5 Ways to Decide Which Loan?

Every loan is a little different from the next. Here are five things to consider when evaluating your options.

1. What are your plans for the property? This is the number one thing I try to determine when I meet with clients. Do they want to pull some equity out, hold the property long term, or flip it in a few years? Each of these scenarios will require a different loan structure, term, prepayment, etc.
2. How much cash flow do you want? Your cash flow will be determined by the loan amount, amortization and the interest rate as well as any reserves that are collected.
3. Will the loan have recourse? Recourse means that the lender has the ability to take anything of yours, in addition to the building, to repay the loan in full. Non-Recourse means the lender can only take back the building if you default on the loan. There are consequences with both recourse and non-recourse loans.
4. What type of lender do you want? There are many types of lenders. Click here to read a discussion on the various types.
5. Does the lender require reserves? Some lenders require you to keep a tenant improvement, leasing commission, tax or insurance payments in a reserve account held by the lender. This can be funded when the loan closes or payments can be made along with the regular loan payment. Other lenders require some or no reserves.

This isn’t an exhaustive list, but is a good way to get started when comparing different loans.

Rate News

• ECONOMIC NEWS: Microsoft called off negotiations with Yahoo, leaving the market to end on a low note today. As expected, the Federal Reserve lowered the Fed rate to 2% last week. As concerns grow over inflation, most experts anticipate the Fed to not make another rate cut. Inflation is most easily seen in the price of oil which is now $120 a barrel.
• LENDING MARKET: The 10 Year T-Bill yield remains above the 3.80% range, which is 40 basis points higher than one month ago. Spreads have lowered slightly but overall rates are still in the 6.25% to 6.75%. Lenders’ appetites remain the same: quality assets with low leverage and little lease-up risk. The biggest problem lately is that debt service coverage is constraining loan dollars.
• FINANCE TERM OF THE WEEK: Yield Maintenance -A prepayment penalty that requires a borrower to pay a lump sum equal to the present value of the outstanding interest payments of a loan. Each lender calculates this differently; it be anywhere from 0 to 10% of the loan amount.

Is The Bottom Near?

• ECONOMIC NEWS: The price for crude oil is now nearing $120 a barrel. Several large corporate acquisitions made headlines; Microsoft attempting to buy Yahoo is still on going, Mars (candy bars) and Warren Buffett are acquiring William Wrigley Jr. Co (Juicy Fruit, Wrigley’s) and a little closer to home Safeco is being bought by Liberty Mutual. The most anticipated earnings report this week is from Visa, which IPO’d last quarter. Overall, the markets are up today. Stimulus checks begin going out this week with the hope that they will stimulate the economy. With the housing market still in the dumps and credit card balances growing, the stimulus package will probably not be enough to “save” the country from recession.
• LENDING MARKET: The Federal Reserve meets this week and will lower the Fed Funds rate. Many see this as the last time the rate will be lowered as credit market conditions are showing signs of stabilizing. There are also concerns that continuing to lower the rate will devalue the dollar more and increase inflation. Banks will be most affected by the Fed rate drop, making it easier for the banks to lend money. Life Insurance Companies (and the non-existent CMBS lenders) won’t have much reaction to the lowering Fed Funds rate unless the rates on Treasury Bills move significantly. T-Bill rates have not moved much since last week, most likely due to the upcoming Fed meeting
• FINANCE TERM OF THE WEEK: Debt Service Coverage Ratio (DSCR) The ratio of net income divided by the annual debt payment. It determines the ability to meet and exceed annual debt payments. Typically 1.25 or higher is needed for a loan. (See this article for more information.)

Small Balance Apartment Lenders

There used to be three main lenders for apartment loans in the $500,000 to $3M: WaMu, Countrywide and World Savings. Any apartment loans in the size range not done by the top 3 were handled by local banks, a few life insurance companies, several CMBS lenders and Fannie Mae’s small loan program.

Countrywide is no lending for the foreseeable future. WaMu is tentatively lending and World Savings (which is owned by Wachovia) has slowed its production. This leaves more apartment owners looking to those other lenders for new avenues of financing.

Michael McQuaid, a local Seattle Apartment broker recently posted his insights on the subject. Check out his post in its entirety here. Below are some highlights, all of which I agree with:

• The typical client… went to [WaMu, World Savings, or Countrywide] because anyone else was at least one-half percent higher on the rate with total fees 3X to get the loan.
• We should anticipate much longer processing times and much more expensive loans as the “new” lenders are going to insist on several third party reports that we have not had to supply to the previous three sources.
  
• Environmental reports, structural reports, and surveys will be necessary and rates will be higher, meaning loan amounts will be lower as well.

the appetites of lenders are changing daily. Check here frequently to follow the lending markets volatility.

The Safeco Situation

It was announced today that Liberty Mutual is acquiring Safeco Corp. What does that have to do with commercial real estate in Seattle? Actually, a lot. Safeco recently sold its headquarters near the University of Washington to move its operations to downtown Seattle. The company leased 424,000 square feet in the CBD. With such a large chunk of the available market leased at once, downtown office vacancies sank, lease rates rose and several new office developments commenced construction. The opposite will likely happen if Liberty Mutual decides to downsize some or all of Safeco’s space. So far, there has been no word on layoffs; hopefully that will not happen.

Other interesting notes about Safeco:

• The Mariners play at Safeco Field. I would imagine that the stadium would not change its name.
• Spun off Symetra Financial in 2004. (Full Disclosure: Symetra is one of the lenders we represent.)
• Safeco’s downtown headquarters, Safeco Plaza, is locally known as ‘the box the Space Needle came in’.