Permanent lending for new projects provides its own set of challenges. Permanent lenders include life-insurance companies, large banks, regional and small banks, credit companies, credit unions, conduit lenders, and even hard-money lenders.
In some cases, the permanent loan will not provide enough money for the borrower to pay off the construction loan, given today's underwriting requirements and reduced property value. The alternative is to pay down the construction loan to the amount offered by the proposed permanent lender, or to obtain a second trust-deed loan or mezzanine financing to get enough money to pay off the construction lender.
Underwriting standards are extremely fluid due to the market’s inefficiency. The best deal in today's market for a well-located prime property is a 5.5 percent, 10-year, fixed-rate loan from a life-insurance company, which means the loan is non-recourse. The underwriting on this loan will be a subjective analysis by the lender using a cap rate probably in the 8 percent to 9 percent range, with a stress test at 150 to 200 basis points over the cap rate to determine the viability of your project and, consequently, the loan amount. With $400 billion of refinance opportunities available in the market annually, you’ll find the best deals being cherry-picked by lenders that have money.
The regional banks and credit unions are probably the best bet for permanent loans. If your project is new, all the lenders are looking for some period of stabilized occupancy. Typically, six months at 90 percent occupancy will be the minimum requirement to qualify a project for a permanent loan.
The regional banks and credit unions typically underwrite at fair market cap rates determined by appraisers. While they might apply some stress test, they’re usually not as severe as the major lenders and life-insurance companies. Banks will look for “relationships.” They want your deposit dollars, which, in today's market, are very valuable. These dollars include not only your project accounts, but other commercial accounts and personal accounts in which you have control.
In many cases, credit unions will be represented by a central company, which will underwrite their transactions to a set of standard guidelines. Once the underwriting is complete, all the credit unions and their group will have an opportunity to buy a participation in your loan. To you, the borrower, this participation is invisible. You only make one payment to the lender who closed your loan, and that payment will then be distributed to the various institutions who’ve participated in it.
These are challenging times in the lending market for any type of transaction. The best professional advice you can get is from those in the arena—loan consultants, CPAs, attorneys and other professional support staff. You can hire better qualified talent in five minutes then you can become in the next five years. Good luck in your quest for capital.
Richard Hill Adams is the chairman and CEO of Laguna Hills, Calif.-based American Realty Capital Advisors Inc., which focuses on self-storage and income-producing properties. He has an extensive history spanning more than 30 years of providing construction loans and equity for real estate projects. To reach him, call 949.455.4100; visit www.arca-money.com.