Lending Pipeline Opening as Long-Term Interest Rates Dip to Low 7% Range

"Thanks to the Fed's two recent interest rate cuts of 50 basis points each in the last two months, the 10-year Treasury yield has dropped as well to the high 5% to low 6% range," Patten says. "With long-term interest rates tied to various spreads above these Treasury rates, it's a good bet that we're in for another year of favorable permanent financing for qualified properties."

Life insurance firms and conduits dealing in collateralized mortgage-backed securities are "assertively processing permanent loans on qualified properties of all types that are being bought and sold," Patten tells GlobeSt.com.

The refinancing volume taking place around the country is "probably going to be at an all-time high if history repeats itself," say Patten, the immediate past president of the Central Florida chapter, National Association of Industrial and Office Properties. He cautions, however, "there is no reason to believe that history is going to repeat itself as far as what happened during the late 80s and early 90s."

Because of the rapid downward movement of the 10-year Treasury bond during the last several weeks, life insurance companies and the conduit lenders have widened their spreads, "in many instances so as not to follow the yield curve down below an interest rate level that the market is unreceptive to," Patten tells GlobeSt.com.

Most life insurance firms are willing to lock in the interest rate at the time of application but conduit lenders won't do the same until after their commitment has been accepted or shortly before the closing, says Patten, who is chairman of the President's Council/Commercial Real Estate Forum of Central Florida.

For build-to-suit projects, credit tenant leases or substantially pre-leased properties, some life insurance companies will advance fund their permanent loan for qualified transactions. "This locks in the current permanent loan interest rate, saves the extra interest costs associated with a construction loan and substantially eliminates duplicate closings costs," says Patten a commercial real estate industry professional for 25 years.

Qualified property types comprise institutional grade office buildings, warehouse and retail properties. Terms and amortization schedules are five years/20 years; 10/20; 10/25; 10/30; 15/15 or 20/20. The loan-to-value breakout can be up to 80%, depending on loan underwriting or up to 90%, depending on the investment grade bond rating and debt coverage ratio.

Interest rates are priced at a spread per deal over the corresponding Treasury bond rate. For example, at the current Treasury rate of 5% and a spread of 2.25%, the fixed rate will be 7.25%. With a spread of 2.35%, the rate is 7.35%. A spread of 2.5% yields a fixed interest rate to the borrower of 7.5%.

Interest rates will vary depending on the 10-year bond yield and spread. There is usually a standard fixed fee or yield maintenance by each lender on prepayment. Normally, there is no recourse or a lender's fee. The origination fee is typically 1% of the loan amount. Closing costs comprise the standard out-of-pocket amount plus appraisal, environmental and property inspection fees.

Interlachen Commercial Mortgage, part of Interlachen Financial Group, services long-term, fixed-rate loans for over 14 life insurance companies and conduits that provide permanent financing for commercial real estate.