One of many recent deals, LaSalle Bank NA was the lender involved in a $12.4 million refinancing of Boston’s 176 Federal St., pictured above.
The torrent of water rushing into Massachusetts this year from record rain storms has finally ebbed as the summer dog days take hold, but there is no such slowdown of money pouring in to finance commercial real estate.
“There is still a lot of money chasing deals,” Ashworth Mortgage Corp. principal Richard B. Ashworth reported last week. “All the lenders have huge expectations [to place capital], and they are having trouble meeting their quotas.”
According to investment banking expert George J. Fantini Jr., upwards of 50 so-called conduit lenders could be quickly rounded up for a boilerplate $10 million commercial real estate loan opportunity, while life insurers are also aggressively pursuing deals. “It continues to be an exceptionally good time to borrow,” said Fantini. “All the stars are lined up right now.”
Virtually every property type and most regions in the country are the beneficiaries of the financing glut, said Fantini, a founder of Boston-based Fantini & Gorga, which can tap into more than 300 capital sources to power a deal. Although office, retail and multi-family remain especially popular, lenders are also embracing industrial real estate and even the oft-volatile hotel sector. In one recent deal, for example, Fantini & Gorga arranged a $17 million loan for the acquisition of a Virginia hotel by a Boston-based investor.
Meredith & Grew Capital Markets Group Vice President Thomas F. Welch agrees that hotels have surged back into favor during the past year, particularly for full-service operations located near urban centers such as downtown Boston. Spreads over the treasury for a typical hotel loan have fallen from above 200 basis points two years ago into the low 100’s, he said, and multiple suitors can today be found to finance a hospitality property. A client Meredith & Grew is currently representing has been favorably received in its efforts to refinance a Bay State hotel, Welch said, and a recently completed refinancing of another regional hotel saw the pricing bid down substantially due to competition. Conduit lenders are especially eager to do hotel loans, he said.
In most instances, said Fantini, lenders are being prudent in underwriting and keeping terms from getting too onerous, but Ashworth said the desire to place capital and produce yields is luring some players to delve into riskier areas such as bridge or mezzanine financing. Others are offering loan-to-value ratios above 80 percent, interest-only instruments and even amortization schedules going outward to 35 years, a length Ashworth said was heretofore difficult to secure. “People are trying to come up with creative ways to separate themselves from the pack,” he explained, adding he believes the strategies are mostly sound.
The continued ratcheting up of interest rates and questions about the long-term health of the economy have done little to curb enthusiasm for commercial real estate, said Ashworth, who has been active through the mid year and expects to be for the remainder of 2006. “We have a good pipeline right now,” the industry veteran said of his Newton-based operation, which offers everything from construction and permanent mortgage loans to bridge, mezzanine and joint-venture funding sources. Both Ashworth and partner June K. Fish each have more than 25 years of commercial lending experience.
As with Fantini and Welch, Ashworth declined to identify his clients or cite specific deals his firm has participated in, but he provided an outline of several recent loans which have been completed by his company in New England and beyond. Ashworth Mortgage provided an 80 percent loan-to-value note for the purchase of a Boston office building, for example, with an amortization schedule of 30 years and spread over the treasury of 107 basis points. Another 80-percent LTV loan was secured for a shopping center acquisition in Woonsocket, R.I., a deal also sporting a 30-year amortization schedule and a spread over the treasury of 93 basis points. Ashworth Mortgage also arranged loans recently for apartment properties in Brookline and in Sarasota, Florida.
Other local investment banking and brokerage houses which have enjoyed robust business placing capital of late include Holliday Fenoglio Fowler LP and CBRE | Melody. Last month, for example, HFF Director Janet Krolman and Senior Managing Director Fred Wittmann tapped conduit lender LaSalle Bank NA for a $12.4 million refinancing of Boston’s 176 Federal St. The 80 percent leveraged financing “was a bit challenging,” said Krolman, due to some occupancy issues, but the client, 176 Holdings LLC, was able to lease much of the vacant space prior to the closing of the refinancing.
The LaSalle Bank deal is intriguing in another respect in that the institution has apparently embraced the commercial mortgage backed securities (CMBS) movement by establishing its own conduit lending arm to originate loans prior to securitizing the notes. According to Fantini, it is a strategy more banks are considering as they see their future in mortgage financing threatened by the CMBS movement.
Life companies including Prudential Insurance and Principal Financial have also launched their own conduit operations, but some maintain the issue is even more urgent for banks given the rapid deterioration of their commercial real estate mortgage share, an arena that has been quickly eclipsed by conduit sources. But while large players such as Citigroup and Bank of America are pooling loans for securitization on their own accord, Fantini said that may not be an easy solution for smaller- and mid-sized banks.
In the 15 or so years that CMBS has become a viable option for borrowers, banks have lost significant market share of the permanent mortgage finance business. Not only are conduit lenders able to provide favorable terms such as non-recourse financing, they can be more competitive on pricing because they are not subject to the same regulations and reserves that banks are mandated to keep in tow. The banking industry has not been quick to adjust its cost-structure or devise products that can compete with conduits, said Fantini, who offers little optimism that the situation can be reversed to any great degree.
“They have shown no evidence of closing the gap,” said Fantini, instead relegating bankers to peddle loan products that conduits and other capital sources have traditionally shied away from such as construction and land acquisition. Even those harbors are being threatened, however, with certain conduit players said to be considering construction lending going forward.
Whatever the market, capital does appear to be plentiful as the final half of the year begins in earnest. Although the summer doldrums have kicked in somewhat, Welch said his company remains busy and is anticipating doing another $1 billion in business this year, a milestone that was accomplished in 2005. Meredith & Grew has always had a strong presence in the retail lending field, and Welch said that product type continues to attract capital following several years of solid performance. Led by Meredith & Grew principal Kevin Phelan and featuring such experienced finance specialists as David Douvadjian, Judith Bairstow and Stephen Horan, the Capital Markets Group is assisting several hotel clients and also taking advantage of increased acceptance among capital sources for suburban office buildings, Welch said, including those in fringe markets. One Meredith & Grew deal currently in the works is the refinancing of an office property in the Interstate 495 North region, an opportunity that has attracted several candidates to do the deal. “The whole tone of the lenders is different than it was two years ago,” Welch said. “The bottom [of the market] has been defined and people are looking to take advantage of the [anticipated] recovery.”
