FEATURE ARTICLE, OCTOBER 2004

TALKING MONEY
Lending companies discuss current trends and predictions for financing in the Northeast.
Dawn Pick Benson

Northeast Real Estate Business recently spoke with leading lenders across the Northeast to get their take on current market conditions, as well as their predictions for lending in 2005. The consensus is that the New York City market is performing the best overall. While multifamily and retail properties are performing exceptionally well, the suburban office market is lagging. Many lenders are also reporting that their lending volume is up significantly this year over last year, and most predict that the overall lending environment will continue to be very competitive.

Northeast Markets

Many markets are doing well in the Northeast, but according to lenders, New York City is outpacing them all. “Metropolitan New York City is the strongest market at present, both in Manhattan and in the New York/New Jersey/Connecticut suburbs,” says Dan Guenther, director of portfolio risk with MetLife Real Estate Investments. “Philadelphia is also benefiting from strength in the life sciences sector of the economy,” he says. Hartford and Providence are growing slowly; Metropolitan Boston is starting to stabilize from the dot-com/telecom slump, but Guenther says mergers in the financial services sector may delay an economic rebound.

“The markets that I work in — New York, New Jersey and Pennsylvania — are all hot,” says Gary Cohen, regional vice president with PW Funding Inc. “With low interest rates and institutional investors still aggressive on real estate, they are bidding up the prices for assets.”

“The market for acquiring and financing properties net leased to credit tenants — regardless of property type — is strong throughout the country, including the Northeast,” says William Pollert, president of Capital Lease Funding Inc.

While residential and retail are the most active sectors in the Northeast, most lenders say the suburban office market is not faring as well. “Retail and apartments in the Northeast are hot,” says Marilyn Mawn, associate director with Bear, Stearns & Co. “New York office is particularly strong right now as well. But suburban office outside of the New York metro area is struggling.”

John Edwards, director with Arbor Commercial Mortgage, agrees. He says that major markets in the Northeast are seeing significant condo activity, but the office markets continue to struggle.

“New York City remains very active, especially in the residential sector,” says Patrick Crandall, vice president and regional manager at Fremont Investment & Loan. “There have been numerous office acquisitions in Manhattan over the past 18 months, and the fundamentals for the office sector continue to improve.”

According to Crandall, Boston has also been very active on the residential side, but the office market there continues to languish. “Suburban office in most of the Northeast is still somewhat soft,” says Crandall.

Guenther also says the apartment sector has performed exceptionally well in the Northeast, with upscale retail centers a close second. “Office markets are also showing signs of improvement, as is the warehouse sector in New Jersey,” he says.

Scott Zucker, managing director and head of origination with CDC Mortgage Capital Inc., says that anchored retail in in-fill urban locations is doing well.

“We like urban retail, especially in underserved areas,” says Chuck Rosenzweig, managing director with RBS Greenwich Capital. He adds that the company has also done well with lending on office buildings in Manhattan and in Fairfield County, Connecticut.

The hotel market has been improving in Manhattan, says Crandall, and industrial remains steady. However, he says limited-service hotels in secondary markets are lagging.

Current Trends and Future Predictions

When asked how current lending compares with lending in 2003, Mawn says demand is much heavier now. “Bear Stearns’ volume is up significantly from 2003,” she says. Andrew Fawer, managing director with CIBC World Markets, agrees: “We had a record year in 2003, only to be broken in 2004.”

Kennedy Funding has also seen an increase in volume compared to 2003. “And we see no reason this should not continue into next year,” says Jeffrey Wolfer, president of Kennedy Funding.

“Lending volumes and competition remain at high levels this year,” says Guenther. “Most lenders appear to still be underwriting prudently.” However, he says that high property valuations pose additional risk for lenders in 2004.

Crandall says there continues to be a significant amount of capital available in the marketplace, and lenders are increasingly aggressive to win quality projects with quality sponsors. “The recent increase in interest rates doesn’t seem to have slowed the pace of investment sales or development in active markets,” he says.

“There has definitely been more competition this year as some new lenders have entered the market,” says Rosenzweig. He says this has led to more capital, and borrowers have benefited as loan spreads have come down due to the increased competition.

Zucker also says the competitive lending environment is leading to tighter spreads and easier underwriting standards than in 2003.

