Mortgage Strategies By Michele Francis Builder & Remodelor, Feb 2003 “Comments on Commercial Lending”

The commercial lending industry in the year 2003 is guaranteed to be active and very lucrative for both commercial real estate borrowers and lenders. Over the past two years interest rates based upon treasury notes and bonds, prime rate, and London Inter-Bank Offered Rates (LIBOR), have continued to fall reaching there lowest levels in forty years. As a result, commercial rates have fallen equal to or below residential lending rates, an unprecedented trend. This decline in interest rates has given lenders the opportunity to offer 10 year fixed rate loans for multi-family projects at 6%, and office-retail projects at or below 7%. In addition, a hotel loan can be obtained for less than 8%. Of importance to mention is short-term floating rates on every product type can be funded anywhere between 4% and 6%.

Furthermore, it is expected that a large volume of commercial loans will re-enter the market place. Commercial loans which closed between 1993 and 1996 with 7 and 10 year fixed rate terms where at significantly higher rates of interest. The majority of these loans financed by Wall Street investors will now begin to roll over.

However, over this past decade the profile of the commercial loan borrower has changed drastically. The traditional approach of seeking financing from the local bank has become obsolete. Today’s borrower is savvier and prefers having more financing options available to them. The commercial lending firm that will look and work outside “the box” for suitable loan terms will gain from an ability to pull from several resources.

In addition, the current market trend is significantly impacting the lease/buy formula for corporations as they consider their occupancy options. Business owners across the board are evaluating whether or not to hedge their bets and invest in commercial real estate.
Ultimately, lower interest rates allow commercial and multi-family buyers to transact at lower going-in cap rates due to the upside anticipated from long term tenants in place. The cross-over effect of the relative safety of real estate and its attribute of preserving capital, combined with the low interest rate market should continue to drive real estate transactions. The caution here is that most rent rolls have a fair amount of challenge due to issues with tenants’ business. Owners, buyers and lenders need to drill down into these issues and allocate appropriate reserves to accommodate potential problems.

Michele Raab-Francis
President
Beechwood Capital Company, LLC.
Beechwood Capital Funding Corporation (Commercial Division (516)935-5600 or e-mail mrf@bwdcap.com

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