Commercial Real Estate In Search of Firm Ground

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In need of a commercial real estate loan?

Despite the havoc in capital markets, it’s still possible to finance the purchase of a retail center or construction of a headquarters building. But be prepared to roll up your sleeves.

Since the fourth quarter, when the capital markets seized up, it’s been more difficult for investors, developers and businesses alike to get commercial real estate loans.

Everything from construction loans to bridge loans to take-out financing after a project has been completed has been impacted by the liquidity shortage.

“There is dislocation in the capital markets affecting all lenders across the board,” said David Rifkind, a principal at George Smith Partners Inc., a real estate investment banking firm and commercial loan brokerage. “We have been experiencing a dramatic slowdown in the closing of commercial real estate financing.”

With Wall Street’s big investment banks out of the business of assembling and selling packages of collateralized real estate loans so-called CDOs to investors, the field of lenders has shrunk dramatically.

Now, its mostly regional banks and life insurance companies that are willing to fund projects, but they are employing conservative underwriting. Multifamily projects also can get funding from Fannie Mae and Freddie Mac, the big government-backed mortgage companies.

“A year ago a borrower that didn’t have that much experience and financial wherewithal could get about the same kind of treatment in the capital markets as someone with significantly more experience and wherewithal,” said Anand Kapadia, a managing director at investment bank Credit Suisse Inc. who specializes in structured real estate finance. “It matters a lot more who you are and what your credit is now. It’s not just, ‘I have great project that can make a lot of money.'”

While it might have taken as little as 45 days to get a commercial real estate loan done in the past, it now takes at least 60 days and can run as long as three months or more. Chalk it up to more detailed underwriting. Still, there are sources in the market.

Jason DiNapoli, president of Los Angeles-based 1st Century Bank, a boutique lender that counts on commercial real estate for about one-third of its loans, said that business is up as Wall Street funding has disappeared.

“We are being shown opportunities that we weren’t shown last year because some of the sources of financing have dried up,” said DiNapoli, adding that his bank has done about 12 commercial real estate loans this year.

At the Bank of Manhattan, a Manhattan Beach-based bank that opened less than a year ago and serves midsize and small businesses, about half of its business is derived from commercial real estate loans.

The bank has done about 20 commercial real estate loans in the $3 million-$5 million range since opening in August and has passed on about 30 lending opportunities. “We are looking to increase our capital base because the opportunities are so strong. There is no competition out there to do loans,” said bank Chairman Kyle Ransford.

But while outfits like Bank of Manhattan are willing to fund small loans, that doesn’t satisfy everyone’s needs.

Bob Safai, principal of commercial real estate brokerage Madison Partners, said it has become more difficult for commercial real estate buyers to finance purchases that require borrowing $50 million to $100 million. Moreover, on any given deal, borrowers have to cough up about 30 percent to 35 percent of the project value to get a loan. A year ago, that figure was more like 15 percent to 25 percent

“A year ago if someone wasn’t there, there was another bank to go to,” Safai said.

Real estate developer Frost Chaddock Developers is currently in the market for $45 million in take-out financing for a 225-unit, market-rate apartment project in Koreatown it is wrapping up. Such funds are typically used to pay off a construction loan and at times to distribute funds to the developer.

Principal James Frost said his best options are Fannie Mae and Freddie Mac, and perhaps a couple of regional banks.

Larry Wilemon, managing director at mortgage banking firm Holliday Fenoglio Fowler LP, is seeking out the loan for Frost Chaddock. In a strategy that highlights the current state of the market, he said lenders that are left standing are underwriting deals to a “stress constant” estimate.

This means that lenders want deals structured so that they recoup their loan not simply from a property sale but by merely a refinancing of the property by the owner.

“A lot more people are looking at recourse on deals,” Wilemon said.

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