8
Local Real Estate Financing
In order to determine local real estate financing terms a number of bankers, mortgage brokers
and other lenders are interviewed on a continuing basis.
Local
banks that survived the poor local economy of the mid-1980s through the early 1990s or
merged with more profitable and stable financial institutions, began to lend on commercial real estate
several years ago and have been actively pursuing loan opportunities involving commercial real estate.
Banks have traditionally been "relationship" lenders, not "transaction" lenders, focusing on lending
services to bank customers, but many banks are now looking at additional profit lines, including
increasing loan terms and amortizations and lending on a transaction basis to attract new business.
Historically, bank lending rates were generally tied to the bank's prime rate with a margin of 1% to 2%
over prime, a 1 point fee, amortizations ranging from interest only to 20 years and with terms from 1 to 5
years. In recent years local banks have been very active in real estate lending in attempts to create,
maintain or gain market share. Mid size local and larger regional banks appear to be the most aggressive
with borrowing rates lower than the Prime rate not uncommon. Typically, banks require some level of
financial guarantee from borrowers in addition to the property collateral. A bank's focus still remains in
the arena of construction loans, interim loans and loans for owner-occupied properties, but they are also
willing to look at special-use properties, including land as security. Loan amounts range from $20,000
to $100,000,000.
Life insurance companies are lending in the Denver area, increasingly through designated
correspondents. Like banks, they are only able to lend on very secure projects; however, permanent as
well as interim funds are available. Rates range from the 120 to 250 basis points over corresponding
treasuries range with 75% loan to value ratios and a $50,000,000 limit. Terms range from 7-15 year
calls with 20-30 year amortization. Although life companies remain committed to commercial mortgage
and residential mortgage investments as long-term investments, some small to mid-size life companies
are investing in CMBS securities as a way to limit the risks associated with direct lending.
Small Business Administration loans have traditionally been available only from specialists in
their processing, local banks are also venturing into this market as a way of diversifying and increasing
loan activity without an unacceptable increase in risk. SBA loans are universally for owner occupied
existing properties below $1,000,000 and rates are currently in the 9% to 10% range with 80% to 90%
loan to value and 20 to 25 year amortization. SBA loans have also become more prevalent in the market
as a way for banks and conduits to increase loan and servicing fees. Acceptance of SBA loan backed
CMBS has also improved, increasing the liquidity of these investments.
Pension
Funds became disenchanted, nationally, with real estate in the recent past due to poor
investment performance. Until recently, pension funds viewed Denver as a potential turnaround market,
rather than a high quality investment market, but with the local economic recovery becoming more
broad-based and widely recognized, pension funds have again begun to actively pursue investments in
Colorado, although generally only the best 5% to 10% of properties are considered "investment grade"
real estate that this type of investor will consider. For some new multi-family development, pension
funds are interested in participating mortgages (equity or cash flow participation) as well as equity
purchases. Minimum loan amounts with pension funds are generally near $10,000,000 with interest
rates range from 85 to 170 basis points over corresponding treasuries.
Savings and Loans in the Denver area are also beginning to return to the commercial loan
market. Some are active in the residential loan market with a small number making multi-family loans
from $300,000 up to $1 million. Commercial loan to value ratios are typically up to 75% with debt
service coverage at a minimum of 1.20. Loans are typically for 20 to 30 year amortization and with
fixed rates for only 3 to 5 years. Because of the relative stability of the Federal Home Loan Bank's 11th
District Cost of Funds Rate, however, many borrowers are electing to accept longer term (up to 15 year)
adjustable rate loans using this index with a spread of 220 to 300 basis points.
Wall Street/Conduit Lenders have grown dramatically in recent years and have become an
active player in providing financing of commercial and multifamily real estate. The financial markets
have recognized in the past five years a lucrative market in commercial real estate loans. Securitization
