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Approaching the lender: industry fears for existing loans.

In the current real estate climate, it seems developers would have a better chance of winning the lottery than obtaining financing from a traditional lender.

As long there is a low loan-to-value ratio and requesting amounts are not too high, a property owner should find refinancing readily available. But, if the property's value has fallen to be equal or less than the loan, is located in a bad area, is untenanted, or is a new project without a tenant in place, the developer or purchaser might as well get on line for that lottery ticket.

Area experts painted a grim picture as they told REW about the real estate financing market today. Of growing concern is the nearly $300 billion in loans that are coming due within the next year. There are problems obtaining refinancing for co-ops with major blocks of unsold shares or those that have declined in value. The decline in value is a problem for other types of property, as well, since there is no longer a satisfactory debt to equity ratio and some lenders are unwilling to extend these loans even if performing under current terms. Where made, large commercial purchase loans are being split among several lenders who are more likely than in the past to request an equity position.

Robert M. Greer, managing director of finance for Jones Lang Wootton said conventional financing is probably not getting any easier and in many ways is getting more difficult. The banks and insurance companies are under pressure to reduce their real estate exposure in general, he explained. "If we have a $100 million to $150 million loan request we have to go to four or five different lenders because no one lender will hold more than $30 million or $40 million," he said. "If we need to do a $100 million loan we would have to put four or five foreign banks together."

Within the next year, Greer said, there is $275 billion in commercial real estate loans coming due within the United States. Of that, $200 billion is held by banks and $75 billion by life insurance companies. No one knows what will happen with that debt, Greer said. Most will be rescheduled, he predicted, with the existing lender granting a five-year extension at 9 percent and expecting "serious payments" to pay down the principal.

"All of the cash flow after the interest is going to pay down the principal," he added."

Greer said there are not many lenders today that will come up with enough money to refinance loans. If a building was not highly leveraged and comes up for refinancing at 50 percent to 65 percent of value, then he believes the pension funds will be players.

Jay Neveloff a partner in Kramer, Levin, Nessen, Kamin & Frankel represents several lenders and agrees that the biggest problems are those existing mortgages.

"As I look out my window, what's going to happen with those mortgages when they come due? Will the banks roll them over or extend them or foreclose? I don't know if the courts in New York will allow them to foreclose where the loan is not in arrears but just coming due."

Neveloff said his client lenders are looking for participation in blue-chip projects where they will lend to eight figures.

"You won't see construction lending on a large scale for a while," he added.

Greer said there are foreign commercial banks that will make some construction loans where there is preleasing, such as in a regional mall or a build-to-suit, and they are also doing some apartment house lending.

"But there is no lending for hotels or for multi-tenanted office buildings," he said.

Peter Hauspurg, president of Eastern Consolidated Properties, Inc., said there are many resales coming up because of problems with financing and lenders. "Either they are going because of foreclosure and there is a deed in lieu, or there are lenders where the borrowers have signed on some other transaction personally", he said. "The Olympia & York situation is not helping at all. Lenders are being strict about leasing and strict about equity expecting 25 percent to 30 percent."

While the lenders, Hauspurg said, are coming back into the market and "playing" on a case-by-case basis, the investor, he said, has to have a substantial stake in the outcome. "So that if it runs into trouble, the investor will have so much more of an interest."

Greer said there are Canadian and European lenders that are stepping in but not the Japanese too much anymore. Bankers in England, Germany, France and Switzerland are also in the market.

"The only new facilities we're financing are for our existing customer base which tends to lean toward real estate families which have been long established in the New York City area," said Yasuda Trust & Banking Co. Assistant Vice-president Robert Mathes. "We don't expect to do much lending and it makes more sense to work with our existing customers."

Mathes said most commitments are in the range of $ 10 million to $30 million. As a general rule, he observed, institutions do not seem to be willing to lend more without syndicating the loan. The European lending institutions, he agreed, appear to be more active.

Greer expects some of the void will be filled over time by pension funds that have been buying real estate and looking at the yields today just through straight lending. "Some have hired advisors to find them loans so they are bidding loans," he noted.,

Met More Financial, is a wholly-owned subsidiary of Metropolitan Life and will lend up to $15 million for multi-family and where there are long term leases. George G. Haase, regional vice president, said the credit criteria for the industrial and/or office building has really become so stringent that investment grade for most large insurance companies is no longer Triple B but in the A category.

"The deals I see getting done are the ones under $10 million," he said. For the most part they are multi-family, he said, and then long-term leased properties, be it office or industrial or owner occupied properties. The hardest deals to finance, he said, are for retailers unless there are very strong anchors.

"Most of the food anchors have gone through LBO's, and lenders shun the deals because of this," Haase added.

