Alex Finkelstein is co-editor of Debt & Equity Journal, from which this article is excerpted.

Chicago—As the final quarter gets under way, lenders continue to compete on projects in almost every category, the Real Estate Capital Institute reports. "There has been an insatiable demand for all types of debt, including first, mezzanine and participating loans while commercial real estate markets continue growth and expansion," notes RECI research director Nat Zvislo. The commercial activity is compensating for the slowdown in housing markets, he says.

Mortgage rates on most property types stayed flat within the 5.5% to 6.25% range, Zvislo notes. For the first time since June 2005, Treasury markets "continued more than a two-month rally, although short-term rates for Prime and Libor remained virtually unchanged," he says. The longer-term Treasuries dropped about 10 basis points to about the same level as a year ago. "Narrow spreads between five-year and 10-year Treasuries hovered at about five basis points," Zvislo says.At the third quarter meeting of the Real Estate Investment Advisory Council's southeast region in Atlanta, national lenders revealed how they handle loan-to-cost and loan-to-value factors on main real estate product types. "The inexpensive mezzanine debt and equity that's out there has put us in a position where we can get a little more equity invested in construction deals," says Tom Butsch, executive vice president and manager of Regions Financial Corp.'s income property group in Atlanta. "On office and industrial, we'd like to see 20%. On multifamily, we're lucky to get more than 15% because it's still a hot product. On anchored retail, we're seeing loan proceeds as high as 95% and that 5% equity is a deferred development fee, so it's really 100% financing."

On hotel deals, Butsch says, "We're still not budging at about 35% equity requirement. But that's not going to get the business these days." He says hotels have rebounded during the past few years. "We like to play in the low twos over Libor, but if it's got a good story, it's going to be sub-two or maybe mid-ones."

John Cannon, executive vice president at Capmark Finance Inc. and head of branch loan originations, says the loan-to-cost ratio is affected by multiple factors, including market variables and how the debt service is covered. He says he has seen acquisitions with fairly low cap rates where first mortgage debt was only able to get up to 70% of the capital stack because of debt service coverage restraints. Cannon says he has also seen deals "where we've gone up to 97% of the capital stack and convinced ourselves we're doing an 85% loan-to-value loan."

Cannon says fixed-rate spreads at his firm "range from a low of slightly below 90 for multifamily to 110-ish for first mortgage debt fixed-rate spreads." He says "floaters would be 150 to 175" for construction and repositioning loans, particularly for acquisitions of moderate rehab properties.

Edward Coco, senior managing director and national sales director of GE Real Estate, says his firm's spreads are very similar to Capmark's. "On hotels, we're comfortable at probably 80% loan to cost," he says. On multifamily and office products, Coco says, "We finance anywhere from 75% to 95% loan-to-cost and we balance sheet the whole transaction." He says that means "Our pricing for a balance sheet deal is probably 125 over for lower leverage, to 200 over or more for a 95% deal."

Coco adds, "Obviously, that 95% deal includes a B-note and probably a C-note internally, because we tranche it internally to match up with our cost of money." The GE executive says his company's "strike zone for financing is in that high 70% to 95% zone for someone who wants a balance sheet deal because they want to either transition assets, or they want to sell assets and buy other assets to substitute into the line. We compete very well in that high 70% to 95% range."

Mark Wilsmann, managing director and head of commercial mortgage investing at MetLife Inc., says, "As an insurance company, our sweet spot tends to be more in the lower risk, lower return sector, as opposed to GE or Capmark." He adds, "Our sweet spot is a 65% leverage deal, adding that from an efficiency standpoint, it's important to understand the capital markets are very efficient with certain types of deals and the private market can be very efficient in other types of deals."

Wilsmann says MetLife can be "very efficient in floating rate and we can be very efficient in short-term and long-term fixed rate, but right at sort of the 10-year, 80% leverage fixed rate, we're not as competitive on a pricing basis." He says MetLife has "done some low leverage floaters in the 50 to 60 over Libor range, which is almost triple-A quality." Wilsmann adds, "We've bought B-notes and usually play in the 75% to 75% range. We generally don't go much higher than that. But in today's world, they're probably 150, 175 over, on a fixed-rate basis."

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