but believes that as long as the rise is gradual, the markets can absorb it without affecting cap rates.
Adds Jaffe, “The perception that interest rates are rising, coupled with the flattening of the yield curve, are driving more and more borrowers to try locking in rates for the long term. I can’t anticipate which way rates or underwriting standards will move in the near term, but since both are relatively low right now I tell my customers that if a debt deal works for them, get it closed.”
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