Wave of smaller lenders taking advantage of rules

As Joe Walsh sang "life's been good to me so far" to a packed crowd at the House of Blues in downtown San Diego last week, his words rang true to the swaying sea of suits.


The crowd, mostly made up of overweight, middle age men, was a private party thrown by Lehman Brothers and UBS for hundreds of commercial mortgage bankers taking a welcome break from hours of meetings at their annual Mortgage Bankers Association convention.


If the bankers learned nothing else last week, they went home assured that it is a good time to be in the commercial real estate business.


Deals are getting done at a seemingly reckless pace. As the torrent of money continues to flow, new lending products and lenders to peddle them are springing up almost monthly. What has allowed the new lenders to offer different products is something known as a CDO, or collateralized debt obligation.


CDOs essentially allow relatively small lending and equity groups to reduce their cost of capital to levels previously reserved for only the largest companies. The result is lenders that developers have never heard of are entering the market and competing against the likes of GE and Merrill Lynch.


In recent months, several new groups have entered the market to offer higher leverage debt and preferred equity. Crystal Capital, Sandleman Partners, JCR Capital and Stillwater Capital Partners are just a few obscure names that come to mind, each offering a variety of products that could eventually be put into a CDO pool.
More innovative and cheaper lending products are what these and the established lending groups are offering. A recent innovation that should be interesting to developers is the ability to finance partially leased properties on a fixed-rate basis. Properties that are in lease-up and have achieved 50 percent to 65 percent occupancy can now be financed with structured fixed-rate loans that are priced with only a marginal premium.


According to the John B. Levy & Co. National Mortgage Survey, fixed rate five- and 10-year loans for fully occupied properties now price in the 5.75 percent to 5.85 percent range. This is attractive when compared to even the least expensive floating-rate loans, which are priced anywhere from 6.50 percent to 7.25 percent.


The flow of capital has created record loan production in the industry and opportunity for very large transactions that previously would have been difficult even for the largest lenders.


Transactions have become so rampant and large that the purchase of Arlington-based Mills Corp. for $7.5 billion (including assumption of debt) was announced last month with virtually no fanfare.


When closed, the deal would bring the troubled REIT private and put the ownership of Potomac Mills and other Mills concepts in the hands of Canadian-based Brookfield Asset Management Inc. Of course, the transaction is already in jeopardy because other suitors are bidding up the price.


So far, as Joe Walsh sang, things are great, just as they were for residential real estate people a short 12 months ago. The worlds of commercial and residential real estate are vastly different, but it doesn't take much analysis to conclude that good times can change abruptly. Andrew Little is an investment banker with John B. Levy & Co. He can be reached at alittle@jblevyco.com