Ample Funds Available
Chicago, Illinois -- (ReleaseWire) -- 11/28/2006 --Permanent loans, mezzanine, secondary and other debt financing options are abundantly available for most existing properties with reasonable cash flow streams. Furthermore, terms and conditions have never been more favorable. Lenders are accepting low spreads at reduced (or no) fees, and offering other incentives including lower legal and third-party processing costs.
Lenders willing to take more risk and earn higher returns are venturing into construction loans. Beside fees and interest rate charges on construction loans, lenders usually have an exclusive right of first refusal to provide permanent financing on completion. And banks in particular, can continue maintaining business account relationships with developers.
Construction loan risk control measures mainly include sufficient preleasing, bonding of costs, take-out commitments and personal guarantees. These requirements provide safety nets and enhancements over and above the actual construction process. However, construction lenders demanding these requirements are not particularly competitive in today's funding environment. The only variable these lenders can offer is extremely competitive pricing (e.g., 120 basis points over 30-day LIBOR).
Lenders earning attractive fees and interest rates are venturing into more entrepreneurial funding territory -- open-ended construction loans without preleasing. Opportunities here include lodging, multifamily, office and retail properties. Within these various property types, lenders can earn returns as low as 130 basis points over 30-day LIBOR (assuming substantial equity) for multifamily assets, to more than 300 basis points for lodging properties with higher leverage (80% or more).
In addition to pricing, lenders can enhance the dynamics of the transaction by only requiring completion guarantees and other minimal enhancements.
Says Nat Zvislo, director of the Real Estate Capital Institute, "high leverage, open-ended construction loans without preleasing are the last frontiers for earning attractive spreads and fees in the real estate capital debt markets."
The Real Estate Capital Institute is a research organization dedicated to studying debt and equity markets for commercial properties in the United States. The Institute's website (www.reci.com) offers a variety of information on fixed and floating rate debt pricing. Additionally, interest rate market updates are available on an hourly basis by calling the Real Estate Capital Rateline at 773-227-4825.