Lenders are renewing their interest in real estate.

Investors and developers are once again being courted by lenders and mortgage bankers seeking to finance commercial property. Real estate values have generally stabilized and lenders feel more comfortable estimating value. Real estate lending is also providing attractive yields relative to other investments.

Traditional lenders such as life insurance companies, pension funds and banks are anxious to invest in whole mortgage loans and are becoming increasingly competitive. Savings banks, thrifts and credit companies are also showing a strong interest in real estate. New sources such as conduit lenders are also emerging.

Life insurance companies and pension funds generally complete lower-leverage transactions secured by "A" quality property. Property types include investment grade apartments, offices, neighborhood retail centers, industrial buildings and mobile home parks. Lower leverage has historically meant no more than 75% of the current market value and many life insurance and pension funds. limit leverage to between 65% and 70%. Capital from these sources can be obtained today with interest ranging from about 7.5% to 7.9% for a 10-year term. Most such loans are fixed-rate, assumable and subject to a prepayment penalty.

These loans generally are non-recourse except in the case of fraudulent acts and environmental contamination. Most life insurance and pension funds will consider transactions as low as $5 million and many of the smaller companies will look at transactions of $2 million or more. Some life companies will consider forward commitments, and combination construction and permanent loans. Pension funds will consider forward commitments with the use of union labor. Borrowers can sometimes access these lenders directly, but often a "correspondent" or "advisor" is necessary because the funding source defers origination, underwriting, and servicing to a local third party to take advantage of their knowledge of the market and the property.

Commercial banks have been increasing their mortgage loan volume over the past two years and they remain the primary source for construction financing. Most banks are seeking to finance "A" and "B" quality real estate with loans starting at about $500,000, of up to 75% of value. For permanent financing, banks will write both fixed- and floating-rate loans. Fixed-rate loans are generally being offered at between 190 and 275 basis points over the corresponding U.S. Treasury maturity. Floating-rate loans are generally based upon a spread of between 150 and 300 basis points over the London .Interbank Offered Rate (LIBOR), with a built-in lifetime cap of between 5% and 7% above the initial interest rate. Bank floating-rate loans can usually be prepaid without a penalty.

While banks have a reputation for offering a more flexible loan structure than life companies, bank loans have historically been structured as recourse loans. Banks look to finance development with borrowers who have a proven track record and equity in the transaction. The location must be viable with a limited supply of competing projects and preferably with limits on other future development. The most attractive property type today appears to be anchored retail with a substantial percentage of credit tenants and pre-leasing. Apartment development is also considered if the market has sufficient demand. Construction loan pricing is generally between 1% and 2% over the Prime rate.

Savings banks, thrifts, and credit companies are currently financing commercial real estate on a floating-rate basis with loan amounts of generally less than $10 million. These companies will consider most types of real estate with the savings banks focusing primarily on apartment projects. The lenders have been willing to lend up to 80% of the current value of the property and will consider properties ranging in quality from "A" to "C". Credit companies are sometimes considered "cash flow" lenders and focus less on the real estate and more on the past performance of the property. They also tend to prefer larger deals and will also consider participating loans. Pricing varies with the risk and overall leverage of the transaction. Interest rates may be based on the pricing of commercial paper, LIBOR or some sort of short-term index.

Wall Street conduits have become a major source of capital. Originally a way to allow the RTC to sell pools of loans in the public market, loan securitization has become a viable financing source for individual borrowers. Conduit loans are originated by a mortgage banker who funds the loan with a warehouse credit line generally established with the help of an investment banking firm. The loans are held until more than $200 million can be pooled and given an investment grade rating by one of several rating agencies. The pool is separated into tranches of varying yields that reflect different risk profiles. An investor buys the portion of the pool that corresponds to their investment criteria. The money is then used to pay off the warehouse line and the process starts again. Conduits now look at almost all property types ranging from "A" to "C" quality. Transactions from $1 million to more than $25 million are considered. The loans are generally limited to 80% of value and are fixed-rate, non-recourse obligations. Some prohibit prepayment for the first several years and then only with a yield maintenance penalty, others allow prepayment anytime. Conduits base their pricing primarily on debt coverage. Loans are written with a 1.2 minimum debt coverage ratio and the pricing for an apartment project for example, will range from 170 to 275 basis points over the corresponding U.S. Treasury maturity. In addition to traditional property types, conduits are attractive sources for hotels, student housing and nursing homes. Spreads for these property types range from 190 to 400 basis points and leverage limits vary from 65% to 75%. The conduit process is becoming more efficient and spreads are likely to come down as a result.

Fannie Mae and Freddie Mac are excellent sources for apartment financing. They allow leverage up to 80% of value and will consider older, "B" quality apartments. They offer fixed-rate, non-recourse loans at spreads ranging from 150 to 175 basis points. These lenders are also interested in senior and affordable housing projects and will involve themselves in tax credit and tax-exempt bond credit enhancements.

Real Estate borrowers today have numerous financing alternatives. Borrowers can expect continued competition among lenders to create attractive financing opportunities.

AMOS SMITH IS VICE PRESIDENT OF JOHNSON CAPITAL GROUP, INC. WITH OFFICES IN CENTURY CITY, IRVINE AND SAN DIEGO, JOHNSON CAPITAL IS THE EXCLUSIVE ADVISOR IN THE PACIFIC SOUTHWEST FOR PRUDENTIAL REALTY GROUP'S PRUEXPRESS PROGRAM, WHICH PROVIDES FINANCING FOR INSTITUTIONAL-GRADE PROPERTIES IN CALIFORNIA AND OTHER WESTERN STATES. SINCE ITS INCEPTION IN 1987, JOHNSON CAPITAL GROUP HAS BEEN INVOLVED IN MORE THAN $2.8 BILLION IN MORTGAGE FINANCING.