I must admit that I did not attend the Mortgage Bankers Association's Commercial Real Estate Finance (CREF) Conference this year. Orlando is, admittedly, not my favorite venue. I did, however, get the scoop.
The reports from this year’s CREF were somewhat unfavorable for those who rely on the Commercial Mortgage-Backed Security (CMBS) market to finance commercial real estate assets. Thanks to new government regulations, the current CMBS 6.0 financing program could be seen as problematic, and the process of obtaining a CMBS loan is potentially mired with more interest rate and performance risk than ever. After nine long years of study, the government has come to the rescue with more onerous rules and policies that serve to make this financing option quite a challenge for most CRE borrowers.
Bank lending in 2015 was, once again, the path of least resistance for the majority of commercial real estate borrowers. With real estate values on the rise and interest rates mostly flat, banks were able to garner the largest portion of the commercial real estate debt pie in 2015 with their higher loan to value levels, increased prepayment flexibility, and ease of closing. So far, borrowers have not been overly concerned with the personal recourse requirements and limited duration of the fixed rates associated with these bank deals. There are a few changes that are underway that have and will affect the banks’ commercial real estate lending programs going forward. BASAL III and Dodd Frank regulations will increase equity requirements, bank reserves and, in turn, increase spreads and documentation for all banks.
Agency lending programs (HUD, FHA, Fannie, and Freddie) will continue to offer slightly above-market interest rates to limit volume in 2016. They are going to be a little more aggressive early in the year but, like last year, they will compete better on product less desirable to life insurance companies, older properties or properties in tertiary markets.
For life insurance company CRE lenders, the motto for 2016 is “if it ain’t broke, don’t fix it”. Life insurance loan programs will not be more aggressive in 2016. Given some of the woes detailed above, life companies will garner the desired increased share of the pie by default. In my mind, there are four types of life insurance company lenders, and they each have their target market staked out. These lenders include:
1. Institutional Low Leverage Lenders. Many of these are the big boys whose loans range from $20- $400 million and loan 65% of value or less on high quality “institution-quality” assets. They can offer the very best rates and terms including some interest only options and lend on a non-recourse basis.
2. Real Estate Lenders. These lenders are collateral-focused and understand what makes a good real estate investment. They make loans ranging from $5- $25 million, lending up to 75% of value. They, of course, like strong and experienced borrowers, but pay special attention to the physical real estate, tenants and leases. These loans are also non-recourse and will have very attractive pricing, but are priced 10-20 basis points higher than the lower-leverage lenders.
3. Package Lenders. These lenders evaluate a combination of the real estate and the credit strength and quality of the borrower, and their programs are most like those of banks. These lenders offer loan terms of 10-25 years fixed, but will do loans on non-traditional or second tier real estate with stronger borrowers. Again, pricing is another step higher, perhaps 15-25 basis points, but still quite competitive. These lenders will do deals between $2- $15 million and will require at least partial recourse.
4. Non-traditional asset lenders. These lenders are doing non-traditional asset types with recourse. These guys, too, are offering fixed-rate loan terms of up to 25 years. Like bank lenders, they are relying on recourse with strong borrowers. Pricing is similar to the Package Lenders.
Whether you are looking for bank, agency, or life insurance company financing, Venture Mortgage knows the players and the market. Our team will add value to the debt origination process. Put our knowledge and experience to work for you.
Steven Petersen is a Vice President with Venture Mortgage in Edina. For more information or to discuss commercial real estate financing options, please contact Steve at firstname.lastname@example.org or call (952) 843-5122.