WORLD PROPERTY CHANNEL ®

(CHICAGO, IL) -- The Real Estate Capital Institute's February Scoreboard sees some light in the otherwise murky real estate capital markets tunnel.

"Modest job growth, combined with controlled government spending discussions directly affect the current economic recovery, which is slowly trickling into the real estate capital markets," according to RECI Research Director Nat Zvislo.

Policymakers are also helping by holding interest rates low at levels favorable for real estate markets. Funding activity is scant, but signs of new hope are emerging. 

"Funding sources and investors are reporting a pickup in capital activity, including hiring staff and bidding on more transactions,"  notes Zvislo.

He adds, "While activity is extremely limited, mild optimism is in the air."

During the month, some lenders slightly dropped mortgage spreads by at 10 to 25 basis points.  Short-term loans remain relatively unchanged, while permanent loans now start at about 5.5% for multifamily assets and 6% for commercial properties.

As lenders workout of their legacy problems, new funding goals surface which are moderately more ambitious than 2009.

As has been the case last year, high-quality projects in major markets backed by excellent sponsorship and cash flow characteristics are most desired -- especially based on low leverage of 65% of value.

Since rates remain low and funds are scarce, lenders resort to more creative solutions to capture such limited opportunities, including offering mezz debt and applying net worth covenants.

A renewed interest is arising in mezzanine programs, particularly for multifamily fundings. 

On a selective basis, funding sources can dip below the standard 125%-debt-service-coverage threshold for loans already on the lender's balance sheet. Payment formats based on self-liquidating amortization schedules of 5 to 10 years and a maximum leverage is 80%.

Net worth covenants are required on a selective basis to help protect lenders against problems associated with sponsorship vs. the actual asset. For instance, the sponsorship should maintain a minimum net worth equal to the loan amount of which 10% or more is liquid.

Noncompliance results in a loan default which is curable by principal paydown or additional credit support (e.g. letter of credit). This structure is more difficult to enforce for partnerships with different principals, as well as larger institutional-grade transactions.

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