December 3-December 16, 2014—
COLORADO REAL ESTATE JOURNAL
— Page 19
Finance
T
he commercial mort-
gage-backed securities
financing industry con-
tinued to gain market share in
2014. Several of the CMBS lend-
ers Essex Financial Group has
done business with have demon-
strated speed of execution, a high
level of deliv-
erability and
the ability to
provide bet-
ter econom-
ics compared
with alterna-
tive nonre-
course per-
manent loan
sources such
as life insur-
ance compa-
nies.
In addition,
several have a
wider variety of loan programs,
including on-book bridge loans
that can be converted to perma-
nent loans upon stabilization. A
handful of CMBS lenders are try-
ing to differentiate themselves by
developing alliances in the top
20 metropolitan statistical areas
with mortgage bankers that ser-
vice large loan portfolios. The
level of servicing quality and
the accountability with the origi-
nating mortgage banker/ser-
vicer continue to be the primary
strengths of a life company loan
and the weaknesses of CMBS
financing.
Strengths of a securitized loan
include:
• Speed of execution/efficient
processing – CMBS loans can be
closed in less than 45 days;
• Although the rate is typically
higher vs. a life company, the
higher leverage and interest-only
payment terms provide better
economics over the holding peri-
od (assuming exit is timed well);
• More flexibility on bor-
rower track record and financial
strength; and
• Multiple assumptions.
Weaknesses of a securitized
loan include:
• Servicing conflicts of inter-
est – lack of accountability and
conflict of interest with a master
servicer representing best interest
of first-loss position bondholders;
• Prepayment choices – defea-
sance or yield maintenance? Any
open prepayment term on the
back end of the loan or a step-
down fixed prepayment percent-
age are significantly cost prohibi-
tive;
• Higher transaction costs –
lender legal fees are usually twice
the amount vs. a life company;
• No rate lock (spread only)
until closing;
• Assumption timing takes
more than twice the time it takes
to originate a loan; and
• Master servicer has right
to change leasing and capital
improvement reserve structure
at loan
assumption.
Strengths of a life company
loan include:
• Rate lock at application;
• Lowest fixed rates;
• Longest terms (10 to 30 years
fully amortized);
• Loan commitment to confirm
deliverability prior to waiving
financing contingency;
• Prepayment choices and
more flexibility – yield mainte-
nance, open prepayment periods,
stepdown (5,4,3,2,1 percent years
six through 10);
• General account loan; and
• Usually locally serviced by
loan originator, which provides
borrower with better servicing
due to originating mortgage
banker’s accountability and
motivation to maintain and earn
repeat business.
Weaknesses of a life company
loan include:
• Acquisition time frames of
30-day due diligence and close
15 days later are very difficult
for most life companies to meet.
Most are reluctant to commit to
delivering a loan commitment
within 45 days;
• Some may sell a portion of
the loan to a third-party investor,
which can cause problems with
modifications or assumptions;
• Life companies get bought
and sold and staff changes over
time;
• Significantly more conserva-
tive underwriting;
• 30-year amortization terms
are limited to lower leverage
and/or higher-quality proper-
ties;
• Higher-quality properties
and borrowers required;
• More location sensitive – pre-
fer top 20 MSAs and are very
selective in secondary markets;
• Higher levels of leasing capi-
tal reserves on high-leverage
loans;
• More conservative structur-
ing around major tenant rollover
risk; and
• Interest only is challenging
above 65 percent loan to value on
most product types.
The main tradeoff with a secu-
ritized loan is a lack of future
lender flexibility in the event the
borrower’s business plan goes in
the wrong direction. Life insur-
ance loan servicing is typically
more efficient and the servic-
ing contact is experienced and
motivated to assist with solving
unforeseen problems.
Life insurance company loans
are usually originated as “general
account” loans where the lender
retains 100 percent of the loan
amount on their books through
the loan term. However, it’s not
unusual for some life companies
to sell a portion of the loan to a
third-party investor, which can
create problems with layers of
approval on situations such as a
loan assumption or an interest-
only payment request if the cash
flow is temporarily low.
Life insurance company loans
are typically the best lending
sources for borrowers requesting
lower-leverage permanent loans
at the lowest interest rate that will
be serviced by an experienced
staff with an alignment of inter-
est. CMBS loans usually provide
better economic terms at leverage
levels life companies won’t offer.
However, senior management
ethics vary and some are known
to retrade for sport. Choosing a
lender with a track record with
the mortgage banker is impor-
tant. Choosing a mortgage bank-
er that can provide full cashier-
ing servicing might be just as
important. This provides a local
mortgage banker that also has a
local servicing group with more
administrative control.
All investors would prefer a
permanent fixed-rate loan that’s
serviced by the lender that origi-
nates the loan by a qualified and
experienced staff that operates
efficiently and in a timely man-
ner. If the CMBS industry finds
ways to provide better servicing
via local mortgage bankers that
have local servicing groups, they
could likely take more market
share from life companies. Right
now they’re just winning on eco-
nomics and willing to do deals
life companies won’t.
s
Peter Keepper
Managing principal,
Essex Financial Group,
Denver
For Company Profiles, Contact
Information & Links, Please Visit
Commercial Real Estate
Lenders
Directory
COMMERCIAL REAL ESTATE LENDERS DIRECTORY
If you would like to include your firm in this directory,
please contact Jon Stern at 303-623-114
@
Academy Bank
Acre Capital LLC
Bank of Colorado
Bank of the West
Berkadia Commercial
Mortgage, LLC
Capital Source
CBRE|Capital Markets
Chase Commercial Term Lending
Colorado Business Bank
Colorado Lending Source
Commerce Bank
Commercial Federal Bank
Essex Financial Group
Fairview Commercial Lending
FirstBank Holding Company
Front Range Bank
Grandbridge Real Estate Capital LLC
Heartland Bank
JCR Capital
Johnson Capital
KeyBank N.A., Key Commercial
Mortgage Inc.
Merchants Mortgage and Trust Corp.
Montegra Capital Resources,
Private Lender
Mutual of Omaha Bank
NorthMarq Capital, Inc.
Principal Partners Lending
TCF Bank
Terrix Financial Corporation
Trans Lending Corporation
U.S. Bank – Commercial Real Estate
U.S. Bank SBA Division
Vectra Bank Colorado, N.A.
Wells Fargo SBA Lending
Wells Fargo N.A. – Commercial
Real Estate Group
West Charter Capital Corp.
