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Banks are back, armed with new products and services.

Banks are back and they are aggressively elbowing each other, conduits and insurance companies for a share of the estimated $110 billion of commercial real estate mortgages that will rollover each year through 1997, plus loans to finance the booming construction market.

Taking advantage of the low-interest environment in the early 1990s and capitalizing on the spread between what they paid their depositors and what they earned on Treasury bills and loans, banks posted record profits in recent years. This year bank profits are expected to grow 7%.

Flush with cash, banks pushed further into the permanent mortgage market -- the traditional domain of life insurance companies and pension funds -- and they are largely returning to their traditional role of construction lender as real estate fundamentals improve in most areas.

Moreover, the drop in long-term interest rates earlier this year has spurred demand for new loans. In March rates for a 10-year loan at 70% to 75% loan-to-value fell to 8 5/8% from 9 1/8% at the beginning of the year.

"With the drop in interest rates, we've seen a real increase in activity," says Carmela Anderson, vice president and division manager of commercial mortgage servicing for Bank of America, a division of San Francisco-based BankAmerica. Anderson's division, which writes term loans from $1 million to $10 million, provided $265 million in financing last year. "Borrowers want to take advantage of rates, whereas last year they were sitting on the fence."

But fears of any near-term interest rates are likely diminishing because of the sluggishness of the economy. The anticipated economic "soft landing" may be in jeopardy. In May, the government's index of leading economic indicators fell for the third straight month, and total employment dropped by 101,000 -- the biggest decline in four years.

Loan originations on non-residential property by commercial banks totaled $128 billion, according to the U.S. Housing and Urban Development's Survey of Mortgage Lending Activity. Banks also provided $19.7 billion on multifamily property last year.

"Commercial banks have been back in the real estate markets in a big way for several years," says Kris Garrett, senior vice president of Phoenix-based Bank One Real Estate, Western Region, which is expected to close on $2.5 billion in loans this year. "Banks are hungry for asset growth and real estate loans are good assets to put on the books."

Overall, banks hold about 40% of all private commercial real estate debt outstanding. At year-end 1994, commercial and savings banks held $368.5 billion in outstanding commercial loans compared to $354 billion at year-end 1993, according to the American Bankers Association, a Washington, D.C.-based trade group. Texas, Washington, Virginia, Pennsylvania and North Carolina recorded significant net increases of at least $1 billion in outstanding mortgages last year, the association reports.

"Banks are searching for ongoing revenue streams, and they are competing for loans on pricing and deal structures," adds David Bundern, associate director of housing and real estate finance at the American Bankers Association.

"Banks have clearly jumped headlong into the permanent lending business, and they are back into construction lending, except on a much slower basis," adds Tom Hallowell, senior manager of real estate advisory services with New York-based Coopers & Lybrand.

Overall, lenders are expected to increase their loan production by 20% to 25% this year. Banks are increasing their loan production, but they are also underwriting conservatively, requiring about 15% equity from developers and writing recourse construction and mini-perm loans.

"Deals are being done with quite a bit of equity," says Walter Spiegel, a partner in the Boston law firm of Peabody & Brown. "My sense is 30% or more in equity is often needed.

"The market will resemble the Eisenhower years," he adds. "We won't see high-flying lending activity; instead it will be slow and steady as the real estate markets continue to improve."

"We've gotten back to being an active lender as the conditions improved," says Larry Briggs, senior vice president of Bank of America. The bank is providing construction loans on multifamily and single-family residential projects, anchored neighborhood and power centers and some industrial development. It also finances low-income housing and provides lines of credit to real estate investment trusts (REITs).

The REIT market, which stalled last fall, shows signs of stirring again, Briggs says. Secondary offerings are being structured and debt financing is being provided to REITs. Firms like Bank of America, Bank of Boston and First Chicago are competing for a bigger share of this market, which typically consists of floating-rate, two- or three-year revolving lines of credit to fund new development or acquisitions.

"The market for lending to the publicly traded outlet center is bankable," says Michael Closer, real estate director of Bank of Boston. "The demand for well-structured, covented loan paper is strong. The syndication was substantially oversubscribed. We could not get all the banks in."

The Bank of Boston was the agent bank that underwrote and put a syndication of banks together for a $200 million credit line for Chelsea GCA Realty, a Lawrenceville, N.J.-based developer of outlet centers. Initially the developer sought a $70 million credit line, which was subsequently upped to $150 million. But the offering was substantially oversubscribed and further increased to $200 million.

"The interest surprised us," says Bank of Boston director of corporate finance Matthew E. Galligan. "Clearly banks had more of an appetite for the outlet sector than we expected. I think banks are asset hungry."

Briggs says the level of REIT activity has really picked up, with newer REITs establishing track records and getting debt ratings.