Michael V. Corotolo, president of Michael V. Corotolo & Associates Inc. which acts as a mortgage broker said people are starting to realize that this is no longer the 80's and the "high dollars" that banks were offering are long gone. Appraised values are not coming in higher, he said, so the dollar amount that banks are offering is lower and more realistic and ensures that people keep their properties while the lenders make good loans. "People are starting to wise up and accept the money," he added. Corotolo primarily deals with residential and commercial loans in the $250,000 to $5 million range.

Banks will base loans on a 1 to 25 debt service coverage ratio and 75 percent loan to value, he said, but base it on today's value. People may say they have it based on their numbers, but the banks are using their own numbers and taking high rents and discounting them," Corotolo explained. "They know today's market is lower and if a tenant goes out, you put someone else in and they will pay less. They are reeducating the borrowers to expect the money they are being offered in today's market."

James D. Kuhn, president of J.D. Kuhn Properties, Inc., said there is plenty of money out there for equity, but very little debt money. "If I want to borrow anything there is no mortgage money around to buy but there is equity money," he explained. The properties that are being sold, he said, are being sold to someone with cash, such as a Wall Street house with its own money.

"There are plenty of people around buying all cash, but those who need mortgage financing cannot get it," Kuhn added.

William H. Stern managing director, Sonnenblick-Goldman Company, which represents Pru Express, said they lend up to $10 million and are aggressively in the market. Pru Express lends on certain underlying co-op mortgages as well as for rentals. "The banks are not coming back," he noted. He is working on several refinancings but complained, "It's a very, very thin market."

Stern said he gets a request every few days from underlying co-op lenders and boards and cannot finance them. "Nobody can," he said. "What going to happen? I don't know."

M. Allan Hyman, a partner with Certilman Balin Adler & Hyman, which represents lenders and other property owners, said the mortgage foreclosures are very significant. "New York has the harshest laws," he said. "It's really anachronistic. The system was designed probably during the depression and to protect against onerous lenders during a time of depression."

Hyman said it puts the lender in the position where he has to wait in Nassau county about two years before he can resolve a foreclosure. "It puts the bank in a position where they don't have a speedy and efficient method to foreclose and they don't want to make loans in that environment," he said.

In the commercial area, Hyman said foreclosure takes longer than two years because the lender has a further problem since usually the borrower goes into Chapter 11. "The bankruptcy courts are becoming more attuned to the fact that these single-asset bankruptcies are not the kind of cases which were envisioned by the code," he said. "That is the kind of environment that is not conducive to lending."

Hyman complained the already "interminable" foreclosure and sale problem has been exasperated by the County Clerk's office, during which time the borrowers are sitting in the property rent free. "A borrower has the right to redeem up until the moment of sale," Hyman added.

Hyman said it is getting tougher and tougher for a residential borrower to obtain financing. He said the banks used to do 'no income check' loans, but he said, "a market they thought would only go in one direction - which was up - can go down and now they are interested in the financial ability of the borrower to repay the loans." There are more significant checks and they are maintaining a substantial equity to debt ratio. "We rarely see 90 percent while 80 percent is more prevalent," he said.

It is almost impossible for commercial property to get a loan, Hyman said. "You practically have to have a rated tenant. Getting commercial mortgages in Long Island is a thing of the past."

In the past, he said, if you had a decent building you could always borrow 75 percent to 80 percent. That is no longer the case. "Getting a mortgage is a very, very difficult job unless you have property leased to a Triple A tenant or a fully rented office building with strong tenants," he said.

The co-ops are having serious problems refinancing. The loans that were made in the early 80's are loans that nobody ever thought would be difficult, Hyman said. The banks are taking a real hard look at co-ops because they have high vacancies and there are concerns about the unit owners coming up with the payments. "The better buildings in nicer areas are doing alright," he said, "but it's a major problem in the city."

Richard Liebman, a partner in Liebman & Liebman of Rockville Center which represents co-ops and other real estate owners and also handies real estate bankruptcy actions, predicts if there is an increase in interest rates, there will have an avalanche of bankruptcies.

"Good properties, even cooperatives, are able to finance," he said. "I've closed some loans at 8 percent and 8.4 percent."

One property, he said, obtained a $7 million first mortgage at 8.33 percent and a $300,000 unsecured working line of credit. "You have to have the 80 percent," he explained.

On another property, 65 percent of the units are sold and rent exceeds maintenance but the lenders want the sponsor to pledge his shares to the bank. "The bank has been on the building since 1962," Liebman said, incredulous.

There is still a potential for good loans," Liebman noted. "What are they going do, foreclose on a cooperative in the middle of Queens?" he wondered.

"They are breaking you," Liebman said. "Every deal is like pulling teeth."
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Title Annotation:Finance; bleak outlook for real estate financing
Author:Weiss, Lois
Publication:Real Estate Weekly
Date:May 20, 1992
Previous Article:Gains tax update; Stanhope decision reversed.
Next Article:Keeping co-ops/condos financially sound.

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