Some lenders make cautious return.

Like a tortoise cautiously venturing out of its shell, some traditional real estate lending sources are re-entering the market. But while many domestic lenders say they are back or that they never left, industry experts say these lenders are willing to look again, but they are not really biting.

The word in the real estate community today is there are funds available from traditional sources - savings and commercial banks and insurance companies - for the right projects. What constitutes a right project? The right project is a multi-family building, a well-tenanted and well-anchored shopping center or maybe a co-op with 85 percent of the units purchased. The right project, for the most part, is still not a commercial office building. Loans being made today also tend to be refinancings or rollovers and not new construction.

Marine Midland Bank has recently targeted three geographic areas for increased real estate lending. Two of these "districts" are for the Buffalo area and Northern New York State. A team of four bank executives are focusing on new business in a third Metro New York district.

Pat Tarrant, vice president, Marine Midland, said in the first quarter of 1993 the bank rolled out its plan to beef-up lending in the $3 million to $25 million range to "experienced developers," both existing clients of the bank and those with which they can form "lasting relationships."

She said they would consider refinancing office buildings with steady cash flow, credit tenants, and long-term leases as well as retail and multi-family properties. She also said they would make new constructionloans for residential projects and significantly pre-leased retail projects where the takeout financing was in place.

"We're being conservative, of course, in the new lending," she said.

While recent loans have been made mostly to multi-family and build-to-suit retail, Joseph DeLuca, executive vice president, Chemical Bank and head of the Chemical Real Estate Finance Group, said he is encouraged by the activity in the market and the introduction of some liquidity via REITs and other vehicles.

"I feel fairly upbeat aboutsome liquidity and value stabilization," he said.

Don Johanson of the Real Estate Lending Division of Fleet Bank said they are "looking" at doing real estate transactions for "high-qualityprojectsandhigh-quality sponsors."

Ken Bowen, who recently joined City & Suburban Federal Savings Bank, said his institution has been looking to double its output to multi-family and commercial borrowers in the under $2 million category. And, he said, they are finding competition on the multi-family deals.

Bowen said he believes this is a good time to be lending.

"You can get deals at 50 percent to 60 percentloan-to-value, which reallyhelps to offset risk," he said.

Maintaining a Presence

Few banks will say they are out of the real estate lending business, but the scarcity of transactions, especially by large commercial banks or money center", leadsborrowersto believemany institutions are in hibernation.

"I haven't seen any deals by [commercial banks] in recent history," said Mark Tietelbaum, managing director, Debt Equity Advisory Division.

But, while some banks are returning, Robert Corso, president, Robert Corso & Company, said he does not see many changes in the climate from one year.

"We're at the same level of interest on all categories," he said.

Pat Leardo, Eastern regional director, Real Estate Consulting, Coopers & Lybrand, which advises lending institutions, said most banks are doing business, buttheirstrictunderwriting criteria distances them from today's deals.

"Institutionsdon'twantto becharacterized as not lending or producing a credit crunch," Leardo said.

Even the large commercial banks, which were badly hurt by real estate-related losses, find it necessary to stay active," said Steve Longua ofMitsubishi Trust and Banking, who is in his last few days as president of the Mortgage Bankers Association.

"I don't think they have the luxury of shutting it down and leaving the market," he said. "They have to maintain a presence."

Conservativeseems to bethebuzzword for all lending today. Steven Wichik, vice president, Fourth Federal Savings, a small multi-family lender, said though his institutionwas virtuallyunscathed by the plummeting values, they are increasing their due diligence.

"We'rescrutinizingandverifyingmore closely," he said.

Some see the insurance companies being a little more active than the banks. Stephen J. Pearlman, director of Finance, JonesLangWootton USA, said the life companies are looking at projects that have more leases and credit tenants, low loan-to-value ratios and high debtservice ratios. Banks, on the other hand, he said, are generally lending to existing customers and pre-targeted borrowers.

Only the most "pristine" construction projects that are 100 to 80 percent leased and already have take-out financing are getting financing today from either source, he said.

Barry Citrin, director, Mortgage Lending, Sonnenblick Goldman, said the first choice of the life insurance companies is multi-family. The second is anchored retail and the third light industrial. Everything else, lead by office buildings, he said, would be a "distant fourth."

Citrin, who does a lot of work with PruExpress, a division of Prudential Insurance, said what is being lent mostly are the mid-sized and smaller sums - $1 million to $20 million.

"That seems to have a lotto do with the change in values," he said, "it's tough to make a large deal work," he said.

