Journal of Property Management

In the 20 years I have been a mortgage banker, I have never seen the lending environment quite like the one we have been in for the past several years, and chances are that capital will be scarce for several more years to come. That being said, there are still pockets of capital available for commercial real estate.

WHO IS LENDING?
The likely capital sources are banks,
life insurance companies, commer-
cial mortgage-backed securities
(CMBS) lenders, Fannie Mae and
Freddie Mac, U.S. Department of
Housing and Urban Development
(HUD)-insured loans and private
capital. Fannie Mae, Freddie Mac
and HUD focus solely on apart-
ment loans. Most loans are not self-
amortizing (e.g., 10-year term with
a 30-year amortization); however, in
some cases, self-amortizing loans can
be structured. The terms and amor-
tization periods vary, according to
the lender’s criteria, the borrower’s
needs and the property types.

Banks are looking for a strong relationship with their clients, many of whom are likely to reside in their city of business. Typically, a bank will underwrite a loan (usually under $5 million) very conservatively by thoroughly reviewing the borrower’s credit history and the performance of any of the borrower’s other commercial real estate properties. The borrower should be prepared to deposit funds—usually a percentage of the loan amount and often called compensating balances—with the bank for the life of the loan. The loan-to-value will be in the range of 65 to 75 percent, and terms usually will not exceed five years. The rates are between 5. 5 to 6. 5 percent and many banks have an interest rate floor in the 6 percent range.

Life insurance companies have been
very active for the past three to four
years. Their loans have always been
conservative (which is probably why
they are still making loans) and they
continue using this model today.
Many of them have a minimum loan
amount of $5 million but a few will
finance properties in the $1 million
to $5 million range. The loan-to-
values are in the 70 percent range and
the terms can range from two to 30
years. Most of the loan requests are
for 10-year loans and the rates vary
from 5.75 to 6. 5 percent, depend-
ing on the strength of the borrower,
property location and performance
and loan size.

CMBS lenders—once the leading capital providers up until the time they abruptly exited the market following the 2007 to 2008 crash—they are now staging a slow comeback. With the exception of a few, their minimum loan amounts are $10 million, thus disqualifying many loan requests. If the property meets the loan minimum and they like the deal,