Catching their interest

When Leslie Ludwig starting shopping around to finance her company's next office project, she had no idea she'd get such an enthusiastic response from Washington-area banks. After letting eight real estate bankers know The JBG Cos. was looking for money to develop a new office building, she received seven offers.

The building wasn't even pre-leased.

"We had a similar deal about two years ago that we took to the market, and we got three responses," says Ludwig, senior financial officer at Chevy Chase-based JBG (www.jbg.com), which develops and manages commercial and residential real estate throughout the Washington area. "Vacancies [in office buildings] are higher now than they were then, so it's not logical."

But for banks it is a rational reaction to changes locally in the financial services industry. So many banks have moved into the area that lenders must offer developers unexpectedly good terms and especially creative financing to compete for a role in the project.

And banks, of course, aren't just competing against other banks these days. Life insurance companies, for example, also are offering construction loans.

A focus on the federal city

The intensified competition here isn't so much a sign of optimism about real estate in general as it is a reflection of the Washington area in particular.

Though weakened by the downturn of the past two years or so, Washington still has one of the strongest office markets in the country, in large part due to the presence of the federal government.

"You have a national group of lenders who are now focusing on a few spots because some of the other markets in the country have not performed as well," says Bill Brandt, senior vice president of commercial mortgage for SunTrust Banks' mid-Atlantic group (www.suntrust.com).

Markets that were hot five years ago have cooled considerably, "so everyone has focused on this market," he says.

Recent arrivals to Washington's banking scene come from around the nation and even outside the country.

A few examples:

New York-based Independence Community Bank (www.icbny.com) expanded its commercial real estate lending activities to the Baltimore-Washington market in July by establishing an office in Columbia.

Corus Bank (www.corusbank.com), a Chicago-based institution that doesn't have a branch in the Washington area, has provided financing for several local projects, including the Residences at The Ritz-Carlton in Georgetown and the Hilton Garden Inn, also in the District.

First Tennessee Bank (www.firsttennessee.com), based in Memphis, set up operations in Fairfax last year to build on its mortgage and construction loan business in Northern Virginia.

The Royal Bank of Canada recently opened an office in Reston to offer construction loans. It also has an office in Newport News, Va.

Getting everything locked up

In the new competitive atmosphere, some lenders are allowing developers to lock in interest rate on loans for projects whose completion is still a year or more away.

Although locked-in rates aren't new, developers are seeking them more frequently now because they expect interest rates to rise after the November elections.

"Developers were typically not users of hedging instruments," Ludwig says. "Now we use it as part of our business to solely protect our interest rate."

The luxury of a locked rate does come with some cost: extra fees tacked on as points over the life of the loan.

"There's an equation that developers have to make in their heads," SunTrust's Brandt says. "Am I willing to pay that much more in my rate over the duration of the loan for that safety of being able to know what my rate is?'"

But for many developers the extra fees may be worth it when the basic underlying rate is so low.

The interest on commercial real estate loans in the United States is based on the London Interbank Offered Rate, or LIBOR, the most widely used reference rate for short-term interest rates.

LIBOR, determined daily by the British Bankers' Association, has become a global benchmark rate because more than 20 percent of all international bank lending and more than 30 percent of all foreign exchange transactions take place in London banks.

The rate, which traditionally sits around 5 to 6 percent, has recently hovered around 1.1 percent.

Being aggressive to win

SunTrust's mid-Atlantic office, whose target market is mid-size and large developers seeking less than $100 million, has been offering locked-in rates to developers of promising projects.

"You can get a 10-year fixed-rate loan now for close to 5 percent, which was unheard of five years ago," Brandt says.

His bank will lock in rates only for high-end projects, which Brandt defines as those that SunTrust thinks have a high potential of performing well.

For example, a residential project in an up-and-coming neighborhood would likely qualify for a locked-in rate, he says.

"If you had something that was a little more risky like a shopping center, you wouldn't feel comfortable for the market conditions of that property in 18 months," Brandt says. "As a lender, you're making a leap of faith that the market is going to be good."

Besides providing more rate lock-ins, bankers in the Washington area also help developers protect their pocketbooks in another way.

They're providing "non-recourse" construction loans, which means the developer doesn't have to personally guarantee repayment.

The developer does, however, have to personally guarantee the project be completed. And if there's a default, the lender still takes over ownership of the project.

"Lenders are being more aggressive, and to win business they're having to give up that recourse during the construction process," Brandt says.

Lessons from tech land

JBG's Ludwig says the competition has become so fierce banks are offering loans to developers who in the past probably would not have been financed.

"This happened in the 1980s, too, where you had people with little experience and not a lot of money, and they're getting loans that they wouldn't have gotten five years ago," she says. "Many of the lenders have decreased their lending standards."

The real estate activity today activity is reminiscent of the ways venture capitalists chased after Washington-area technology companies in the 1990s, seemingly willing to fund and all tech startups.

Many of those venture capitalists had to close their doors as the tech economy went bust. Ludwig says commercial real estate bankers need to be cautious.

"You want to be careful," she says, "because you don't want to forget that things can change."

Tania Anderson is an Arlington-based freelance writer.

© 2004 American City Business Journals Inc.