All facets of the economy are under constant scrutiny as analysts look for signs of improvement. Commercial real estate is under the magnifying glass, and lenders in particular are watching for signs of a changing economy. Underwriting has become stricter over the last year and lending activity has decreased during the current economic slowdown.

“Most areas — as well as product types — show signs of softness with reduced collections due to vacancy or concessions,” says Tom Aschmeyer of Atlanta-based Column Financial. “Expenses are up, with increases in taxes and insurance.”

Frank Baldasare, who works in the Tampa, Florida, office of Calabasas Hills, California-based ARCS Commercial Mortgage, agrees. “Real estate lending was down in 2002, especially with apartment lending,” he says. “While 2001 was a very strong year, especially for apartments, lending activity dropped in 2002 — in some cases by 20 percent or more. As some markets gain momentum going into 2003, lending activity will start to increase. However, most markets will remain relatively flat.”

“I think capital is still going to be cautious,” Baldasare continues, “because there are no clear-cut signs as to which way the economy is going. However, capital is plentiful as it has shifted out of the stock market into the real estate market.”

“Overall, real estate values have been helped by the Fed rate action,” says John Beam in the Atlanta office of GMAC Commercial Mortgage, based in Horsham, Pennsylvania. “The low cost of today’s mortgages has maintained values by partially offsetting the slippage in income. Owners are not being forced to sell. If rents and occupancy continue to spiral down, there will be more pressure to sell, which should present good acquisition values.”

Anchored retail, particularly grocery-anchored retail with good sales performance, is currently a favored property type. Kroger and Publix are the primary anchors, followed by other regional players such as Bi-Lo, Lowes Foods, Food Lion and Bruno’s.

Baldasare says that multifamily repositioning is another active area of finance in the current economy. He adds, “Property types that are still suspect are hotels, because of low occupancy rates, and office buildings, because there is still quite a bit of sublease space in markets where dot-com companies have left vacant space. That has to be absorbed before you’ll see lenders actively looking at office buildings.”

Tim Radomski of Atlanta-based NetFunding.com predicts the office market will lag an economic recovery by 18 to 24 months.

Southeastern Markets

Major property markets in the Southeast exhibit relatively sound macroeconomic characteristics given the current interest rate environment, according to Howard Shoer of Miami-based Bayview Financial Trading Group. “This is especially true in larger property markets like Atlanta, Miami, Tampa and Orlando, where supply and demand remain relatively in check,” he says. “On a micro level, certain markets and asset classes struggle and will likely continue to do so in the near term.” As an example, he cites the supply imbalance in the limited-service hotel asset class in Miami and Orlando.

“Although commercial real estate market conditions are down overall, multifamily housing continues to be the strongest of the property types,” says Bob Gabriel, regional vice president in the Atlanta office of Boston-based Berkshire Mortgage Finance. “The strongest multifamily markets appear to be Southeast Florida, Nashville, Tennessee, and some secondary cities in the Southeast.”

While Tom Walsh, based in the Atlanta office of Birmingham, Alabama-based Collateral Mortgage Capital, agrees that some multifamily markets are stronger than others, he says most major markets are struggling with multifamily. “Atlanta is in bad shape, especially in the high end where 3 months’ free rent on a 12-month lease is not unheard of. Charlotte and Raleigh-Durham, North Carolina, are as bad as Atlanta, maybe worse,” he adds.

In terms of office markets, Aschmeyer of Column Financial says, “The biggest collapse we have seen has been in markets like metro Atlanta, where a large portion of the tenant base evaporated overnight.”

“It’s no secret that major Southeast markets such as Atlanta and Charlotte are on everyone’s list for low returns and high risk,” says Steven McRae, vice president of GMACCM. “Excess supply, infrastructure problems, corporate work force, concentration of technology and telecom companies and negative job growth have played havoc on any recovery until 2004. On the other hand, retail in these areas appears to offer the best supply/demand characteristics.”

He continues, “We see finance opportunities in cities with manufacturing or port economic bases such as Greenville and Charleston, South Carolina; Savannah and Columbus, Georgia; Birmingham, Alabama; and Nashville. These cities have not been severely affected by oversupply or negative job growth.”

