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Specialty lenders for commercial real estate: A primer on the marketplace


In the summer of 2012, financing has returned for many real estate investors. Borrowers are able to secure financing at record low interest rates especially for if the asset is a residential rental property. Pricing for a five year fixed rate loan is being priced for as low as 3%, with a 25 to 40 year amortization, and in certain instances interest only for the first two to ten years of the mortgage.



Financing for certain asset classes including construction financing has also become much more readily available to well capitalized, experienced borrowers. Borrowers are having a much easier time to secure record loan rates for mixed use retail residential, office, urban retail and industrial assets. Yet, financing for unique assets which may include hospitality; golf courses, health clubs, restaurants, bars, student housing, vacant land is available from to a small group of borrowers. While financing is available the terms and conditions require higher interest rates, shorter amortization and in nearly all instance, the borrower must personally guarantee the loan.



Construction financing for residential rentals and condominium developments has become more readily available to established, well capitalized developers. Nevertheless, a number of lenders are offering construction financing to lesser experienced and capitalized borrowers at higher rates and conditions. Shannon Eidman, SVP, Builders Bank, said "We are still actively seeking construction and renovation deals in the $1 to $6 million range in the boroughs with focus on condos and apartment buildings. We will also look at townhouse reposition/construction and fractured condo financing (fractures are based on rental)."



"Builders Bank is committed to providing quality service to meet the construction, interim and permanent financing needs of the developer/investor whose business plan may include small to mid size assets frequently disregarded by the larger banks".



"We are offering, loans of up to 70% of cost; underwriting a condo to a break even or rental; requiring full 100% recourse on the construction. The borrowers or sponsors of the deal need to have a few deals under their belt and good financials, he added.



While construction financing by major money center lenders is now being offered at rates as low as 200-250 basis points over Libor, Builders bank is pricing their construction financing at prime plus 100 basis point with a floor set in the 5 percent range with rates ranging form 5% to 5 ½%. The borrower will also be responsible for an origination fee of one point for up to 24 months, as well as an additional fee of 25 basis point for each three month increment of extension option.




A number of private equity funds and private lenders are serving as a major source of financing for interim and bridge financing. One of the most active lenders is Madison Realty Capital, whose managing principal and co-founding partner Josh Zegen, said "We have seen a pickup in bridge lending requests to re-capitalize deals on broken construction projects. This opportunity has come about by banks willingness to sell loans at a discount because of an increase in values and increased bank earnings which have given flexibility to write down loans to current value without significantly impairing there balance sheet."



"A recent example was a transaction was a borrower requested our company to re-capitalize the construction of a brand new CVS property in Queens. We provided the sponsor a $7 million loan to buy back his debt from the local commercial bank at a discount as well as funds to complete the construction of the retail store. We were able to provide the flexibility and speed of execution to complete the transaction."



Mark Zurlini, principal, Palisades Financial, a direct lender, said, "Over the past decade, we have provided specialized financing for unique asset classes. In the state of New Jersey we have provided financing for golf courses, substantially completed condominium and rental properties and in certain instances land for development. Financing is made available if the borrower meets certain criteria including reputation, and the proven ability to complete the project. While our rates are more expensive than traditional banks, we offer quick turn around, guidance to borrowers and in most instances ability to coordinate an exit strategy for the borrower. Most important in all of our transactions is that the borrower has capital or the term the preverbal "skin in the game".



If you pass a pub/bar or restaurant near Penn Station or on Second Avenue in Manhattan, there is an excellent chance the mortgage financing for the property was be secured through a banking relationship with Country Bank.



New York City headquartered Country Bank with assets of $500 million has been active player in the commercial real estate lending for twenty years. The bank specializes in originating loans from $1 million to $6 million with a specialty in owner occupied and investor real estate. Financing is available for mixed use, hotel, owner occupied commercial, pub/restaurant, self storage, garage, warehouse and brownstone/townhouses.



