Timing is everything, and if there ever was a time to discuss alternatives to conduit (CMBS or securitized) loans, now is it. This summer, the shakeup in the credit markets caused many conduit lenders to increase spreads, stop accepting applications, stop approving and funding loans or, in some cases, completely halt operation.
Many borrowers who had conduit loans in process and even rate-lock deposits in place have either had their rates re-priced despite the rate lock or had their loans cancelled. The increase in spreads resulted in rates that, in many cases, were higher than those offered by portfolio lenders. What was once a 110 to 140 basis point spread (1.1 percent to 1.4 percent) over the Treasury is now higher than 200.
While many of the best-priced portfolio lenders have also raised spreads, they now often provide a better deal for borrowers with regard to rate, term, amortization, fees, costs and cash flow, due to fewer impounds. Non-recourse is an option for many portfolio lenderswhich include banks, savings & loans, credit unions and insurance companiesdepending on loan-to-value. Thirty-year amortizations and interest-only options are also available in some cases.
One of the biggest advantages conduit lenders have had is the ability to finance a property in any state and town. While this is still a competitive advantage, more and more of the larger, better-rate portfolio lenders are extending their reach into at least the major metropolitan areas if not those with populations of a minimum of 25,000.
Benefits to Portfolio Lending
Its wild and wooly out there as of press time (late August), with lenders modifying their spreads at the slightest change in the markets. But theres no substitute for safety and security. When a portfolio lender locks your rate, its rarely re-traded unless your rate-lock period expires. Other advantages of using portfolio lenders are:
- Lower loan costs, as they require fewer third-party reports (usually no property-condition or seismic report).
- Minimal if any legal fees.
- Lower survey costs, in many cases due to the scope of what is required.
- Lower insurance costs for the borrower, as portfolio lenders have easier insurance requirements and fewer endorsements.
- Lower title-insurance costs, again due to fewer requirements and endorsements.
Another big plus is many portfolio lenders will lock your rate for a deposit of as little as zero dollars up to 1 percent. Conduits require a 2 percent deposit.
To demonstrate whats available in the portfolio-lending market, heres a sampling of some local (California) and nationwide bank programs:
There are many more options to be had, some with no prepayment penalty for fixed rates up to seven years, some with no loan fees. Most portfolio lenders will want to see a 1.25 debt coverage ratio and a maximum of 75 percent loan-to-value, and they require an appraisal and Phase One Environmental Site Assessment. Processing, document, funding and legal fees will typically not exceed $3,000 to $3,500. Loan fees are usually 1 percent but can vary.
The insurance-company lending market is also picking up where the conduits left off. Although they have raised their spreads, were still seeing long-term fixed rates from insurance-company lenders in the low to mid 6 percent range. They tend to be a bit pickier regarding what they will lend on and prefer more conservative deals, but they offer an excellent alternative to the conduits and can offer some flexible prepayment-penalty programs outside their typical yield-maintenance scenarios.
To many of you, the rates and terms quoted in this article may appear unrealistic based on what you have been able to find in your market. But the finance world extends well beyond your local bank, so shop around. Do some research yourself, or use an experienced mortgage banker or broker who specializes in commercial and self-storage financing.
While it may seem as if Im conduit bashing, please understand the situation is only temporary. It will eventually correct itself and return to whatever ends up being normal. At some point, conduit lending will again be better than what most portfolio lenders can offer on the rate and, in many cases, the leverage side. Conduits will once again be the darling of those looking for a superb 10-year, fixed-rate loan with a 30-year amortization, who can stomach the uncertainty of a yield-maintenance or defeasance prepay.
But in the mean time, portfolio lenderslike banks and insurance companiesare smiling like Cheshire cats, finally being able to take back business from the conduits that, for so many years, were the premier funding source for self-storage and most other commercial property types.
David Smyle is the president of La Mesa, Calif.-based Benchmark Financial, a commercial mortgage banker. For more information, visit www.benchmarkfin.com.