Multifamily, Small Deals Get the Money

ELMWOOD PARK, NJ-Multifamily properties and smaller deals under $10 million are the easiest to finance in today’s debt-deprived marketplace. It also helps if the borrower is considered creditworthy. Those were some of the trends that came to light from a recent survey of GlobeSt.com readers sponsored by Real Estate New Jersey. Thirty real estate professionals took the poll, which posed a series of questions on the present climate for lending.

When asked to describe the current financing market, 69% said that money is available, but for only smaller deals with the best sponsors. A majority of the respondents–55.6%–reported that deals under $10 million are getting done, while one-third related that transactions between $10 million and $20 million can still get dollars. “Anything under $20 million should have a home, but at higher rates and lower leverage,” stated one Northeast-based owner.

When asked who were the most active lenders today, 73.3% responded regional and local banks, followed by insurance companies (13.3%) and hard money lenders (6.7%). “Money is available from regional banks with recourse and loan to values from 50% to 60%,” said a director of leasing and acquisitions at an owner/developer. “Spreads are still very high.”

Said a chairman of an owner/developer: “Banks are active, but are returning to old-fashioned ‘relationship’ lending.”Michael Strauss, senior director at Marcus & Millichap Capital Corp. in Elmwood Park, confirms those assertions. He tells GlobeSt.com that a number of the large national banks that once dominated the marketplace have either pulled back completely or are much more conservative in their lending terms. However, “they are being replaced more and more by local community banks,” Strauss says.

Kennedy Funding Inc., a private lender based in Hackensack, has seen its business surge due to the absence of traditional banks in the marketplace. In the past year, it has financed nearly $200 million in loans.

“Banks are not lending today, so it’s giving us the opportunity to lend on assets we would normally not be involved in,” says Kennedy president and co-CEO Jeffrey Wolfer. “Typically, Kennedy Funding is known as a land lender, a situational lender or a lender of last resort. We are starting to see deals that are very different from that.”

To get a loan from Kennedy, borrowers will pay more, Wolfer admits. Loans are underwritten for three years, interest only, at interest rates around 12%. Points range from three to 10. “We are expensive, so we give the opportunity for the borrower to pay back with no prepayment penalty,” he says.

As for current underwriting terms, participants were asked what was the most prominent: LTVs of 60% or less; higher cap rates; or underwriting based on current cash flow. A clear majority–53.3%–agreed that all those terms were now standard in the marketplace.One executive at an owner/commercial mortgage banker said that leverage amounts have decreased, cap rates have risen 150 basis points and “personal guarantees are many times required.”

As for what property type is most easily financed, 71.4% pointed to multifamily. “For multifamily, there are a lot of very good banks that have stepped in that you never would have thought of a year ago,” Strauss says.

Industrial was a distant second at 21.4%. “Well-tenanted or owner-occupied industrial with good financial statements are financeable,” said a Northeast-based owner.More than 50% said that deals now take between 90 to 120 days to complete. Debt purchases were cited by 42.9% as having the most potential for growth, followed by refinance deals (39.3%). Said one SVP at a mortgage banker: “I chose refinance and not debt purchases because I am not friends with Timmy [Tim Geithner, Treasury Secretary].”

Not surprisingly, nearly 80% said that the recession has impacted the value of their portfolio in a negative way, and 52.2% responded that had no plans to either increase or decrease the size of the lending portfolio in the next 12 months. Fifty-two percent related that they were concentrating on CBDs.

When asked what impact the federal stimulus package would have on the capital markets, 86.7% stated it was too early to tell. Over 50% said they expect the economy to recover in 2011. “Commercial real estate will have a tough year in 2010 as commercial insolvency will rise,” said a director at a national owner/developer. “Existing real estate will improve in 2010, but the new development pipeline will not improve until 2012-[20]13.”One participant predicted that if the federal stimulus fails, there could be dire consequences for the economy. “As a 30-year veteran, I can say with certainty that this is borderline catastrophic,” said the mortgage banker SVP. “If the Feds misstep, we will be on the course the Japanese took. We could lose a decade.”

Of course, that same respondent also has an alternate plan. “I expect interest rates to rise. This will slow growth and depress values some more. But what the hey? I buy gold.”