Lenders Remain Bullish on Region Despite Slowdown.

HERE was time in the real estate business when the mantra was, "If you build it, they will fund." Then the bottom fell out of the market.

The real estate investment trust (REIT) bust of the late 1970s and the S&L-fueled development bust of the late 1980s both fueled national economic recessions that left property and construction lenders with major headaches. In the wake of those two nearly epic routs, lenders wrenched spigots shut on new construction lending and a significant portion of borrowing on investment sales.

As the market heads into another of its cyclical slowdowns, lenders, having this time learned the lessons of the recent past, are not pulling the plug on real estate investments and are, in some cases, actually encouraging them.

Across Los Angeles, lenders are still looking at a generally healthy and appreciating property scene, and are -- stringent requirements in hand.-- willing to belly up to the property lending bar, said George Smith, founder of Century City-based George Smith Partners Inc., a mortgage brokerage.

"The regional banks are looking at the Southern California economy and saying, 'You know, things don't look so bad here. We may not even be in a recession,'" he said. "Those (regional) banks are looking to pick up business that maybe some of the larger national banks are not willing to take. It's refreshing. This time, real estate wasn't what caused a recession; in fact, it is the strongest part of the economy."

But conditions have clearly softened in recent months, and lenders are responding by requiring a little more equity, along with a better track record on the part of developers or buyers, said Smith -- though certain developments are almost sure to get a bright green light from bankers.

"You can get an apartment construction loan. There is a huge deficit of apartments in Los Angeles," said Smith. Similarly, developers of industrial space can usually find money to borrow, and at good rates. There are loans to be had for annual interest rates of around 7.5 percent, according to industry analysts.

Equity requirements rise

Office buildings can still be built or purchased, but lenders want to see a good chunk of borrower equity go into the deal -- as much as 40 percent cash down on an office deal, said Smith. That's quite a contrast from the late '80s, when some lenders would extend loans that arguably exceeded property values, so confident were all parties that values would just keep soaring.

According to Adam Weissburg, a partner with Cox, Castle & Nicholson LLP in Century City, a law firm known for its real estate practice, these changes reflect a market in which players are seeing the maturation of real estate finance.

Throwing money at real estate in good times, or retreating wildly in downturns, may be swings that are now tempered. Rather than slam shut the borrowing window, lenders are only ratcheting up a few clicks on loan terms, such as demanding lower "loan-to-value" ratios for loans.

Last year, if an office building could be bought with just 25 percent down in cash, Weissburg said, this year lenders want investors to ante up as much as 30 percent of the value of the property. Like Smith, Weissburg said that industrial and apartment building borrowers are having the easiest time getting money, while retail and office developers are having a tougher times.

Loan judgments are made on "a project-by-project basis," said Weissburg. "Good projects still get financed, rates are still reasonable, but not every deal gets financed."

How developers handled previous loans also is becoming more important to lenders, as the economy begins to taper off. Interestingly, some senior lenders (usually banks) are now no longer willing to lend on projects in which the borrower has secured a second, or junior loan, from a mezzanine fund or other financier.

"The banks want to see the borrower's own capital at risk," said Weissburg.

One type of real estate project now popular with both real estate developers and financiers is the renovation or rehabilitation, said David Blenko, president of El Segundo-based Haverford Capital, a seven-year-old real estate mezzanine fund and investment shop.

"If you can show you bring a lot of value-added to a project, then lenders are willing to listen," he said.

Haverford is active in this market, and recently announced it would provide $6.5 million in junior financing to developers Overton Moore Properties and Pacific Coast Capital, to help build a new $30 million, 170,000-square-foot office project in El Segundo. Blenko said that while some lenders may look askance at developers who take out junior financing, in his case, lenders are usually happy to see Haverford on a deal.

"We have a good track record, and if we invest our money, that actually gives banks more confidence in the project," he said.

Weissburg concurred with Blenko that good-quality property renovation projects are likely to get a friendly evaluation by lenders. With a recession looming, projects in which there appears a palpable "exit strategy" -- a reasonable time after which the building can be sold for a profit, and lenders repaid -- are more appealing than from-scratch development projects or property purchases, in which the payday may be several years away.

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