Financing '97: ready, set, go!

It is truly amazing that each year at this time, all kinds of experts and wannabes are voicing their predictions about the future of the real estate industry. Our aim is not to impugn the value of their forecasts. Rather, we would offer our own by using a more down-to-earth, and less academic approach derived from our successful activities as commercial and residential mortgage brokers who are in touch with the daily realities of real estate finance and related matters.

The improvement in the New York real estate market over the past 12 months has been dramatic, and was in great part due to the lack of new construction. This real estate expansion is concurrent with the state of the steadily but slowly growing national economy, and is also reflected in the very favorable terms and conditions to which lenders were able to commit - especially in the last quarter of '96.

In accordance with our predictions last year, we've seen a continuous increase in the overall availability of funds for all kinds of projects, including but not limited to construction of new office and industrial projects, as long as they are at least 50 percent pre-leased. Nevertheless, developers still felt the sting of lenders applying underwriting criteria that were less restrictive than in '94 and '95, but still far from loose, and preparing market analyses with results that never correspond to the developers enthusiastic views.

In general, our experience reflected the public perception that institutions have increasingly shown a growing interest in funding loan requests on property types beyond the ones on which they have traditionally lent. Even geographical areas that only 6 to 8 months ago were labeled as being fringe are now being considered for lending. We feel that this trend of rising competition amongst lenders and the lowering of their minimum loan size requirements will persist throughout '97. Borrowers will be able to take full advantage of this situation and might achieve a better pricing, loan term scenario and a more favorable bottomline - when guided by savvy mortgage brokers.

One area though, called "interim-financing," has become an uncharted territory of lending, as this arena is apparently entirely ignored by most domestic lenders. In general, this would mean good news for borrowers in need of alternatives to life companies and conventional lenders. The current vacuum though has lent itself to "pricing abuses" of various Wall Street conduits private lenders for which this domain has become a true gold-mine.

These loan types are mainly short-term loans maturing within a 36-month time frame and typically are covering requests for financing on bulk. purchases of sponsor-owned condo or co-op units as well as rehab, renovation and conversion (from commercial into residential) projects. Therefore, the average borrower and even some less savvy mortgage brokers are under the impression that it will be extremely hard to chance on a conventional lender.

The apparently attractive terms and the pricing, usually quoted from these sources at 225 to 375 basis points over the corresponding treasury, come with a steep price. In the case of conduits, where loan-to-values are being advertised in the range of up to 75 percent, this becomes apparent. After the first go-around and a couple of weeks into the deal, the borrower is being made aware of the fact that the lender will deduct various capital and structural reserves from the first funding, leaving the borrower with a real loan-to-value of not more than 60 percent, thus reducing the funding by several hundred thousand dollars.

The good news is that conduits and private lenders are now not the only game in town, and that borrowers still have the option to choose from a competitive pricing and term menu, depending on the underlying dynamics of the deal. We already entertain relationships with several conventional lenders that are actively involved in the arena of interim financing, and we foresee that more of these loan requests will surface during the next 12 months.

The impression that was created in the marketplace of a lending community willing to loan on spreads rather than on underwriting will need some rectification, for it is wrong. The trend in '97 is definitely for lenders to maintain stringent underwriting criteria, with relatively low loan-to-values and higher debt service coverage ratios to minimize the default risk - even at the cost of 10 to 20 fewer basis points on the spread.

Nevertheless, when we peer into our crystal ball, we see 1997 as a fairly good period for real estate finance - with certain caveats. Financing will still be plentiful, and the receptiveness of lenders to entertain transactions will increase substantially. Borrowers can count on very quick quotes on a desired property type, but one should not be misled by this overall heightened receptiveness, as it largely relates to the lender's fear that the deal might go elsewhere.

The reality is that the event of the funding process has become more complex and lengthy, and this won't change within the near future. These complex changes in the overall lending environment demand the services of a good mortgage broker, and if the borrower needs to sort the wheat from the chaff, without loosing valuable time and money, these services will become invaluable. A savvy broker will make sure that the deal gets placed with a lender that will honor the quick initial quote, and that a meaningful financial solution is being achieved.