June Issue: Finance & Investment—Order Up!
- Jun 12, 2015
By Keat Foong, Finance Editor
No question about it—the debt financing market is extremely active, and commercial banks have returned to the action in full force. Banks of all sizes are finding ways to attract customers in the competitive financing market, and borrowers may be in luck if they are seeking what these institutions are proffering.
Banks are now not just supplying their customary bridge financing but upping their volume of construction and term loans as the business cycle gears up. They are also providing favorable terms that were unheard of even three years ago: low interest rates, fixed-rate loan terms, non-recourse and interest-only features. And they are creatively customizing their products to customers’ individual needs to win deals.
More banks are jumping back into the market every month, observed Richard Walter, head of Bank Assetpoint and senior managing director of Promontory Interfinancial Network L.L.C., a service provider to a network of banks. As they become accustomed to the new regulatoory environment, banks are better able to proceed with lending activities, Walter suggested. Meanwhile, other business lines—such as consumer loans—remain more difficult for banks. “The banks know commercial real estate loans well,” said Walter.
“For the most part, banks are back in commercial property. There is no product type they are hesitant in, except some retail,” he added. And the depository institutions of all sizes—from the big banks to the community banks—are generally all equally eager to lend.
Banks are offering “very aggressive” interest rates on residential loans, said Steve Bram, principal & managing director at George Smith Partners. He reported that George Smith has executed a number of five-year (recourse) term loans at less than 2 percent interest, or at Libor plus 1.75 percent. For example, one mixed-use apartment and creative office project—a former fractured condo—is receiving a $45 million loan at this interest rate. Because it also offers the recourse option, interest rates for five- and seven-year fixed-rate terms using swaps can be as low as, or beat out, those on financing offered by CMBS and life companies, according to Bram.
In addition to the favorable terms, many clients do not mind recourse loans because they have secondary assets, Bram noted. To qualify, the borrower must have a net worth of at least 100 percent of the loan amount or liquid assets worth at least 10 percent of the loan. Banks may not require the sponsors themselves to be tremendously experienced in the asset class, as long as their staff possess that expertise.
Bram said that large banks offer the most competitive interest rates—in the 3 percent, and occasionally, 2 percent, range. Middle-tier and smaller banks are generally advertising rates in the high 4 percent range, but of course will lend in local markets, which the big banks may avoid.
Traditionally short-term lenders, banks are also offering longer fixed-rate terms to attract more business. The depository institutions remain hesitant to extend 10-year fixed-rate loans—which are still CMBS and life companies’ purview—but they are combining fixed with adjustable rates, explained Walter. This might result in a 10-year term, fixed for only three, five or seven years and subsequently reverting to Libor-based semi-annual adjustable rates. These “hybrid ARM-FRM” loans benefit both sides: Banks are very comfortable operating in the three- to five-year space, and the borrower gains a more advantageous prepayment penalty than with CMBS or life companies, he said.
“Banks have competed on rate to the point where they’ve reached critical mass. Rates are at an all-time low, and these lenders need to offer other terms to win deals,” said David Singer, senior vice president & bank relationships manager for the New York-based Eastern Union Funding. Other bells and whistles offered by banks include “interest only for a year or two—sometimes even for the full term, even though historically this was an agency or CMBS lender’s product and not something conventional banks would do.” Banks are also “offering highly competitive self-amortizing deals, so we’re seeing fixed-rate, 15-year loans at 3.25 percent interest, although that is more rare.”
Stay the Course
While their traditional practice may be evolving, banks are not necessarily “doing away” with their standards. Gregg Gerken, head of commercial real estate lending at TD Bank, said that banks are remaining “fairly well disciplined.” Though there are more of them in the market, “they are still able to compete on disciplined terms. If they lose a deal, there is plenty of other deals out there,” especially given the refinance wave of 2015-17, Gerken added.
Indeed, banks are for the most part “staying the course on recourse,” and have not become overly enamoured of extending non-recourse loans, sources argue. Whereas as recently as two years ago, they wanted full recourse, banks are willing now to look at non-recourse for lower loan-to-value financing, said Walter. Nevertheless, Bram said that banks are not pushing very hard to supply attractive terms when the financing is non-recourse.
And while they are touting low interest rates and longer fixed-rate terms, banks are not sharply going up the curve in providing leverage. According to Walter, they are willing to reach 75 percent LTV or LTC on multi-family properties, but not higher than 70 percent on most other product types. In fact, most leverage is still coming in at 65 percent (on non-recourse financing), said Bram.
Still, banks are offering flexibility as one of their hallmarks. They may be more creative in structuring the deal compared to CMBS sources. They may extend a loan for properties with little initial cash flow, may be flexible on the term, and may allow the borrower to take out proceeds during the course of the loan.