REQUIRED READING: Focus On Exit Strategies, Diversity When Examining Lending Programs

Capital is precious in today's world, and bankers have grown cautious – to say the least – regarding to whom they will extend credit.

It is no surprise that borrowers have found that in certain situations, some banks are only willing to lend to existing clients, and some banks will only make capital available if there is an opportunity to sell ancillary services such as cash management or investment banking services.

Other borrowers have discovered that they are reaching capacity with their existing lenders and that their bank is requesting that they refinance existing loans to take them off the balance sheet before extending additional credit for new loans.

This arrangement constrains new real estate development, because the process of accessing new financing takes significantly longer than it did before the credit crunch.

Aggravating the situation, just as borrowers are finding challenges when they go to banks for financing, financial institutions themselves are finding challenges when they try to find ways to share the risk on commercial mortgages.

The syndication markets are choppy; many banks are interested in being the lead, but few are interested in being participants. At the same time, the number of banks needed to syndicate a deal has quadrupled since mid-2007.

In order to free up capital for new construction, many borrowers are looking to the permanent financing market. Presently, Fannie Mae and Freddie Mac are the only games in town, and fortunately, they offer attractive loan-to-value and debt-service coverage requirements.

While the government takeover of Fannie and Freddie has caused some legitimate concern, it is important for borrowers to know that both institutions remain open for business and are actively participating in multifamily lending.

Fannie and Freddie remain good options, and solid relationships with the agencies is still one good thing to look for in a lender. But that is just the beginning.

Between the borrower's challenges and the lender's limitations on risk sharing, what else should today's borrower look for in a lender? Getting back to the basics and taking a close look at a financial institution's capacity and capabilities is a good start.

Getting back to the basics is critical when assessing whether a lender can come through with a real estate loan in today's market. Borrowers should investigate the lender's ability to lend. Is the lender capable of delivering the needed funds?

Unfortunately, the many traditional lenders that historically relied upon conduits to provide exits for construction, interim and bridge loans are unable to continue to provide capital the way they did before.

In fact, almost as soon as warning signs became apparent in the credit markets, larger financial institutions clamped down on real estate lending. Commercial mortgage-backed securities (CMBS) volume dropped from frothy heights to a standstill.

Markit, the administrator of the CMBX index that tracks volume on a twice-yearly basis, went so far as to delay the release of CMBX-5 nearly a month due to the lack of deals. Because most real estate lenders were using CMBS as a frequent exit strategy, when the CMBS markets ground to a halt, so did the origination of many commercial mortgages.

It is important to recognize that all banks continue to be severely constrained by the upheaval in the commercial mortgage markets. When an institution has less capital to lend, getting the best return from that capital is, naturally, the financial institution's first priority.

Lending constraints can come from many factors, but generally, the larger the institution, the larger its real estate lending capacity will be. From a borrower's standpoint, it is important to find out what constraints a potential lender is facing and then identify lenders with as few constraints as possible in this market.

Additionally, diversity has long been understood as a critical factor in surviving many types of challenging market cycles. Likewise, any lender that offers a broad range of capabilities will be better off in this market – particularly if that bank offers a combination of a healthy market basket coupled with multiple exit strategies.

This reasoning is particularly true for banks that have built relationships with agency lenders such as Fannie Mae and Freddie Mac. Banks that have built such relationships tend to not be over-lent, and they are able to take advantage of larger spreads than before. While it may be more expensive for the borrower, the capital is still there for the right opportunities.

Banks with agency conduits in place can implement a number of solid exit strategies, as long as the deals are originated with a specific exit in mind. Rather than the old solution of using CMBS issuances to get loans off their balance sheets, these banks are typically able to work with Fannie, Freddie and the Federal Housing Administration (FHA) to provide conduit loans for multifamily development – for the deals that qualify.

However, navigating the Fannie and Freddie maze can be time-consuming and tricky, so only banks that have put the time and energy into qualifying as an FHA, Fannie or Freddie partner are able to take full advantage of this solution. By using the agencies for deals that qualify, the limited balance-sheet funds that may be available can be preserved for the projects that truly warrant a mortgage right now, despite weakening market fundamentals.

The influx of new borrowers has actually provoked a welcoming response from the agencies, which have instituted new programs to accommodate owners and developers in the business of providing much-needed multifamily housing.

Borrowers who have sought only traditional financing in the past should, in fact, talk to lenders about whether or not a multifamily project might qualify for an agency loan. The agencies are not just set up to fund affordable housing, but now offer programs that cover virtually every type of senior housing, market-rate multifamily housing and even nursing-care facilities.

For instance, Fannie Mae is continuing to expand its relationships with many of its long-term delegated underwriting and servicing partners to accommodate more project types and new markets.

Likewise, the FHA has also been going to great lengths to make sure its programs meet the needs of the multifamily sector. In particular, senior housing programs from the FHA are now offering ways for borrowers to develop many different types of continuing-care facilities that were once classified as medical facilities.

Nursing care, seniors housing with food service, seniors housing accommodating multiple ages in the units – as well as exclusively seniors facilities – are all covered and made accessible through FHA programs.

The different loan programs are available through lenders with whom the FHA has strong relationships. Borrowers should be careful to assess what their potential lender's history is with the FHA in order to ensure a smooth underwriting process and on-time closing. Experience and current strong relationships with the regional FHA office are critical to getting deals done in this sector.

If you represent a borrower with strong fundamentals and an all-star development track record, you can be confident that your project will find a lender to finance it. Just look carefully at each bank's capacity and capabilities before starting the walk to the closing table.

Shawn Riley is senior vice president and retail sales manager of the Key Commercial Mortgage Access group at Cleveland-based KeyBank Real Estate Capital. He can be contacted at (216) 689-4141.


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