Knowledge Center

Monday, March 25, 2013

Real Estate Lending and Equity Deal Terms
for Middle Market Real Estate Investors, Spring 2013

Commercial real estate loan origination growth remained steady for the first quarter of 2013. Among property types, health care properties saw the largest increase in loan originations in 2012 with a 33% increase over 2011. Multi-family property loan originations for 2012 also spiked 30% over the prior year. Hotel properties proved to be the dark horse of 2012 originations with an unexpected increase of 8% over 2011, while retail properties enjoyed origination growth of 24% in 2012. 

Commercial bank portfolios increased 44% in 2012, while conduit loan volume increased by 7%.  Government-sponsored enterprise loans also realized an agreeable increase in loan volume of 39%. However, life insurance companies reported a 6% decrease in loan volume for 2012.

Based on an informal survey of real estate lenders and brokers, the following is a summary of deal terms in today's market for real estate investors:

Multi-Tenant Retail

Senior Debt:

Typical deals from life insurance company lenders are fluctuating between 65% and 75% LTV, non-recourse loans. Recourse requirements continue to be the norm in exchange for a higher leverage. Both banks and insurance company lenders remain focused on interest rates averaging between 4.75% and 5.0%. These loans typically have 10-year terms amortized over 25-30 years. Loan amounts exceeding 75% of value remain rare.

Conduit lenders continue to offer on average 65% LTV at rates between 5% and 5.5%.  These loans are non-recourse and typically have 10-year terms, amortized over 25-30 years.

Typical costs include fees as low as .25% and as high as 1.00% of loan amounts (and in some instances as high as 1.25% for higher-risk properties) and deposits up to 2% of loan amounts (partially refundable at closing).  Lenders continue to focus on strong national tenants with long term leases in place.

Mezzanine Loans:


Mezzanine retail lenders remain focused on the greater than $5 million market and continue on average to offer loans of 75% to 80% LTV, with rates ranging between 9.5% and 10.5%.  The term of the loan is typically coterminous with the senior debt.


Equity dollars for retail deals are targeted to the greater than $15 million dollar market, with pricing at approximately a 9% to 12% preferred return with splits thereafter between 20% and 50% to the promoter and the balance to the investor group.

Multi-Family Residential

Senior Mortgages:

Life insurance companies have continued to offer between 75% and 80% LTV.  Properties with established rental and occupancy history continue to have opportunity for as high as 85% LTV. Loans in the $5 million to $10 million range are generally non-recourse, and on average have a 10-year term with rates at 5% to 6% (and as low as 4.5% in some instances for select deals).  Typical costs include fees of approximately 1.25-1.50% of the loan amount (which may alternatively be built into the rate) and deposits up to 2% of loan amounts (partially refundable at closing).

Regional banks have also remained consistent in LTV requirements, and have shown continued willingness to lend as high as 75% LTV (with 80% LTV remaining rare but available on select deals).  Such banks have been offering rates in the range of LIBOR + 2.5% to 3% for floating rate deals and from 5% to 5.50% for fixed rate products.

Mezzanine Loans:

Multi-family mezzanine lenders are lending between 75% and 80% LTV, with interest rates for mezzanine loans falling within the 9% to 13% range.


Equity investors should continue to expect a preferred return between 9% and 12% (depending on the risks and nature of the deal), and 50% to 80% of the profits. "Waterfall" provisions, whereby the promoter is entitled to a greater share of the profits if equity investors achieve certain IRR thresholds, remain a common business point.


Spring 2013 vacancy rates for multi-family properties, which have averaged between 7% and 8% since mid-2010, are predicted to reach a record low of 2.1%.  Low inventories are predicted to give rise to a substantial jump in average rent rates, which in turn will serve to increase the overall property profitability. While the prediction of improved profitability is always welcome news, lenders who are traditionally wary of quick spikes in rental income will continue to favor properties showing consistent vacancy rates and income streams. Low multi-family inventories are also predicted to bring a healthy increase in multi-family construction projects, and bringing with it the expectation of an upturn in construction loan originations. Spring 2013 has brought a favorable outlook to overall improvement of the multi-tenant market, so it will be interesting to see how these forecasts materialize as we enter the second quarter of 2013.

As you review these terms, we would appreciate any feedback you have on how this survey can improve in the coming quarters.  Please contact Keith H. Berk, Kristin L. Dunlap or Cambi L. Cann with questions or comments.

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