A year ago, commercial borrowers were complaining they had virtually no access to any sort of financing. And while that may no longer be the case, it’s not necessarily good news, either.

Life insurance companies, desperate for investment income, are not only back in the game, but they’ve also dropped interest rates and made concessions on debt. Small- to medium-sized banks are engaged in sometimes-fierce competition for business. Investors in mezzanine debt are scouring for properties to invest in.

But all that money is only interested in a very small slice of the commercial market – stable, income-producing properties, preferably in need of debt under $50 million. Those properties are rare these days, and anything else still has loads of trouble securing financing.

“Commercial real estate still has good risk-adjusted returns, with the right underwriting,” said Peter Goedecke, managing member of Boston financier Goedecke & Co. “It’s tough to find stuff that works. The hardest thing is finding properties that underwrite properly.”

A Tale Of Two Cities

“It’s a tale of two cities,” added John Fowler, executive managing director of Holliday Fenoglio Fowler. “If you don’t have the right sponsorship, or if you have leasing rollover, you’re going to have a tough time financing it.”

“If you have stabilized property, something that’s well-leased without a lot of expirations in the near term, and it fits within a certain size, it’s not too big, there is a market for that debt,” said Beth Mitchell, co-chair of the commercial finance practice group at Boston law firm Nutter McClennen & Fish. “There are a lot of lenders willing to make that loan. It’s pretty competitive, and the terms are good. If you fall outside that box, it can be pretty challenging to find debt.”

Fowler noted that lenders are “financing the income stream, not the bricks.” And these days, many income streams are stressed by rising vacancies and falling rents. Even without taking tumbling fundamentals into account, capitalization rate expansion, the rate used to determine the worth of income-producing properties, has eaten into values by roughly 30 percent. So even strong candidates for refinancing need some form of recapitalization; buildings that have seen recent spikes in vacancy, or that are rolling out of loans made when values were at their peak, still find the debt markets all but shut to them.

“You have to have a loan-to-value ratio and cash flow that work,” Goedecke said. “Rollover from construction loans generally won’t work. If the loan was sized three years ago, it doesn’t work. If it was ten years ago, that might work.”

The RAM Cos.’ recent purchase of an 80,000-square-foot flex building at 10 Industrial Ave. in Chelmsford illustrates the seismic shifts in valuation and financing underway. The property traded for $7.3 million in a submarket where values have been decimated. RAM was also able to pull down a $5.5 million note from River Bank, making the property 75 percent leveraged. That’s on the high end of loan-to-value ratios being made today. RAM was able to secure the debt because the building is under a long-term lease to the Department of Veterans Affairs.

Still, the seller, the New Boston Fund, paid $11 million for the property in 2006. New Boston had more than $10 million in debt on the property from Wachovia.

Mitchell, of Nutter, said financing remains scarce for larger loans. “Over $50 million, it gets much more difficult.” In fact, according to data from the Warren Group, publisher of Banker & Tradesman, only 17 mortgages in excess of $50 million have been filed with county registries of deeds since the start of the fourth quarter 2009.

“If you’re a strong borrower, and you put up equity and guarantees, it’s still possible, but it’s taking a lot more time,” Mitchell added. “You have to talk to more lenders than you ever have before, and if you have to assemble a group of lenders, it takes even longer. It’s a much more cumbersome process.”

Fertile Ground

Sliding values mean even good deals generally need some form of deleveraging and recapitalization. That’s where folks like Daniel Mee come in. Mee, founder and executive director of Tremont Realty Capital, supplies mezzanine financing out of offices in Boston, New York, Chicago and Hartford, among others.

“From late 2007 to mid-2009, there was nothing going on, zero,” Mee said. “We were in the market, we’d look at hundreds of deals, and none made any sense.”

Now, that’s no longer the case.

“There are some really encouraging green shoots,” Mee told Banker & Tradesman. “Candidly, it’s pretty fertile ground now. If you have conventional financing, almost every deal needs [mezzanine debt].”

The difference from nine months ago, Mee said, is that more and more deals in need of mezzanine financing underwrite properly. That’s not to say there’s a plethora. But the numbers are improving.

“You go up the rent rolls, make some very stressed assumptions about the tenants, probably unrealistic on the negative side. That’s why most don’t underwrite right. You’re putting them through such stressed underwriting. Six months ago, there was a trickle of transactions, and one out of every hundred made sense. The trend continued, and now, one transaction a day makes sense. One of every ten you want to spend time on.” He added, “There’s a fair amount of weakness in the economy, and that’s stressing a lot of deals. It’s still far from a frothy market, but the trend is very encouraging.”