The demand for permanent credit tenant lease (CTL) financing is somewhat stronger than in 2003 as borrowers seek to lock in today’s low rates, long-term, before rates begin to move up, says Pollert.

In regards to the year ahead, many believe the lending environment will continue to be extremely competitive. “If interest rates move up — and most people think they will — the lending environment will become even more competitive,” says Cohen. “There will be less trading of properties and less refinancing, so lenders will be doing all they can to get business.”

“We feel there will continue to be an abundance of capital, and the environment will continue to be competitive,” says Mawn. “Talk of the Fed increasing rates continues to motivate property owners.”

Guenther also believes that competition will remain intense. “Cap rates are likely to stabilize soon and to start trending upward modestly in 2005 as interest rates rise,” he says.

As rates rise in 2004 and 2005, Pollert says there will be increasing pressure for borrowers who are on floating-rate mini-perms to lock in permanent financing.

“I think interest rates will continue to rise at a moderate pace and the environment will remain highly competitive as fundamentals continue to improve along with the overall economy,” says Crandall.

While interest rates will affect the lending environment, changes in underwriting are also expected to affect the competition amongst lenders. “In our sector of the business, we are less affected by interest rate fluctuation than by tightening of credit underwriting by the banks and other more traditional lenders,” according to Wolfer of Kennedy Funding. He says, “People who utilize Kennedy Funding do so not for pricing, but for the ability to get the deal done when no one else can, because certain aspects of the deal may not be ‘bankable,’ or the need for speed. Not many companies can close a $5 million, $10 million, or $20 million dollar loan in a week or two.”

Looking to the future of lending in the Northeast, lenders have various predictions. “I think 2005 will see a slowdown in the financing business,” says Cohen, “but hopefully in 2006 and beyond, we will see a pick-up because a lot of the business done in the mid- to late- 1990s will start coming up for refinance.”

“Institutional lenders will continue to seek out opportunities in major metropolitan areas in the Northeast as the long-term economic outlook is bright for this university-laden region in an increasingly global economy,” says Guenther. He predicts that smaller metro areas will struggle, however, as the manufacturing sector continues to contract.

Capital Lease Funding, Inc. Headquarters: New York Active: Capital Lease Funding (CapLease) is a publicly traded net lease REIT focused on commercial real estate assets that are net leased to high credit quality corporate, governmental and not-for-profit tenants. Types of loans provided: CapLease offers self-amortizing, long-term credit tenant lease (CTL) loans with debt service coverage as low as 1.0; “balloon balance” credit tenant lease financing; high-leverage, 10-year CTL debt structures; rate locks and forward take-outs; property acquisitions and equity partnerships; and Joint Venture Development Programs that provide equity to cover pre-development costs and meet the equity requirements of the construction lender. Recent Transaction: CapLease structured and closed a $22.8 million loan for the construction of a 100,000-square-foot medical research building in Farmington, Connecticut, which is leased to the University of Connecticut. Construction is expected to be complete in early 2005. The transaction had several unique aspects. In addition to requiring the loan to be funded within a tight timeframe, the borrower was seeking to obtain construction financing while simultaneously locking in permanent financing at today’s historically low interest rates. Other issues included the lack of a special purpose entity, sovereign immunity, appropriations risk and use restrictions. CapLease was able to structure a permanent fixed-rate credit tenant lease loan that served as both a construction loan and permanent financing. The full amount of the permanent loan was funded pre-construction and the borrower was able to lock in today’s low rates. The loan closed within weeks of application. — William R. Pollert, President

Kennedy Funding, Inc. Headquarters: Hackensack, New Jersey Active: Nationwide Types of loans provided: We provide asset-based loans, primarily real estate financing. We specialize in hard-to-do deals, including bankruptcy, foreclosure scenarios, land loans and development loans. We also are known for closing very quickly, sometimes in as little as a week. Popular loan products: There is a lot of demand for land development loans, particularly for the mid-level developers and projects. We are also seeing a lot of redevelopment type loans, i.e. acquisition and positioning for redevelopment. Recent Transaction: We have just closed an $18.5 million deal on a property on the Las Vegas strip. Currently a closed motel, the property is adjacent to the airport and therefore has some height restriction uncertainty that is an issue impacting what may be built there. Although we feel we are secured even if a height restriction is in place, in the event the developer gets a variance, the property becomes much more valuable. In addition, we closed that loan in 2 weeks’ time, something that gives us an edge over most of our competition. — Jeffrey Wolfer, President

