Magazine article Journal of Property Management

... It's Where the Money Is

Magazine article Journal of Property Management

... It's Where the Money Is

Article excerpt

Rates are low. Terms are favorable. And you don't have to be Willy Sutton.

If you need to finance or refinance a property; do it sooner rather than later, say industry experts. The capital markets are flush with cash. Ample money is chasing available projects. The economy hasn't had so much as a hiccup. Interest rates are about as low as they've been in 20 years. Terms favor borrowers. And underwriting standards are getting more relaxed as lenders compete for borrowers' business. Getting a loan is so easy, compared to just a few years ago, it's the next best thing to bank robbery.

"This is an optimum time to be a borrower," says Gregory J. Spevok, director of marketing at Bear, Stearns & Co., New York City, which currently securitizes $150 million of real estate loans a month. "There's lots of money. And there are more complex and highly leveraged deals now than are likely to exist again."

Generally, borrowers can expect to find some attractive opportunities. Fixed-rate loans are at about 7 percent. Loan-to-value ratios are about 80 percent with a 25 to 30 year amortization schedule.

Yet, if there are plenty of funds available, the sources of that funding are very different than they were the last time financing was easily accessible. No longer are insurance companies, pension funds, and thrift institutions the primary lenders for commercial real estate projects. Instead, financing now comes from banks and other sources that pool loans and securitize them for resale to Wall Street investors. Mortgage brokers can help guide you to the most viable capital sources, but it never hurts to know where the money is cropping up.

The Easy Life

A decade ago, 74 percent of the $96 billion of capital that flowed into real estate that year came from debt markets, according to LaSalle Advisors Investment Research. Banks supplied 66 percent of the total.

In 1997, LaSalle found that $72.4 billion flowed into real estate. Yet only 47 percent of those funds were debt, with much of the financing coming from the commercial mortgage-backed securities (CMBS) marker, followed by banks. Public equity and debt combined made up 67 percent of new capital.

These fundamental shifts in financing sources have opened new possibilities for borrowers. The so-called conduit lenders, those that pool and resell loans to investors, are active in the market. Finance companies have money to lend. Commercial banks still lend directly to property owners, but even they now securitize many of their own loans, blurring the distinction between conduits and banks. Less active in the market, but still involved primarily with Class A properties, are insurance companies and pension funds.

Offers You Can't Refuse

As competition among lenders intensifies, underwriting standards are relaxing. Lenders are cutting reserve requirements, according to John Perrovski, executive vice president at Heller Real Estate Financial Services, Chicago. "A rising market hides a lot of aggressive moves," he says, noting that lenders walk a fine line between competing effectively yet not making a "stupid move."

Actual standards on deals have loosened in the last 12 months. But Stacey Berger, executive vice president of Midland Loan Services Inc., Washington, D.C., also says that because spreads have tightened, the same property with similar underwriting standards is getting more loan dollars today.

"The debt-service payment has been reduced, so the same income stream can support more dollars," he notes.

For new construction, Dean Schwanke, senior director of policy and practice at the Urban Land Institute, Washington, D.C., says lenders have even loosened preleasing requirements, which were quite rigorous a few years ago. At a recent industry convention, he says, one lender was promoting 100-percent loans on new construction, a phenomenon not seen since the 1980s. "Developers lined up to get that banker's card," Schwanke says. …

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