Commercial Real Estate Loans

As the deepest U.S. recession since the Great Depression grinds on, there are some hopeful signs for a turn around in the much diminished commercial real estate arena.

One factor helping to drive commercial building starts is the aging of America. As the Baby Boomer generation pushes the age demographic ever upward, more senior housing and nursing care facilities are needed. The result is an increase in construction starts for these two areas over last year, according to the Seniors Housing Construction Trends Report 2011.

According to David Schless, president of the American Seniors Housing Association (ASHA), it is an important but modest amount of new construction. “Until the capital markets change and the economy improves, we expect to see relatively muted levels of construction of market-rate seniors housing.”

Senior apartments are responsible for 49 percent of the new units currently under way, of which, only 8 percent fall under the category of market-rate properties. Another 20 percent of the new projects are independent living properties, with assisted living properties accounting for 16 percent and nursing care buildings 15 percent.

Another area of recent activity is commercial building investments in secondary markets across the country. This trend may be led by spiking valuations for office properties in a number of gateway cities. Continue Reading

Many borrowers are surprised to learn that life companies are one of the most traditional sources of commercial mortgage financing in the business and have been for decades. Historically they focused on trophy type project ie with minimum loan amounts above $10,000,000 up to a billion or more. Due to the credit crisis many life insurance lenders have lowered their minimum loan amounts to a $1,000,000 and a few to as low as $500,000.

But what are the positives and negative of this type of financing? That’s what this article is about.
One of the best features of this type of financing is long term fixed rates. 5, 10, and 15 year fixed rates are available. As of this writing rates are competitive compared to conventional bank loans, ranging from 5% – to 6% (The longer the fixed period the higher the rate) often only 30 basis points higher than bank financing.

Also, because life companies are not banks they do not they do not have the same underwriting standards and typical limitations that banks do. This is not to suggest that they are not conservative, which they are. For example most of them are capped at 65% loan to value and 1.3 to 1.35 debt coverage ratios and only like general use properties such as retail, office or industrial. But still they can and will do things that banks cannot. Such as “cash out refinances”, which is currently nonexistent with banks in this market.

Another benefit includes that they do mostly investment properties loans which is still difficult to get done with most banks. The underwriting process is also simplified as life companies normally lend their own money and hold onto and service loans over their life, rather than pooling them and selling them on Wall Street. So for the borrower this means that they don’t have to perfectly fit into a restrictive “Box”. Continue Reading

On the very first day of Business School in Finance, the first thing that is taught is TINSTAAFL (There is no such thing as a free lunch.) That is probably the most important thing you learn and much of finance then builds on this concept. So, if something sounds too good to be true, it probably is not true. To be sure, there have been times where this skepticism has prevented me from trying some things that ultimately became lucrative but more often it has prevented me from getting involved with things that didn’t pan out.

In today’s business environment, we are seeing interest rates paid by financial institutions of 1% or 2%. The 30 year mortgage rate now is just a little more than 4%. Yet in Commercial Real Estate, we see cap rates being quoted at 10% to 12% for Commercial Investment Properties. So, one has to wonder, why isn’t this a slam dunk? Why isn’t money pouring into these investments? After all, if this is true, this seems like a license to print money.

In some cases, money is flowing toward these investments but before putting your life savings into one of these investments, refer to the opening paragraph – There is no such thing as a free lunch. In many cases, these deals simply are too good to be true. Understanding Investment Property and the way that these cap rates are figured is crucial to your decision to invest. Continue Reading