Owners locate a way around real estate credit crunch.

The world of real estate financing is undergoing a tremendous upheaval, the proportions of which no one could have even imagined a few years ago.

Solid relationships between lending institutions and developers, decades in the making, are being suddenly scuttled or drastically revised. More and more lenders are being seized by federal regulators, and those remaining are being incredibly tight-fisted when it comes to real estate.

Against that chaotic backdrop, several innovative new wrinkles are being introduced to real estate financing.

Among the most promising is "rated-debt financing," which is shaping up to be "a whole new area of securitization for the '90s," said Mark Kogan, a vice president at Goldman, Sachs & Co.

Rated-debt financing, in effect, allows owners of healthy existing real estate projects to sell their mortgages piecemeal to outside investors for cash.

The method can only be used for existing projects, not new-construction ones.

It entails having a debt-rating service, such as Moody's Investor Service or Standard & Poor's Corp., issue an actual debt rating on an existing project's mortgage. Next, an investment banking firm -- such as Goldman, Sachs or Salomon Brothers -- uses that debt rating to underwrite commercial paper or long-term bonds on behalf of the real estate project's owner.

"We're able to do this on a floating-rate basis, where the borrower issues commercial paper with interest rates adjusted as often as every 30 days," explained Kogan, "or fixed-rate bonds with terms as long as 20 or 30 years."

Similar securitizations were underwritten in the mid-1980s. But those required backing from a bank or insurance company willing to act as guarantor. Today's debt-rated financings, however, are backed solely by the underlying real estate.

"By using debt-rated securitizations, we're able to achieve (interest rate) savings of between 50 and 75 basis points versus those available on a conventional loan," Kogan said. "We've already done about $3 billion worth of this kind of securitization."

Debt-rated financings typically have to be at least $50 million to make economic sense, Kogan said. Any amount smaller than that would make interest-cost savings inconsequential.

Also, the existing project should have a "very conservative" loan-to-value ratio and coverage ratio to obtain a favorable debt-rating on the mortgage. A "coverage ratio" compares a project's cash flow to its debt-service requirements.

Another new trend taking shape in the hectic world of real estate financing involves the formation of investment pools dedicated to specific types of projects and specific levels of risk.

"As real estate yields continue to fall, which they clearly are, you're going to see fewer and fewer individuals willing to take the kinds of risks associated with these low-yield transactions," said Paul Keller, president of El Monte-based Keller Construction Co.

"So what you'll see, I believe, is investment banking firms forming investment pools with specific criteria," he said. "One pool might invest in only R&D projects in the Sun Belt, another in large office buildings in major urban areas, and another in apartments in the Southwest."

Each pool would have a specified level of risk and yield, Keller prophesied, which would allow institutional investors a level of comfort they previously didn't have.

Traditionally, developers have hired investment bankers to search out investors willing to fund a particular project. But in the future, Keller predicted, those investors will already be assembled. All the proposed project would have to do is meet the pre-determined yield-and-risk criteria of the particular pool to which those investors belonged. Then it would be financed.

The equity pools could conceivably totally eliminate the need for any kind of debt financing in the future, Keller said. Institutions would no longer issue loans to developers. They would merely identify the pool or pools in which they wished to invest, and accrue yields from equity participation.

Another new trend in real estate financing will be the participation of new investors on smaller deals, some sources said.

"Instead of the traditional large real estate companies and financial institutions, capital will come from the smaller corporations and individuals who didn't over-invest in U.S. real estate during the 1980s," stated Robert E. Davis Jr., firmwide director of real estate capital markets for Arthur Andersen & Co. "Most of this capital is being invested in smaller amounts of $5 million to $10 million and in non-traditional properties such as residential housing for first-time buyers."

Large institutional investors that loaned huge sums to developers in the past will no longer take on the risk involved in such mega-loans.

Traditionally, a financial institution would lend a developer, say, $200 million, and then "syndicate" that mega-loan to a number of participating lenders. Each participating lender might assume, say, $30 million of the overall debt, thereby limiting the initial lender's risk.

But such traditional loan structures are now too risky, many institutional lenders insist, because the initial lender must assume the entire risk of syndication.

Hence, institutional lenders are now eliminating that syndication risk by bringing in "participating" lenders to fund the initial loan, rather than bringing them in after the fact.

"There is less of a likelihood that we will do deals by ourselves any more," said Carol Weiss, director of real estate finance at Prudential Mortgage Capital in Century City. "There will be co-investors coming in with us, as well as investments made on behalf of companies with which we have existing relationships."

Insurance companies will continue to be major real estate financiers on the debt side, said Randal Howard, senior vice president at Eastdil Realty Inc. in Century City. But insurers' lending will be largely limited to existing buildings, rather than new construction.

On the equity side, pension funds are often mentioned as the most likely source, considering their vast amounts of available capital and incredible discounts that banks and the Resolution Trust Corp. are offering on foreclosed properties.

But Paul Garity, a principal at KPMG Peat Marwick, questioned that conventional wisdom.

"Some advisers are saying they have pension funds interested in buying REO (real estate owned) and RTC (Resolution Trust Corp.) properties, but there's a lot more talk about pension-fund money than actual deals so far," Garity said. "Pension funds aren't going to turn their entire portfolio objectives around overnight to take advantage of real estate, especially when stocks are having a good year and real estate is being bashed daily in the press.

"In the past, pension funds invested in 'triple A' office deals that were supposed to be risk free, and they got burned," Garity continued. "How are you going to now convince those (pension fund) guys to buy RTC buildings that are troubled from the start? I don't see it happening."

Meanwhile, foreign pension funds might also become a significant source of financing in the 1990s, sources said, particularly government pension funds from socialist countries in Europe.

"The Swedes and Danes have enormous government-employee pension reserves, and are becoming increasingly active in U.S. real estate," said Howard of Eastdil Realty. "But they're going to be purchasers, rather than financiers. It's cheaper to buy existing product now than to finance new product."

European investment is also being stimulated by the strength of the U.S. dollar against European currencies.

"U.S. real estate is now selling at 20 to 30 percent less in terms of foreign currency values than it was in 1985," said Davis of Arthur Andersen & Co. "And, although real estate values have been depressed, CAP rates on U.S. properties are generally 300 to 600 basis points higher than for comparable European properties."

Davis estimated that Europeans will invest about $11 billion in U.S. real estate during 1991.

The Japanese will continue to be a factor, as well, but on a much smaller scale. Davis predicted Japan will invest about $8 billion in U.S. real estate this year, less than half the $16.5 billion it spent in 1988.

Japan investors here will tend to be smaller players who had not previously invested in U.S. real estate. They will not be the huge companies and wealthy individuals that invested big during the 1980s, many of whom got badly burned.