Approaching the lender: industry fears for existing loans - bleak outlook for real estate financing - Finance

Real Estate Weekly, May 20, 1992 by Lois Weiss

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.