Back to the Future With Life Co. Lending

This year is shaping up to be a "Back to the Future" year in commercial real estate finance, with life companies the preferred capital source for much of the market, and a nice balance of bank lenders, CMBS shops and bridge capital providers rounding out the commercial market. Of course, Freddie, Fannie and FHA lending continues apace in the multifamily realm, yet even with that product, more traditional capital providers are filling more market needs, as new construction necessitates bank loans, and borrowers recognize a need to be diversified in their capital sources on existing product.

Although one could look back to the 1980s and see similarities with the dominance of life company lending in the market, the present time is much more consistent with the late 1990s, when the real estate markets were returning to health after a damaging recession, and the capital markets were active but cautious. Lenders were determined to not repeat the mistakes of the past, and the new entrant to the market, CMBS, was well underwritten with amortizing loans and cautious documentation requiring such things as funded reserves.

At present, we have experienced a strong return of the traditional life lending programs in all property types, and a steady but growing pipeline of CMBS loans for properties that need more leverage than life companies allow, or those which may not fit the traditional lender box just right. Our bank loan business is active and varied, with non-recourse bank lending picking up steam as a shorter-term low-rate alternative in the permanent loan market. This is a big difference from two years ago, in which deal flow was heavily dominated by apartments, with Fannie and Freddie lending at that.

This market keeps finance professionals on their toes, as there is no simple answer to the question, "what sort of loan can you get on my property?" It is not a one-size-fits-all market like the go-go years of CMBS, when every loan was fully leveraged and priced at an aggressive rate. Now, the answer depends on a list of dealspecific features, including the property type, leasing status, location, age, borrower profile, etc. The next question for borrowers is preferred term length and features such as flexible prepayment.

The nice thing about life companies and the other sources is that there are options for borrowers today, provided the property meets standard tests. Whereas an institutionally owned class A office in Downtown San Francisco can readily garner 3.5% fixedrate life company money, a well-leased suburban office complex 90 miles up the road in suburban Sacramento may obtain virtually no life company interest, or only get lower-leveraged quotes from those with 5% money or higher. This certainly is not a bad loan, but is quite different from that on the "prime asset."

This takes us back to the future: covering the market to match the right lender with the specific deal, as opposed to a bid process of lining up all similar-looking players. For those who like operating with fundamentals, this is a fine market to work within, since good money can be found with a little work in selecting the best fit.