Alternative financing available.

As we proceed into the mid-Nineties, at least two positive pieces of news have surfaced in real estate, says Arthur Fefferman, president of AFC Realty Capital Inc., a real estate investment-banking and mortgage-brokerage firm.

A particularly powerful form of finance - the mortgage conduit - is about to explode in the Northeast, which is regaining much of its former status as an attractive investment target, he says. And, second, the Federal National Mortgage Association (Fannie Mae) is easing its requirements.

"The timing of these developments could not be better," says Fefferman, "especially for owners of smaller income properties that have not benefitted from the popularity of real estate investment trusts and large-scale securitizations. Until now, it's been very difficult for them to tap the new capital flowing into real estate."

Banks are not much help, the AFC president notes, because they often insist on recourse financing, impose strict lending criteria, are prevented by regulators from lending as much as they would like, or have simply gone out of business altogether. That's where mortgage conduits come in, he says.

Mortgage conduits are vehicles by which such groups as mortgage banks and investment banks create pools of small income-property loans and package them as collateralized securities. Conduits were virtually non-existent in 1992. By the end of 1993, however, they already had refinanced more than $1.2 billion of loans, with hundreds of millions of dollars of additional mortgages in the pipeline, according to the national accounting firm of Kenneth Leventhal & Company.

The same resurgence of interest in the Northeast that is helping to fuel the rise in conduits is also attracting financing under Fannie Mae's "DUS" program, says Fefferman.

"DUS" stands for delegated underwriting and servicing. A lender granted DUS status can act, in effect, as an underwriter of multi-family mortgages on behalf of Fannie Mae.

Fannie Mae has relaxed some of its standards, especially in connection with apartments that are sponsor-held or military- and student-related, reports the AFC president.

"Nationally, we've done over $300 million in multi-family loans through either conduit or Fannie Mae programs," says Fefferman. "And we expect both of those programs to boom in the Northeast."

For borrowers, the timing is ideal, he believes. Because of lower rates and the special advantages of the Northeast, refinancing can be obtained for projects that were always well conceived and economically sound, but had been financially marginal during periods of higher interest rates.

As rates are lower than they have been in over a decade, the reduced debt service means that cash flow will not be overburdened, he says.

Of course, only certain projects are appropriate candidates for refinancing.

"The key is cash flow, good occupancy, and an area in which multi-family housing is in short supply," says Fefferman. "Because good housing is in strong demand in many areas - since office buildings and hotels have been over-built - great creativity isn't essential to obtaining refinancing."

The ability to understand what works and what doesn't are what is crucial to a project's success, he notes.

"If the numbers make sense, the environmental and physical nature of the property are suitable, and there is a solid awareness of today's capital markets, then refinancing is very do-able indeed," Fefferman says. "The window is open. The question is how long it will remain so.