Page 20 —
COLORADO REAL ESTATE JOURNAL
— December 16, 2015-January 5, 2016
Finance
I
n early 2014, I wrote an arti-
cle for the Colorado Real
Estate Journal about the
paradigm shift that was occurring
in commercial real estate lend-
ing. The status quo was chang-
ing – banks were breaking the
normanddoing longer-term, non-
recourse loans on their balance
sheets, while more life insurance
companies were taking construc-
tion risk and providing more vari-
able-rate debt to match short-term
annuity businesses. My thesis was
that there was no such thing as
“normal” in today’s lending envi-
ronment, capital sources and loan
products were being blurred, and,
as a result, borrowers were ben-
efiting from more capital options
and better pricing power.
Fast-forward to today. Banks are
now being more selective with
their longer-term fixed-rate pro-
grams in anticipation of the Fed-
eral Reserve beginning to normal-
ize monetary policy in Decem-
ber; however, the life insurance
companies continue to blur the
lines with new lending programs
as more and more of them con-
tinue to search for yield in this low
interest rate environment. The best
example is the ongoing creation of
short-term, nonrecourse “bridge”
programs for transitional assets.
In an effort to find more yield,
several life insurance companies
are taking additional, calculated
risk on transitional assets with
either above-market vacancy or
near-term tenant rollover. These
“bridge” programs can be tai-
lored for specific assets, fund up
to 75 percent of total project cost,
and provide future fundings for
improvements and leasing capi-
tal to help execute specific busi-
ness plans. In essence, these new
life insurance company programs
mirror traditional bank lending,
but come with fixed-rate options
and without personal guarantees.
While there continues to be a
focus on increasing yields and
overall returns going into 2016,
the life insurance companies also
will be heavily focused on increas-
ing their core, long-term lend-
ing businesses to match up with
their increasing long-term liabili-
ties. The common theme coming
frommost life insurance company
investment committees is a desire
to increase their mortgage alloca-
tions next year, given the good
yields, cash flowpredictability and
relative value of the assets com-
pared to alternative investments.
In my opinion, there has never
been a better time to secure long-
term financing
with increased
lender appe-
tite, new and
ever-changing
lending pro-
grams
and
rising concern
of rising rates.
Below are four
ways in which
the life insur-
ance
com-
panies
will
increase their
commercial
mortgage allocations in 2016:
n
Forward loan commitments.
A majority of life insurance com-
panies are still willing and able
to provide forward loan com-
mitments for up to 12 months in
advance of funding. The forward
commitment allows borrowers to
lock interest rates now, while they
remain low, and have a firm loan
commitment subject to any sub-
stantial changes to the property
and its economics. While forward
loan commitments can sometimes
come with a small interest rate
premium (two to four basis points
per month beyond a three-month
free period), the certainty of execu-
tion and minimal increase to the
overall coupon can be extremely
valuable in an uncertain interest
rate environment.
n
Longer-term loan options.
Essex Financial Groupworks with
several life insurance companies
through a correspondent network
that are now offering longer-term
loan options beyond the tradition-
al 10-year fixed-rate period. In fact,
the average loan term originated
by Essex Financial Group between
2014 and 2015 was 12 years. Sev-
eral life insurance companies now
have 20- to 30-year fully amortiz-
ing loan programs that match up
to longer-term liabilities on their
balance sheets (one specific lender
even has a 40-year fully amortiz-
ing option). The most significant
benefit to these longer-term loan
options is locking in a very low
interest rate for a significant period
of time, eliminating future inter-
est rate risk and fixing the most
important variable to predictable
cash flow. Essex currently is in the
market on several 30-year fully
amortizing loan requests, and the
pricing for such product rang-
es between 4 and 4.75 percent,
depending on the property type
and leverage request. Although
most of these longer-term options
come with prepayment penalties,
some life insurance companies
will provide future earn-outs to
increase loan proceeds with future
value creation.
n
Constructionloans.
Thetrend
of life insurance companies com-
peting in the construction lending
space with new and revitalized
construction loan programs con-
tinues to increase. The concept is
to secure the permanent financ-
ing by taking the construction risk
and providing the construction
financing. The ideal structure for
most life insurance companies
include a 12- to 24-month con-
struction period with necessary
completion guarantees, followed
by aminimum five-year loan term
and maximum 30-year loan term
upon construction completion.
The benefit to the borrower is a
fixed interest rate during the con-
struction and permanent periods,
plus a guaranteed takeout at con-
struction completion. Although
originally conceived to lend on
ground-up apartment projects
to steal market share from Fan-
nie and Freddie, programs have
evolved to fund credit tenant com-
mercial projects and select retail,
office, industrial and hospitality
developments. Most life insurance
company construction loans need
to be larger than $20 million on
assets located in primary markets.
n
Construction loan takeouts
prior to stabilization.
For years,
Fannie Mae and Freddie Mac
dominated multifamily lending
and financed the lion’s share of
stabilized apartment communi-
ties, consistently beating life insur-
ance companies with higher loan
proceeds, lower interest rates and
longer amortizations. Although
much more competitive today
with lower spreads and whole
interest rates than agency execu-
tions, life insurance companies
continue to findways to steal mar-
ket share from Fannie and Fred-
die. Aproven and successful tactic
has been to take out apartment
construction loans at construction
completion, prior to lease-up and
stabilization. Typically, life compa-
nies won’t fund until the property
is generating a 1.00x debt cover-
age ratio. In addition, this type of
financing execution may require
additional credit enhancement (i.e.
master lease, debt service reserve,
personal guaranty) until there
is sufficient cash flow to cover
debt service 1.25x, but the credit
enhancement burns off and the
loan becomes nonrecourse once
the property’s cash flowcovers the
debt obligation.
s
Cooper Williams
Principal, Essex
Financial Group,
Denver
Commercial Real Estate
Lenders
Directory
COMMERCIAL REAL ESTATE LENDERS DIRECTORY
Academy Bank
Arbor Commercial Mortgage, LLC
Bank of America Merrill Lynch –
Commercial Real Estate
Bank of Colorado
Bank of the West
Berkadia Commercial
Mortgage, LLC
Bloomfield Capital Partners, LLC
Capital Source
CBRE|Capital Markets
Chase Commercial Term Lending
Colorado Business Bank
Colorado Lending Source
Commerce Bank
Commercial Federal Bank
Essex Financial Group
Fairview Commercial Lending
FirstBank Holding Company
Front Range Bank
Grandbridge Real Estate Capital LLC
Hunt Mortgage Group
JCR Capital
Johnson Capital
JVSC-CBRE Capital Markets
KeyBank N.A., Key Commercial
Mortgage Inc.
Merchants Mortgage and Trust Corp.
Midland States Bank
Montegra Capital Resources,
Private Lender
Mutual of Omaha Bank
NorthMarq Capital, Inc.
RNB Lending Group
TCF Bank
Terrix Financial Corporation
Trans Lending Corporation
U.S. Bank – Commercial Real Estate
U.S. Bank SBA Division
Vectra Bank Colorado, N.A.
Wells Fargo SBA Lending
Wells Fargo N.A. – Commercial
Real Estate Group
