 |
 |
 |
 |
 |
 |
 |
 |
Shopping Centers Today -> June 2003
 PRINT THIS STORY: |
  CHANGE TEXT SIZE: |
AS COMPETITION HEATS UP, LENDERS GET CREATIVE
Pension funds and commercial-mortgage-backed securities lenders are formulating creative ways to drum up new business for their retail real estate financing programs.
Tired of being undercut by persistently low interest rates, they are making five-year, interest-only loans and lending up to 85 percent of a retail property’s assessed value.
“Lenders are coming up with unique products to get people off of their drug by cash flow,” said Mark Rowell, director of lender relations at NetFunding.com, an Atlanta-based commercial real estate brokerage.
Eighty-five percent loan-to-value, or LTV, deals have become more common since January. At press time, one such loan was being considered to finance a power center in Southern California, says Gary Mozer, CEO of George Smith Partners, a Los Angeles-based commercial mortgage brokerage. To assemble an acquisition loan for the property, the lender first originated a senior loan at 170 basis points over the 10-year U.S. Treasury, which was 3.9 percent in April. On top of that senior loan, the lender proposed a 5 percent LTV mezzanine piece carrying an 11 percent interest rate. If the deal is finalized as expected, the borrower would pay a combined interest rate of about 5.92 percent — impressive for a property that is 85 percent indebted.
In another instance, a lender proposed tacking an extra 40 to 50 basis points onto the senior loan, instead of charging a 14 percent or 15 percent interest rate on the mezzanine piece, said Rowell. This means that a borrower paying 180 basis points over the current 10-year Treasury rate would wind up with a total interest rate equal to 230 basis points over the Treasury.
“It is much cheaper than going out and paying 15 percent for a mezzanine loan,” said Rowell.
Lenders are also offering five-year, interest-only loans to compete with bank rates as low as 3.5 percent. Borrowers don’t make principal payments for the entire loan period; they just pay off the interest. When the loan comes due, the borrower can pay off the entire principal at one time by making a so-called balloon payment. Some borrowers are hoping that attractive floating rates will still be around when it comes time to make the balloon payment, so that they can refinance the principal.
Some market players are urging caution. There’s lots of money, but a limited supply of quality properties, said Peter Doerken, president of Doerken Properties, a Santa Monica, Calif.-based real estate investment company.
Some investors who currently qualify for generous financing, might not be able to do so once the loans come due, Doerken said.
“I perceive that a number of properties may go back to the lenders at that time,” he said.
 |
|
Click
to view all charts (640K, PDF format*.) |
 | Current Issue November 2008 |