"Recent transactions which we have provided financing include acquisitions, cash out refinancing, partner buyout, lease hold mortgages, leasehold fee purchases, and bridge loans," said Joseph Murphy, Jr. president of Country Bank. "The bank recently provided $3.2 million in financing for an investor owned single tenant restaurant property on the West Side, Restaurant Row. The loan was fixed rate for five years, requiring the borrower to provide full recourse. In the Park Slope section of Brooklyn, the bank provided a $1.5 million fixed rate loan with full recourse for owner occupied building with a pizza restaurant on the ground floor and residential apartments above. " "We have also financed the acquisition of a foreclosure short sale of a non-flagged 100 key, limited service hotel in Queens. The property was over leveraged with a CMBS loan, had lost its flag, and was operated by the special servicer."



Manhattan based Progressive Credit Union has and continues to provide specialized financing for unique real estate assets. Many of the local diners located in the tri-state region, garages, auto body and repair shops in the five boroughs have secured permanent financing from this $600 million credit union. Over the past three years the credit union has been responsible for the acquisition and construction financing of resort properties in Fire Island and a life style hotel and cabaret on the West Side.



Robert Familant, Treasurer & CEO, Progressive Credit Union, "We have a niche in providing financing for unique assets which require "going the extra mile" in the underwriting process. Our pricing is commensurate with the risk, we close on the transactions." We have providing financing for distressed debt, construction, and investor owned luxury condominiums for rental, and are open to any transactions that provide suitable collateral and adequate debt coverage."



If you visit a local lender and request financing for a stand alone restaurant or a franchise operation, the typical response is "no thank you, or we are not providing that type of lending". A national lender who provides specialized franchised restaurant financing is United Capital Business Lending, a BankUnited Company. The company has provided financing for restaurant franchises, offering loans of up to $10 million, for a period of up to ten years, and 100% financing.



The Small Business Administration (SBA) continues to be a source of financing for commercial real estate. A number of borrowers who are unable to secure bank financing have turned to local institutions which include CIT Bank, Small Business Lending, ValueXpress, Empire State Certified Development Corporation and other local financial institution who originated SBA 504 and 7A mortgage financing. "SBA mortgage loans cater to owner occupied property with higher loan to value than available in the private sector", said Joe Murphy, Jr.



The SBA 504 Loan Program provides small businesses with long term fixed rate financing sued to acquire fixed assets for expansion or modernization. The 504 loans are made available through Certified Development Companies (CDCs), the SBA's community based partners for providing the 504 loans.



The 504 Loans are typically structured with the SBA providing 40% of the total project cost, a participating lender covering up to 50% of the total project cost, and the borrower contributing 10% of the project cost. Under certain circumstances, a borrower may be required to contribute up to 20% of the total project costs. The loan structure for a project with $1 million project is (a) $500,000, first lien with the bank (loans obtained from a private sector lender covering up to 50% of the total project cost); (b) $400,000, 2nd lien with 504 loan, 20 year, fixed rate (loan obtained through a CDS, funded through an SBA-guaranteed debenture, covering up to 40% of the total project cost); (c) $100,000, borrower contribution of at least 10% of the total project cost).



Last year, ValueXpress obtained a $4.5 million mortgage loan commitment with its New York banking partner, Country Bank, from the SBA for a Quality Inn located in Brooklyn. The property securing the loan is a four story, 81 room limited service hotel allowing the borrower to purchase the fee and recapture equity in the property.



New York City is the Mecca of colleges and universities; nevertheless the city lacks dormitories and student housing facilities. The oldest and most prominent College of the City University of New York in the Borough of Brooklyn is Brooklyn College which until two years ago lacked its' first dormitory. In the fall of 2009 a local developer of residential properties acquired land located less than two blocks from the entrance to the campus. After filing and securing permits for approval for the dormitory, no commercial lenders were offering financing. Subsequently, Construction and mini permanent financing was provided by private equity fund, Madison Realty Capital. The borrower obtained a $12 million in construction financing for a term of two years. Upon completion and renting up of the rooms, the developer secured permanent financing from New York State's largest credit union, Bethpage Federal Credit Union.



With the commercial real estate market in New York City and the region improving, expect more lenders to welcome the opportunity to finance these previously difficult-to-finance, specialty assets.



07/20/2012 - 19:49


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