Borrowers representatives seems to agree that they are getting less out-right refusals, indicating that banks are shopping around again. "Everybody now is willing to look, willing to talk," said Jerry Swartz, principal in Pergolis Swartz Associates Inc., a commercial mortgage brokerage.

In addition, to multi-family properties and strong retail shopping centers, Swartz said, build-to-suits are also attracting traditional debt financing.

But he said lenders are looking for 90's-type transactions.

"The deal itself has to be conservative," Swartz said. "The lender wants to see equity from the borrower and usually hard equity."

Bank are selling a lot ofthe assets they gained through foreclosure, and many believe, that after this house cleaning is completed, banks will be again looking for sources of income.

"All of a sudden, they'll find themselves havingto make money," said Alan Gross, chairman, GFC Capital Group.

Foreign Lenders

More Quiet

Foreign lenders, especially the Japanese, are viewed by many to be outofthe market completely. So the domestic sources are responsible for most of today's activity.

"To the extent there's a pulse out there, I think it's the domestic banks," said Longua.

TheJapanese banks, he said, havebeen "wounded" by the loss in value to their collateral, and the U. S. legal system has not given them the relief they hoped for.

SomeEuropean institutionsand Pacific Rim banks that did not invest in the roaring 80's,however, are beginning to get their feet wet due to the drop in prices.

But with foreign lenders, Swartz said, the once popular "participating" mortgage, where one lender took the lead position and sold subordinate positions, has lost its favor.

"Lenders aren't prepared to do that because they're afraid of spinning their wheels and not getting the other participants, he said.

Swartz said he has been able to do some "club loans" involving foreign lenders. In this transaction four or so foreignbased lenders would all commit their percentage up front.

But, he said, while domestic lenders are scrutinizing the borrower and the property, the foreign institutions are placing their greater emphasis on the borrower.

"They really are concerned with the borrower and his credit worthiness and image," Swartz said.

Alternative Sources

Borrowers who can't find refinancing or are unable to re-negotiate with their current lender are looking to alternative sources. These vehicles usually demand some equity in the project and many credit-starved owners or developers are more than happy to give it.

Credit companies are seen by some as a traditional source of lending, but many of the credit companies view themselves as an alternative because they are currently filling the void left by the major banks and life insurance companies.

"We're looking to deal with borrowers because the number of players has diminished," said Charlie Schoenherr, New York districtmanager, GE Capital.

Accordingto Schoenherr, his company is finding this a time of opportunity. In the 80's, he said, financing for Class-A buildings was easy to get so those deals went to the institutions. The credit companies, he said, were left with the "B" properties in less desirablelocations.But today, he said, they are lending to the better developers, and in many cases, getting some equity.

Another option gaining popularity is mortgage-backed securities either for individual properties or for pools.

Al Berger, who heads Al Berger & Company, said these have been working quite well for multi-family properties, nursing homes and medical office buildings. But, no one, he said is ready to do an office building.

"People are still concerned about what happens when the office tenants move out," Berger said.

And the biggest lenders for multi-family, he said, are still HUD and Fannie Mae and not banks.

Real Estate Investment Trusts or "REITS" for existing portfolios or for new investment are also being formed and sold in the health field and the retail market, for example: Weingarten, Kimco and Federal Realty.

Pension funds are also expected to get more involved in the debt and equity side of investment.

"Treasuries at 3 percent are not very attractive," said Bill Shanahan, managing director, Financial Services Group, Cushman & Wakefield." ... with a few trillion in pension funds, they could be a major player."

More and more financing is becoming a matter of creativity. Gregory Miller and Paul Lambert, principals of Minnesota-based Leasehold Capital Corporation, have pioneered an alternative financing method thathelps office building owners secure funds for tenant improvements.

Leasehold Capital makes the loans with the help of its financial partners and then the loans are sold in the capital markets. The tenant lease is the source of repayment. The funds are secured by bifurcating the lease into two streams of income one being assigned to the tenant improvements. Therefore, Leasehold Capital, does not take a mortgage on the property. They become an unsecured lender supported by the credit of the tenant.

The loans, ranging from $250,000 to $1 million, canbetenant-specific, Miller said, or they will lend a lump sum with a criteria of what tenants qualify This vehicle, Miller said, works bestin markets where there are high-quality tenants, but the supply and demand ratio hurts an owner's ability to get financing.

"We see New York as the single best market for us," Miller said.

The primary issue seems to be confidence. Many say the lenders are waiting to see more investor activity, but, on the other hand, investors are reluctant to get involved if there is little hope of financing their ventures.