Washington, D.C., and Northern Virginia are also doing well, according Greg Newman, based in Atlanta, of Fremont Investment & Loan, headquartered in Anaheim, California.

Leading Lenders

Lenders across the nation have completed tough deals recently, and they offer unique products targeted to every aspect of commercial real estate.

AMI CAPITAL

Bethesda, Maryland-based AMI Capital finances multifamily, retail, industrial, office, hospitality, assisted living, senior living and hospital properties. The firm offers Fannie Mae loans, FHA/HUD loans, CMBS products, life company, mezzanine debt and equity.

Popular right now, according to Director John Richards of the Atlanta office, are Fannie Mae multifamily loans, FHA/ HUD 221d4 new construction loans, and short-term floating rate loans.

Richards also says that anchored retail and long-term credit-leased facilities are doing well right now. Medium-priced multifamily and condo properties along the coast and credit grocery-anchored shopping centers in some secondary cities are also seeing a fair amount of activity, he says.

ARCS COMMERCIAL MORTGAGE

ARCS Commercial Mortgage provides direct loans for apartments. “We are the largest Fannie Mae apartment lender in the country,” says Frank Baldasare, vice president. The company also serves as an intermediary, arranging financing for office, industrial and retail properties through its capital markets division.

ARCS offers fixed- and floating-rate permanent loans, credit enhancement for tax-exempt and taxable bond financing on apartment properties and forward commitments for proposed apartment properties, as well as bridge financing and mezzanine financing. Fannie Mae also has a discounted mortgage-backed security program, which is good for portfolio lending.

ARCS recently funded a $24 million loan for an apartment property repositioning. The 520-unit property, located in Jacksonville, Florida, was in a good location but had large collection losses and a great deal of deferred maintenance.

“The owner had bonds on the property, but the bonds were unenhanced,” he explains. “Although the property had limited operating history from the repositioning, we were able to do a current bond refunding to provide roughly $19.4 million in tax-exempt bonds and $4.4 million in taxable bonds. We were able to recapitalize the property and put AAA-rated bonds on the property.”

BAYVIEW FINANCIAL TRADING GROUP

Bayview Financial Trading Group specializes in financing out-of-favor or difficult-to-finance real estate properties, such as rooming houses, nursing homes, self-storage facilities, marinas, warehouses, unanchored retail and properties in transition. The company does not finance raw land, construction loans or development deals.

“Our program is geared to borrowers that have properties that conventional lenders tend to shy away from,” says Howard Shoer, vice president-national sales manager. “Bayview will lend money on turnaround properties that have experienced negative cash flow, recently improved properties without stabilized cash flow, first-time projects, out-of-favor property types and to people with prior credit problems.”

The key to Bayview’s program is sufficient equity in the deal. “If there is truly enough equity in the deal, we can often get over other hurdles, including documentation deficiencies or temporary cash flow problems,” says Shoer. “The liquidity of the asset is also important to us.”

Bayview Financial provides 15- to 20-year, fully amortizing fixed- and adjustable-rate loans as well as bridge and select rehabilitation loans.
In May 2002, Bayview financed a $7 million loan for a full-service hotel of more than 300 rooms in Florida. The loan was written at 7.7 percent and it closed 11 business days after Bayview received the package.

“This property was built in the late 1960s and renovated in 2002, but it has exterior corridors and nine separate buildings. We were able to complete this deal because it had some compelling positives: a stable cash flow, a borrower who is an experienced hotelier, and a reasonable loan-to-value ratio of 58 percent. This deal shows Bayview’s willingness to lend on out-of-favor property types and showcases our ability to work quickly,” says Shoer.

BERKSHIRE MORTGAGE FINANCE

Berkshire Mortgage Finance is a national lender and servicer with a $15 billion portfolio that includes properties in 48 states and Washington, D.C. The company handles multifamily property loans, including affordable housing, senior housing and student housing. The majority of Berkshire’s loans are first mortgages through Fannie Mae, Freddie Mac and FHA. The company also offers mezzanine and bridge loan programs.

