Michael Stoler — A return to lending

Banks, insurance companies and government service organizations plan to provide financing for commercial real estate in the fall, according to real estate lenders in the tri-state region.

Insurance companies including Northwestern Mutual, the Teachers Insurance and Annuity Association of America (TIAA-CREF), Principal Life Insurance and John Hancock are once again talking to prospective borrowers for financing of five to 10 years. And although rates are no longer in the range of 5 to 6 percent, a good deal might be able to fetch a fixed-rate loan in the range of 7 to 8 percent at par.

Richard Coppola, managing director at TIAA-CREF, said his company “has continued to seek mortgage loan financing opportunities in core assets in major markets with strong borrowers, in line with our investment objectives of providing secure, attractive returns for our retirement-plan participants.

“While we have been active, we continue to be very selective. All of our loans are approximately 50 to 55 percent leverage for terms of 5 to 7 years on a fixed-rate basis,” he said, adding, “These longer-term loans on core assets at a conservative leverage level, all with well-capitalized public ownership, fit our disciplined investment criteria and strong underwriting guidelines. We expect to selectively continue to seek such opportunities during the remainder of 2009.”

Highlighting the increase in activity, during the last week of July, SL Green Realty Corp. refinanced the Graybar Building, a 30-story, 1.2 million-square-foot office building at Grand Central Terminal on Lexington Avenue between 43rd and 44th streets. The new leasehold mortgage was provided by TIAA-CREF, which obtained a $145 million leasehold mortgage for a rate of 7.5 percent fixed that matures in 2016 with two one-year options. The previous mortgage for the building, built in the 1920s, was due to mature in November 2010 and carried a rate of 8.44 percent.

And even with lack of liquidity in the market during the past 90 days, competition has become heated enough lately that more than five commercial banks sought to provide refinancing for a 532,000-square-foot, Class A office building in Westchester County. The owner had a $100 million mortgage from an insurance company that was seeking liquidity and offered the owner the option to purchase the performing loan at a $30 million discount. The owner sought the assistance of a mortgage broker as well as his existing banking relationships, and was offered financing for 85 percent of the purchase price. He obtained a new first mortgage of $60 million. The winner of the bidding war, John Hancock Life Insurance Company, provided the borrower with a 10-year fixed-rate financing at a rate of 7.25 percent.

Also in July, Stonehenge Partners — with the help of Freddie Mac, the government service organization, which continues to provide much-needed financing for multifamily residential apartment buildings — closed on the refinancing of the 43-story Ritz Plaza, a 479-unit luxury residential rental building with a 158-space parking garage, 25,000 square feet of office space and 3,120 square feet of retail space located at 235 West 48th Street between Eighth Avenue and Broadway.

Stonehenge obtained a 10-year mortgage for $151 million at a rate of 5.34 percent from Freddie Mac. Stonehenge, which acquired the property in December 1996 for $76.7 million, used the proceeds of the loan to pay off a $120 million loan, which was originated in December 2003 from Capital One Bank (originally North Fork).

Another example of the uptick in recent activity: According to recently released financial reports, local savings and commercial banks have been active in providing financing this year. During the first six months of 2009, New York Community Bank, one of the region’s largest multifamily lenders, increased its loans by $585 million. Multifamily loans account for the bulk of the increase, having risen $497.5 million to $16.2 billion, which represents an annualized growth rate of 6.3 percent. As of June 30, the average multifamily loan had a principal balance of $3.9 million, with an average loan-to-value ratio of 61.1 percent.

Executive vice president and chairman of commercial real estate at Signature Bank George Klett said, “The first half of this year has been very slow. We closed about $350 million compared to about $1 billion during the first half of last year. However, there has been much more activity the last couple of months, and as a result, we closed about $115 million for the month of July.” Dime Community Bancshares, the holding company for The Dime Savings Bank of Williamsburgh, also another prominent lender in multi-family residential loans, originated about $111.4 million of mortgages during the second quarter, above the $83.7 million level in the first quarter.

Lenders continue to prefer to provide first mortgage financing for residential multi-family rent-regulated apartments. Most of the active players are offering five- to seven-year financing at rates as low as 5.5 percent, with amortization of 25 to 30 years. These loans are being offered at par, requiring the borrowers not to pay any origination fees. Lenders who continue to entertain this form of financing include New York Community Bank, Amalgamated, Dime of Williamsburgh, Flushing Savings, TD, Astoria Federal, Signature Bank, M & T Bank, Capital One, Herald National and NorthEast Community Bank.

Later this month, a syndicate of lenders comprised of national, regional and German banks have agreed to provide a $100 million first mortgage for a Park Avenue office building. The syndicate agreed to provide the loan for a term of five years at a rate of Libor plus 400 basis points. Just 18 months ago, this loan would have been provided by one lender at a rate of Libor plus 100 to 125 basis points.

However, a number of small community banks are reducing their lending activities due to supervision and review of regulatory agencies. The chief lending officer of a local community bank, who prefers to remain anonymous, said, “The Office of Comptroller of the Currency is causing roadblocks for many community lenders. The OCC is requiring extensive paperwork, updated appraisals and financial statements on borrowers, resulting in stifling of lending.”

Yet while many lenders are interested in offering real estate financing, few of the lenders in the market will entertain a request for construction financing. In my survey of more than 20 local lenders, only a handful would entertain construction financing to established real estate families or borrowers for residential rental developments. If a borrower is seeking financing for a condominium, the general consensus is similar to the rules of the game of Monopoly: “Do not pass go, do not collect $200 and do not ask the bank to do business with the borrower. We are out of business for construction financing.”

To be sure, we are a ways off before construction lending comes back into the market. While lenders are slowly re-entering the market, they are backing proven properties owned by established sponsors.