Commercial real estate financing with respect to “investment properties” with third party “income streams” (as contrasted with owner-occupied transactions – “OR”) have been and continue to be available. Market conditions may affect the magnitude and frequency of these investments, but for qualified packages, the funding has and remains available.
This is in part explained by the ultimate source or origination of commercial real estate funding. Generally, funding sources include insurance companies and pension funds, either directly or through correspondents, mortgage banking firms, savings & loan institutions, regional banks, and specialized firms acting as “conduits” for “Wall Street money”. Each of the sources of funding, by definition, may have changing (sometimes even diverging) parameters for investment as well as varying appetites affected by any number of variables such as perceived risk, return objectives, geography, end-use of the properties, investment size, and/or liquidity concerns.
Over the long term, the bulk of commercial real estate financing has traditionally been sourced from the insurance companies. These companies tend to commit between 20% – 25% of their assets for commercial real estate loans. Due to market conditions, the level of activity may vary, but the transactions in all cases have continued. Because these firms generally have longer term perspectives, over time, they tend to offer the best rates, longer amortization periods, and the smallest fee. Insurance companies do not necessarily provide the highest dollar mortgage and tend to be more conservative in their underwriting than other lending institutions.
Insurance companies fund commercial real estate transactions either directly with regional or local offices or a correspondent system using commercial mortgage bankers or local brokers. Most maintain offices in major metropolitan areas throughout the country and/or have field staffs which will visit the areas frequently. These firms are tailored to deal directly with the borrower. Currently, the bulk of the transactions are handled through a correspondent network of local mortgage banking companies that will represent their lending interest in a particular area. Finally, there is the local broker who is familiar with both the current real estate conditions as well as the lending climate, and can efficiently package and process the borrower loan needs.
When pursuing an insurance company end loan through any of the above sources, the borrower must be cognizant that the process may be lengthy and involve support costs. An average commercial loan can take 60 days from application to commitment, and another possible 60 days to close. Typical fees range from 1.0% -2.0% (points) of the loan amount plus closing and incidental costs which can run between .25%-.50% . Although initially such costs may seem significant, over the life of the loan they are relatively small.
When preparing any commercial real estate package, regardless of funding source, a number of items should be properly organized prior to discussing the matter directly with the source:
- Income and expense statement for the property reflects solid income stream;
- Assemble a solid tenant profile (quality and lease commitment) with a copy of all leases;
- All financial statements on the borrowing entity;
- Financial statements on all principals associated with the owning entity;
- Property appraisal, if available; and
- Complete plans and survey of the property, if available.
Upon assembly of these basic materials, the funding source will review the information and inspect the project to gauge initial investment risk in the transaction. This process typically requires several weeks. If dealing with an insurance company directly, the borrower will be provided a quote based on the interest of that particular institution. If dealing with a mortgage banker or broker, contacts to several insurance companies may be made to acquire quotes (rate, term, and dollar amount). The borrower may then choose between the several options before signing a specific application for funding.
Once into the application process, fees need to be posted to assure the lender of the borrower’s commitment if the loan is closed in accordance with the quoted terms. These fees are referred to as standby points and typically run from 1.0% – 2.0%. They are refunded to the owner once the loan is closed. These fees are in addition to those earned or charged by a mortgage banker, broker, or other lender.
The closing process can be quite detailed and frustrating to some borrowers. For example the process may include tenant estoppel certificates, environmental audits, engineering reports, title searches, and/or extensive lease reviews – all typical real estate “due diligence” inquiries. All of these are of a “due diligence” focus to ensure a “comfort zone” to the borrower consistent with the original risk appraisal on the deal. It is highly advisable to acquire knowledgeable real estate counsel to assist in the process. The lender will in all cases be represented by either in-house legal staff or local counsel. Overall closing can take up to 60 days.
In the current market setting, insurance companies continue to fund significant levels of commercial real estate and have shown a renewed interest in the Mid-Atlantic region. This interest is expected to continue throughout the decade.
The potential borrower should seek to match its realty package with the funding source that best fits its long term goals whether that be the insurance companies, mortgage or regional banking institutions, S&L’s, and/or specialty firms.
Ricard Juergens, President, Frank S. Phillips Mortgage Co. (301-229-9000)