The Wall Street Journal-20080123-Real-Estate Finance- Balance-Sheet Loans Return- More Real-Estate Projects Take Old-Fashioned Route As Mortgage Securities Dry Up
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Real-Estate Finance: Balance-Sheet Loans Return; More Real-Estate Projects Take Old-Fashioned Route As Mortgage Securities Dry Up
When the owner and operator of the Trump casinos in Atlantic City, N.J., looked to refinance debt and fund the construction of a new Taj Mahal hotel late last year, it turned to a tiny bank in Las Vegas, rather than the big investment banks that have dominated real-estate lending in recent years.
Beal Bank Nevada provided a $500 million credit line -- its first commercial loan in three years. "We're re-entering the market because of the fact that you can make solid loans again, and you don't have to compete with dumb money," says Andy Beal, the bank's founder.
During the recent commercial boom that took off in 2005 and lasted through early 2007, Wall Street called the shots on lending. Investment banks pooled commercial mortgages, bundled them into loans and sold them to investors as bonds, called commercial mortgage-backed securities. The cheap, ample debt fueled a real-estate boom that sent prices soaring to record levels.
So-called balance-sheet lenders -- those that make loans and hold on to them, such as life insurers, some regional banks and pension funds -- found it hard to compete, because they typically require more cash down and enforce more stringent terms. "It was increasingly difficult to find well-structured, high-quality deals adequately priced for the risk," recalls David Brown, head of global private markets at TIAA- CREF, the largest U.S. retirement fund.
Yet, as the frenzy reached its peak in early 2007, underwriting became increasingly lax and investors started to balk at buying the bonds. By summer, investment banks had scaled back their lending significantly. Sales of commercial mortgage-backed securities are expected to plunge by half this year, from a record of $230 billion last year, Moody's Investors Service predicts.
That set the stage for the return of balance-sheet lenders. Among those that have jumped in over the past few months: regional bank M&T Bank, insurer MetLife Inc. and TIAA-CREF.
To be sure, few expect make-and-hold lenders to compensate for Wall Street's absence. Insurance companies, for example, "are not going to do $200 billion a year, and their lending volume as a whole might be in the range of $40 billion to $50 billion," says David Twardock, head of Prudential Financial's commercial real-estate finance business in Newark, N.J. "There is a need for a functioning securitization market."
But while Wall Street remains virtually seized up, balance-sheet lenders are opening their taps. TIAA-CREF and MetLife recently teamed up to provide General Growth Properties Inc., a real-estate investment trust, a $400 million loan to refinance Columbia Mall in Columbia, Md. The deal might have gone to Wall Street before the credit-market turmoil. TIAA-CREF also recently originated a $185 million loan for ProLogis, a Denver-based REIT, to purchase 19 industrial properties in seven markets across the country.
M&T Bank, based in Buffalo, N.Y., saw its loan volume for New York City transactions increase more than 20% in the fourth quarter from a year earlier, and expects the trend to continue into this year. "We're winning more deals with acceptable returns and acceptable loan terms like those requiring at least 25% of equity," says Peter D'Arcy, the bank's group manager of structured real-estate finance.
Indeed, borrowers who look to these lenders to help them close a deal must accept tighter terms. Gone are loans that were common during the boom, such as those that only required interest to be paid for as long as 10 years, and those that exceeded 80% of a property's value.
"The general mantra is more conservative underwriting," says Jeff Hanson, executive vice president at Grubb & Ellis Co., a Chicago-based real-estate services firm.
Nonetheless, these balance-sheet lenders are coming to the rescue of those who are desperate to close a deal quickly, or who are scrambling to refinance short-term debt into a longer-term mortgage.
For instance, New York developer Harry Macklowe was in default on a predevelopment loan for a speculative office building in midtown Manhattan but recently received a much-needed loan commitment from Union Labor Life Insurance Co. in Washington, D.C. "It's a good lending opportunity for us," says Herb Kolben, a Union Labor senior vice president, who declines to specify the loan terms prior to its closing. Had it not been for the credit-market swoon, he adds, "We wouldn't have had a chance to bid for this, because [Wall Street] lenders were much more aggressive in structure and pricing."
Of Beal Bank Nevada's financing for the Trump project, John Burke, executive vice president and treasurer of Trump Entertainment Resorts Inc., said: "As we looked around all the possibilities, Beal Bank provided us a quicker execution without us having to deal with the uncertainties in the market."
