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James Real Estate - RE Fin Terms Dnvr 2000 3rd Qtr (Page 1)

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James Real Estate - RE Fin Terms Dnvr 2000 3rd Qtr
1
DENVER METROPOLITAN AREA
REAL ESTATE FINANCING TERMS
3rd Quarter 2000
Jeffrey J. Smyth, CCIM
William M. James, MAI

Since the turn of the century, Denver has grown from 134,000 people to a metro area population
of over 2.2 million. Denver has traditionally been a net importer of capital to support real estate and
other development, and is noted for its "boom and bust" cycles - the most recent was in the early to mid-
1980s. Like most of the U.S., this boom was fueled by a combination of excess capital from lending
institutions and tax laws that encouraged real estate investment. Increasing oil and gas prices also
contributed.
When natural gas prices dropped in 1983 and world oil prices followed, Denver's energy
industries began to contract and population and employment growth slowed. The 1986 tax reform act
removed most of the tax incentives to real estate ownership. As a result, the value of virtually all types of
real estate in the badly overbuilt Denver real estate markets plummeted. This was definitely an
unhealthy financial situation for real estate lenders as millions of dollars were lost in real estate loans.
Thus, in 1990-1991, financing was simply not available for any but single family homes and the best
commercial/investment real estate. In many cases, only "credit leased" and owner-occupied properties
could be financed. Money was available only to financially strong borrowers. Underwriting of the real
estate was almost a secondary consideration. By 1992-1993, a few "aggressive" lenders started returning
to the market. To offset the perception of risk, loan ratios were lower (50% to 65% of value) and
property types were generally limited to post-1980 apartments and well occupied retail and industrial
properties in market areas with low vacancies.
Today, with Denver perceived as one of the country's strongest real estate markets financing is
available for most types of improved properties. Risk pricing of loans is typical, however; where
"credit" leased properties on a long term basis might command rates as low as 120 basis points (1.2%)
over Treasury securities. Rates for class B and C properties and/or in market areas with higher vacancy
tend to be higher ranging from 200 to as high as 350 basis points (2% to 3.5%) over corresponding
Treasuries terms.
There is adequate financing available for new residential development. A feared shortage of
single family lots has been mitigated largely by bank financing of new lot development since early 1993,
and builders have generally been able to finance the new homes needed to support the population and
employment increases of the past 5+ years. As was the case for the rest of the country, much of this
demand for housing was also fueled by declining home mortgage interest rates. Multi-family
construction has also increased in recent years, but lenders' stringent underwriting has so far prevented
any significant overbuilding.
Financing has become more readily available from a variety of sources over the several years for
other property types. This has generally occurred as vacancy rates have improved; first for industrial
properties, then retail and more recently for office buildings. In today's market, about the only broad
category of property type for which new financing is still difficult is land purchased for long-term
speculative investment.

General Interest Rate Trends

In response to the 1991-1992 recession, the Federal Reserve allowed short-term interest rates to
remain low through 1993 with an average prime rate of 6.0 percent. Fearing increased inflationary

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