Recently, Berkshire financed the acquisition of a 604-unit apartment complex in Georgia. The company arranged for two separate loans totaling $42 million in order to accommodate the borrower’s plan to convert a portion of the property to condos.

“The loan was to a client that we had worked with a number of times; the client was confident we would be able to meet the requirements,” says Bob Gabriel, regional vice president.

COLLATERAL MORTGAGE CAPITAL LLC

Collateral Mortgage Capital is a national lender that finances institutional-grade income properties. The company offers programs for permanent, interim, mezzanine and construction financing, specializing in financing for multifamily projects and manufactured home parks.

“The last 12 months have shown us the lowest permanent loan rates in recent history and LIBOR-based interim rates lower than anyone thought possible,” says Tom Walsh, vice president. “Unfortunately, these rates have come at a time when many real estate markets are struggling economically, and many projects cannot be underwritten to provide loan proceeds to meet an owner’s needs or expectations. Because of this, loan volume is not commensurate with the favorable level of interest rates. This has led to a need for non-traditional financing products, including mezzanine debt.”

Recently, Collateral Mortgage Capital arranged an interim loan on a multifamily property in a close-in area north of midtown Atlanta. This property had been especially hard hit in the wake of September 11, 2001, and was in need of physical improvements to help bring occupancy back to acceptable levels.

“Surrounding properties were outperforming the market, so we were confident that the correct improvements would have the desired result,” says Walsh. “The quirk in the deal is that this property will likely be razed within the next 5 years to allow for a development of much higher density. Lender and borrower were faced with deciding which improvements made sense in order to enhance the property in the short run, while not wasting money on improvements that are long run in nature.”

COLUMN FINANCIAL

Column Financial offers financing for all property types. Column Financial has several loan programs. The company’s core program offers non-recourse, fixed-rate permanent loans with 5-, 7-, 10-, 15-, and 20-year terms for stabilized properties and up to 85 percent loan-to-value ratio. Column Financial also offers a small balance loan program, featuring $500,000 to $3 million loans. The company’s interim program offers 3-year floating rate loans for assets that need moderate repositioning. With its large loan floater, Column Financial offers 3- to 5-year loans for transactions greater than $50 million.
Column Financial recently completed a $23 million loan on a renovated/repositioned grocery-anchored shopping center in Florida where the borrower sought maximum fixed-rate leverage but center was not yet fully completed.

“Based on the borrower’s credibility we funded the full loan request and structured a 10 percent loan guaranty, which was released upon completion and lease up of additional local space,” says Aschmeyer.

FREMONT INVESTMENT & LOAN

Fremont Investment & Loan provides loans for office, retail, multifamily, industrial and select hospitality properties.

Fremont recently provided a non-recourse construction loan of $41.5 million for a 25-story condominium project in Miami. The Metropolis at Dadeland was the first major project for the development team, but Fremont was comfortable with each of the team members’ previous experience in the South Florida condo market, explains Greg Newman, vice president and regional manager. “Fremont won the deal due to our ability to move forward with a quick commitment and provide a non-recourse construction loan.”

GMAC COMMERCIAL MORTGAGE

GMAC Commercial Mortgage (GMACCM) offers lending for all property types. The company’s origination volume totaled more than $19 billion last year and will exceed that number this year, according to John Beam, senior vice president/branch manager.

The company provides all loan structures including fixed, floating, bridge, mezzanine, construction, tax credit, tax-exempt, affordable, lines of credit and even equity. Investor lending positions include portfolio (proprietary, bank and life company), capital markets (CMBS), agency (Fannie Mae, Freddie Mac and FHA), bond placement and asset-backed finance.

Recently, GMACCM handled a loan for a big box retail center with a multiplex theater and health club anchors that needed maximum leverage for refinance. GMACCM structured senior debt/mezzanine debt with a maximum 85 percent loan-to-value ratio and utilized a modified cash flow sweep with a cap and release to build up tenant reserves but allow cash flow to the borrower.