Arbor Commercial Mortgage, LLC Headquarters: Uniondale, New York Active: Nationwide. Types of loans provided: For all income producing properties, Arbor provides permanent loans through FNMA, FHA and Conduit execution; the company also provides bridge, mezzanine, preferred equity, and note acquisitions through Arbor Realty Trust. Recent Transaction: New Brunswick Apartments is a 206-unit apartment complex located in New Brunswick, New Jersey. Arbor provided a $14.94 million Bond Credit Enhancement through Fannie Mae. The property has a 100 percent Project Based Housing Assistance Payments Contract (HAP). This transaction required that we wrap the individual sources of equity to facilitate the extensive renovation, while maintaining the existing occupancy. Arbor crafted the bond credit enhancement that included tax credits, a de-coupling of the Interest Reduction Payment (IRP), and underwriting with the new HAP contract rents. (An IRP is a subsidy to reduce the effective mortgage interest rate paid by the project. IRP is part of a HUD 236 mortgage and, in the event the borrower elects to extinguish the HUD 236 mortgage through a refinance, the borrower can elect to (1) pay off the debt and IRP or (2) pay off the debt and maintain the IRP. In the second scenario, we wrap the IRP into the new mortgage as is the case with New Brunswick Apartments.) Arbor handled the challenge through a collaborative effort by both the borrower and Arbor’s underwriting and legal team. We were chosen to service the loan because of our flexibility to offer bridge financing to satisfy the seller, should it take longer to secure the required legal documentation in order to secure the IRP. — John Edwards, Director

Fremont Investment & Loan Headquarters: Anaheim, California Active: Nationwide. Types of loans provided: We provide short-term, floating-rate, bridge loans and construction loans of $10 million and up on a non- or limited recourse basis. Our loans typically involve properties in which there is some opportunity for value creation or ground-up construction. We will also roll our bridge and construction loans into a mini-perm if it makes sense for the business plan. Recent Transaction: Fremont provided $111.3 million in acquisition and construction financing for an office building with planned conversion to mixed-use. The property is located at 15 Broad Street in New York City. Situated directly across from the New York Stock Exchange, the asset is a New York City landmark and the original headquarters of J.P. Morgan. The 1 million-square-foot property comprises three separate buildings: 15 Broad Street, 23 Wall Street, and 35 Wall Street. Originally, Fremont provided a $75 million acquisition loan to this repeat borrower prior to having all plans and permits in place. We then rolled that loan into a construction loan once all the approvals were obtained. Due to the size of the construction loan, Fremont required a participating lender to close the deal. We successfully participated the transaction prior to closing and will act as lead lender throughout the life of the deal. The deal was challenging because the borrower needed to acquire the asset prior to having solid plans in place for the repositioning of the property. This was Fremont’s third deal with this borrower and Fremont is confident in the borrower’s ability to complete the plans, obtain the approvals, and build a quality product that will meet the demands of the marketplace. — Patrick Crandall, Vice President and Regional Manager

MetLife Real Estate Investments Headquarters: Morristown, New Jersey Active: MetLife makes commercial mortgage loans throughout North America and in Europe. Our New Jersey regional office covers the Northeast, from Pennsylvania through Maine. Types of loans provided: MetLife makes conventional commercial mortgage investments (fixed-rate and floating-rate, short-term and long-term). The company also provides structured financing and invests on an equity basis in joint ventures. Popular loan products: Short-term, floating-rate loans are very popular, as are long-term, fixed-rate loans. Recent Transaction: Greenwich Office Park, which includes 350,000 square feet of office space in seven buildings, is located at 51 Weaver Street in Greenwich, Connecticut. This deal is significant because it is a very well-leased, high-quality, renovated office park with a local tenant roster in a high vacancy suburban market. We analyzed local demand closely as part of the underwriting and stress testing of future loan performance. Our company was chosen over other companies to service the loan because we negotiated competitive terms for the financing following our rigorous analysis of the property and submarket. — Dan Guenther, Director of Portfolio Risk

