Money for something: equity kicks for a price

Real Estate Weekly, May 22, 1996 by Lois Weiss

"I'm seeing commercial lending transactions for our clients but the requirements are different," said Moerdler. "There is a standard list of carve-outs from recourse. You can get today's version and get limited recourse and recourse, but loan to value ratios are lower, banks are more careful, regulators are looking more carefully, and the bank's auditors are watching more carefully."

Banker Collins agrees that while financing is readily available because of the healthier real estate climate, what is different is the more stringent underwriting criteria.

"People are using the experience of the economic cycle and are building that into the cash flow models," explained Collins, accounting for some of Sturner's complaints. "We can no longer take the first year's [leasing] assumption and expect it will go on in perpetuity."

That means they will mirror what the residential cooperatives have been forced to do by accountants and take into account reserve money for repairs.

The banks will model the cash flows to the reality of the rent rolls, says Collins, allowing for tenant improvements, leasing commissions, tenant refit and lobby and elevator cab refit before they assume those costs will be covered by rapidly rising rent rolls.

For the residential buildings, he said, they will take into account windows, roofs, elevators and the like.

The insurance companies have also undergone new rules, and the overseer association ranks the amount of mortgages those firms are holding versus securities and other investments.

"They are very strict as far as reserves," said Riley. "But if they relax those [rules] then there will be more insurance money."

While there are new sources of capital that will provide equity and perhaps take a piece of your pie, Moerdler says, "if you only want debt on the property the total pool of funds is smaller than before."

Since many lending rates are keyed to basis points above Treasury notes and bonds if there is no increase in Treasury rates, Riley believes there will be more lending.

"My own guess is that unless we get a big uptick on Treasury rates, people will lend more on real estate because they can get more interest."

Bushell says there is not a lending problem but more often a problem generating capital from an equity source that comes in with you and shares the risk.

Convertible and participating loans, and so-called lenders of last resort are all more popular today, Moerdler said.

These money lenders are acting like the corporate mezzanine lender but are not as institutionalized. They are also getting more of everything with rates of 14 to 16 and in some cases 18 percent, and grabbing 2 to 8 points with a short maturity of a year or two.

"Some have other people's money and since they are already in the real estate business, are willing to take the risk," Moerdler observed.

Arthur Stern, chair of Cogswell Realty, sees a "whole slew" of lending companies and quasi-banks that are coming out with mezzanine and bridge loans where they take participation and quasi-equity interest and convertible equity interest that were not available a couple of years ago.