GMACCM also handled a loan for a student housing project, utilizing the new Pilot Agency Financing Program through Fannie Mae, which allows higher leverage on 100 percent student properties. “GMACCM was one of the first DUS Lenders to offer the new Fannie Student Housing Lending Pilot Program,” Beam continues.

LEGG MASON REAL ESTATE SERVICES

Legg Mason Real Estate Services arranges financing for all income property types. The company also handles some single-tenant properties, “as long as there is credit involved,” says Dave Schofield, senior vice president/regional manager in the company’s Orlando office. Legg Mason offers first mortgages, second mortgages, mezzanine loans and equity placement.

In October, Legg Mason handled an apartment transaction funded by one of the insurance companies with which it has a correspondent relationship. The $16.5 million transaction involved a forward commitment on a two-phase apartment development. The insurance company fixed the interest rate on the loan in June 2002 for an October funding on a property that had significant vacancies. The borrower did not want to pay off his loan until October because there was a sizable pre-payment penalty. So he went to Legg Mason in April to re-finance and take advantage of the rates. But he needed a forward commitment that would enable him to wait until October to pay it off.

The 384-unit apartment community was located in Kissimmee, Florida, a market that had recently suffered increased vacancy. The overall occupancy for apartments in Kissimmee was around 83 percent, and 2 months’ free rent was being offered to new renters in the market. The occupancy problems in Kissimmee were a result of the September 11 terrorist attacks and the decline in Orlando tourism. The first phase of the project, 312 units, was 10 years old and 82 percent occupied in April. The second phase, 72 units, was completed in February 2002 and was only 15 percent occupied in April.

“The lender gave the borrower a commitment in June; it required that the property be 78 percent occupied by October,” says Schofield. “The borrower needed to personally guarantee the portion of the loan in excess of $12.375 million until such time as the entire property reaches a 92 percent occupancy. The lender gave the borrower 12 months from closing to achieve that. The interest rate spread on the loan was 175 over the 10-year Treasury, with a 10-year term, 30-year amortization.”

In order to arrange such complicated loans, “you have to have a lender that understands the market,” stresses Schofield. “And the lender has to be comfortable that the property will be able to perform.”

NETFUNDING.COM

NetFunding.com is a national company that serves as an intermediary, connecting borrowers and lenders through its Internet platform. More than 400 lenders use the NetFunding.com Web site to source deals for all property types, including office, retail, multifamily, industrial, hospitality, manufactured home communities, congregate care and golf courses. “NetFunding.com is a real-time capital connection, providing parties with instant access to information. We have seen quotes come back from lenders in as fast as a few hours as opposed to the traditional way, which can take days or weeks,” says Director Tim Radomski.

NetFunding.com recently funded the $7.5 million refinancing of a Radisson Hotel. This was the company’s first hotel financing since September 11, 2001. “This transaction received eight loan quotes, indicating a turn in the market,” according to Radomski.

He explains, “Traditional sources felt that hotel properties could not receive funding in a post-9/11 environment. NetFunding.com accesses a broad marketplace of institutional lenders, allowing the borrower to find lenders leading trends, not following.”

The company was also involved in a 10-year, fixed-rate financing for a $7 million single-tenant industrial property where the tenant was non-investment grade. “Traditional sources would not process a single-tenant building occupied by a non-investment grade tenant,” says Radomski. “NetFunding.com has 400 institutional lenders using this marketplace to originate commercial loan originations. This coverage allowed the borrower to find a lender that was willing to underwrite both the market and the operating history of the tenant.”

Going into 2003

While some lenders believe 2003 will deliver a better market than 2002, others remain cautious. Schofield of Legg Mason says companies have money to invest in 2003. However, he adds, “There is going to be a lot of pressure to find good deals. They are going to have to be good deals because the underwriting continues to tighten.”

There is some disagreement among lenders as they try to predict where interest rates will go in the next 12 months. Beam comments, “There is no reason for rates to climb. However, a signal of a turn in rates is expected to be an increase in capital spending and corporate hiring.”

Baldasare says, “Even though I think interest rates may go up, I think lending activity will increase in the latter part of 2003 in submarkets gaining strength and with niche products such as affordable housing .”


©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.