CIBC World Markets Headquarters: New York Active: Nationwide. Types of loans provided: Construction, bridge, redevelopment, permanent, and mezzanine loans. Popular loan products: Our clients have been building ground up, redeveloping properties, or wishing to lock in low, long-term rates. We have been very successful in providing “one-stop shopping” by offering the construction or bridge financing, then permanent financing. Clients can take advantage of additional capital in the form of mezzanine debt. We have been flexible on the term of permanent financing: 5- to 20- year financing is available. Recent Transaction: CIBC recently closed a loan on State House Square, an 855,000-square-foot Class A office building located in Hartford, Connecticut. Acquisition financing of $52 million made the deal challenging. It needed to close in time for purchase, and appropriate reserves were needed to be structured for lease rollover. CIBC was able to work quickly with the borrower to close the deal, while structuring appropriate reserves for tenant rollover occurring in the next few years. — Andrew S. Fawer, Managing Director

PW Funding Inc. Headquarters: New York Active: Nationwide. Types of loans provided: Mostly fixed-rate loans, as well as some floating-rate debt and construction loans Popular loan products: Everything. With interest rates at very low levels, clients’ needs vary, but money is cheap so business is hot and competitive. I have done a lot of long-term, self-amortizing deals. Recent Transaction: A portfolio of 33 apartment properties, totaling approximately $224 million. The properties were all located in New Jersey, New York and Pennsylvania. The deal was challenging because the borrower had expectations that we had to meet regarding no reserves, and the property conditions varied. PW Funding handled the challenge with a team of 12 to 15 people from various offices around the country who all worked together to get the business done. Our company was chosen to service the loan because we have a long-term relationship with the borrower and they trusted us. Many of our borrowers come back to us with their financing needs, time and time again. — Gary Cohen, Regional Vice President

Bear, Stearns & Co. Headquarters: New York Active: Nationwide Types of loans provided: Fixed- and floating-rate loans for the entire debt stack on income producing properties. Popular loan products: Floating-rate loans and high leverage fixed-rate deals. Recent Transaction: Bear Stearns financed a property in Chester County, Pennsylvania, that contains a regional mall, neighborhood shopping center, and a stand-alone theater. The total collateral for the loan consists of 803,527 square feet, and it is located on 63.11 acres. The regional mall consists of 696,601 square feet, certain out parcels consist of 85,359 square feet, and the theater consists of 21,466 square feet. The property is currently 96.6 percent leased to approximately 90 tenants. The deal was challenging because the loan had significant moving parts. Bear Stearns loaned the borrower $94 million, allowing them 60 days to secure an equity partner and then pay the loan down to $77 million. Additionally, one of the anchors was still under construction at closing and another was closing and being replaced by Kohl’s. Bear Stearns was chosen over the competition because of our ability to close within 3 weeks and creatively structure the loan to meet the borrower’s needs. — Marilyn Mawn, Associate Director

RBS Greenwich Capital Headquarters: Greenwich, Connecticut Active: Nationwide Types of loans provided: Fixed- and floating-rate mortgages as well as mezzanine and preferred equity financing. Fixed-rate loans range from $5 million to more than $500 million and floating-rate loans range from $20 million to more than $500 million. Recent Transaction: Our largest loan in the region over the past year was 111 Eighth Avenue in New York City. We provided $500 million of a first mortgage loan as part of recapitalization of 111 Eighth Avenue. The property is a 2.9 million-square-foot office building located in the Chelsea submarket of Manhattan and occupies an entire city block between Eighth and Ninth avenues and 15th and 16th streets. Approximately 30 percent of the building was leased to telecom tenants and the building was not a traditional high-rise office building. We became very comfortable with the real estate because large corporate users have been attracted to 111 Eighth as their headquarters space. The building is attractive to these companies because of its large floorplates, high ceilings and large floor-to-ceiling windows. As a telecom building, it is one of the “most connected” buildings on the East Coast; it is home to many of the world’s leading telecom providers. Our company was chosen to service the loan because we have done previous lending with the sponsorship and they were extremely focused on reliability and certainty of closing. Our strong balance sheet was important to principal a $500 million loan. — Chuck Rosenzweig, Managing Director

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