Now is a Great Time to Lock in Interest Rates
Submitted by A. Adams
The availability of mortgage funds to finance commercial real estate and multifamily projects until mid 2007 was unlimited and the lenders were very lenient in their underwriting procedures. When the real estate bubble burst in mid 2007, the
lending market dried up and there were very few sources of funds available. The funds that were available were all at very conservative underwriting standards.
In the last few years, the financial markets finally have loosened to the point that almost all traditional lending sources have returned to the marketplace. Interest rates for commercial mortgage debt are at 35 year lows. These rates, coupled with the significant investor funds on the sideline, have provided for a dynamic marketplace to secure commercial debt. If you are involved in commercial real estate as an investor, owner or developer, it is an excellent time to lock in long term fixed rates. With this historically low interest rate market and the uncertainty of our global economy, including the United States $6 Trillion worth of debt, there exists a window of opportunity within the next 18-24 months to protect your cash flows and values of your real estate assets.
It may be timely to discuss the major funding sources available to our clients in today’s marketplace. These lending groups include the following:
§ Capital Markets (Commercial Mortgage Backed Securities –CMBS)
§ Agencies- Freddie Mac & Fannie Mae
§ Life Insurance Companies
The banking industry continues to be the primary source of funding, which it has been for the past several years. Regional banks on loans up to $15 Million have been very competitive in providing construction and permanent mortgage loans. We recently completed a transaction that offered 10 yr fixed rate loan based on a 25 year amortization schedule at a rate of 3.95% fixed. Construction loans are readily available at up to 85% loan-to-cost (LTC) and even 90% LTC for a qualified borrower. Floating interest rates on these programs are as low as 275 basis points over the 30 day LIBOR which provides rates at 2.95% with no floor. A number of lenders will provide a 5, 7, or 10 year fixed rate loan from the start of the construction loan. All of these loans generally require recourse and have flexible pre-payment penalty terms.
The large national banks continue to be more conservative in regards to loan-to-value underwriting, both on construction loan and permanent mortgage credit facilities.
In 2007 this market was on course to fund $300 Billion in loans before the market crashed. This segment of the industry effectively went out of business for several years and is now back to where it is anticipated that the 2013 funding levels could reach up to $100 Billion. In the first quarter alone of 2013 $22.9 Billion in CMBS loans were issued. For comparative purposes, in 2011, the CMBS market issued a total of $33 Billion in mortgage backed securities. In 2013, just in the CMBS market, there is in excess of $30 billion in loans that will be maturing.
The terms and conditions of the loans offered through the capital markets has improved dramatically over the last 24 months. The loan sizes now start at $3 Million and higher. The Interest Rates are in the 3.75% +/- range for 10 year fixed rate non-recourse mortgages with 30 year amortization schedules. These terms are for general purpose real estate and the only exception is for flagged hotels which carry an interest rate of 4.25% +/- with a 25 year amortization schedule.
Agencies- Freddie Mac & Fannie Mae
These agencies lead the marketplace for multi-family loans. In 2012, Fannie Mae funded over $30 Billion and Freddie Mac funded over $26 Billion. These represent significant increases over 2011 production. The quality of the investments being booked has resulted in very low delinquency rates.The interest rates offered by both of these agencies for multi-family product are some of the lowest in the industry. The loan terms being offered are 5, 7, or 10 year fixed rates with 30 year amortization schedules. All of these are up-to 80% loan-to-value, non-recourse mortgages with interest rates at approximately 3.75%.
Life Insurance Companies
The life insurance industry has continued to be a strong source of funding for the larger more conservative borrowers. In 2012, this industry funded $45 Billion in mortgage loans. The quality of their product has produced a very little delinquency in this lending sector. Loan sizes for life companies range from $3 million to $100 million. They typically want general purpose real estate and it is not unusual to see their loan-to-values in the 65-75% range. In addition to the long term fixed rate product, selective life companies will offer construction/permanent financing on a joint venture basis.
This financing sector has provided a consistent source of funding for the apartment and healthcare related industries. FHA closed over $14.6 Billion in 2012, which is an all-time high for this agency. They provide construction funds through their 221(d)4 program, refinance and acquisition funds for existing facilities through the 223(f) program and the third lending vehicle is the A(7) program which allows existing borrowers to lower their interest rates with significantly less paperwork than the traditional FHA process. Interest rates are at historical lows with up to 35 year fixed rate mortgages at 3% +/- and long term construction rates at 3.5% +/- fixed for 40 years. All FHA mortgage loans are non-recourse, including the construction loan program.
Mezzanine financing is a flexible way to add a layer of additional leverage to a senior loan and may be used to compliment a wide variety of senior financings issued by agencies, CMBS, life companies, and banks. Mezzanine loans typically start at $3 million with no maximum and can provide leverage up to 85% combined loan-to-value. Mezzanine financing interest rates are typically higher than first mortgage loan rates, but the resultant blended interest rate provides for a platform to achieve a higher loan-to-value.
If we can be of any assistance in analyzing and or financing your real estate investment needs, please contact us at THE CABOT GROUP. Our firm is a full service commercial real estate firm that can assist you with acquiring, financing, leasing, managing and repositioning your new or existing real estate assets.