Competition pushes spreads down

"The (financing) pie is very big, but it's very competitive," adds Coopers & Lybrand's Hallowell. Other traditional lenders like insurance companies, pension funds and small banks are also back in the market. And these lenders are crowding a lending environment that's been led by the public debt and equity markets in recent years. As a result, spreads are down considerably.

Anthony J. Thomas, senior vice president of Providence, R.I.-based Fleet Bank of Rhode Island, which underwrites both construction and permanent loans, says the combination of pent-up demand, improving markets and competition has led to an increase in lending activity.

"When we got back into the market in 1993, there was no competition," says Thomas. "Last year there was limited competition; now everybody's out there."

Earlier this year, Fleet Rhode Island provided an $8.5 million loan to refinance an existing loan and fund the expansion of a garden apartment project in Warwick, R.I. The five-year loan refinanced 192 existing units and funded the construction of 48 additional units. When long-term rates fell, the borrower, a local developer, opted to swap the floating rate for fixed-rate financing.

"We offered the borrower a variety of options," Thomas says. "There's strong apartment demand, and we see more new construction going forward."

"There's a lot of activity in apartments, retail and industrial properties," Bank of America's Anderson says. "There are many lenders interested in this product. Borrowers are looking for reliability and fast turnaround, and that's how we're differentiating ourselves."

Bank of America closed a $3.9 million loan on a 100-unit apartment development in Rohnert Park, Calif., 26 days after receiving the application. In addition to locking in an interest rate, the borrower had to meet a semi-annual bond payoff deadline.

The apartment sector overall attracted $900 million more capital in 1994 than in the previous year. According to a real estate survey by Coopers & Lybrand, new loan commitments on apartments rose to $3 billion last year, up 42% from 1993. At the same time, loan delinquencies dropped 54% to 1.9% of loans during the same period.

Bank One Capital Corp. has closed on $1 billion in apartment and nursing home loans since 1993, says Linda Mackov, vice president of Bank One Capital Corp. The bank, which is a Fannie Mae DUS and FHA-approved lender, is perhaps the only super-regional that has both DUS lending status and an in-house capital markets group, Mackov says. It is also a Freddie Mac lender in several states as well as one of the country's most active FHA-approved processors.

"We're expanding our capabilities and generating a pretty steady flow of loans," she says.

Construction and mini-perm loans are skewed to apartment and retail development and redevelopment. Regardless of the property, banks are requiring equity of up to 40%, with an average of about 15% equity needed, bankers say. Fleet National required 25% equity in the financing of a Phoenix apartment project. The Providence-based bank has targeted $300 million for the apartment sector this year.

"Depending on the credit of the borrower, we require equity between 10% and 40%," says Bank One's Garrett. She says two-thirds of Bank One's Western Region volume will be residential, which includes a sizable single-family housing program. Its apartment lending is primarily to REITs.

Hallowell notes several Swiss and German banks financing the renovation and expansion of regional malls. The major mall owners are credit-worthy real estate companies, he says, adding that the play is a way to win a regional mall's permanent mortgage.

Bank One, Fleet National Bank, First Union and Wachovia Bank are among the major commercial banks to fund the construction of high-end garden apartments.

Super-regionals are super-conduits

While banks are returning to their primary role of providing floating rate construction and mini-perm loans, many of the large regionals are beefing up or adding capital market groups to better tap the permanent mortgage market. These banks take loans from origination to the public markets internally or through investment banking partners. Bankers say they are better suited than investment bankers to be conduits because the wheels of the process are in place and well-greased at banks, particularly loan origination and servicing.

"Banks are typically equipped to provide for shorter-term, floating rate debt," says Carl Kane, managing director and head of the capital markets group at New York-based E&Y Kenneth Leventhal Real Estate Group. Securitization gives banks and their customers another option if these loans are structured and priced to sell in the secondary market.

Major banks like Bank One, Citicorp, First Union and NationsBank have formed capital markets groups. PNC Bank, Key Bank, Bank of Boston and Midlantic Bank originate commercial mortgages for Wall Street firms.

"Banks need to provide floating rate debt because their deposits are floating rate," says Mike Greco, managing director of First Union Capital Markets Inc., a division of Charlotte, N.C.-based First Union Bank. "Our group was created to give customers somewhere to go if they wanted a permanent, fixed-rate, non-recourse loan. Our loans are originated to sell (as securities to investors) and not held for the bank's portfolio."

Adds Rob Schweitzer, vice president of NationsBanc Capital Markets Inc., a year-old subsidiary of Charlotte, N.C.-based NationsBank Corp., "We're in the business to take advantage of the potential profitability of the CMBS (commercial mortgage backed securities) market, but a subset to our getting into it is the desire of NationsBank to change its balance sheet in terms of how much real estate it holds on its balance sheet for the long term. The conduit business is a vehicle that allows the bank to lend more and serve more customers while reducing or keeping a comfortable balance sheet risk."

Commercial banks accounted for about 4%, or slightly less than $1 billion, of the total commercial mortgage backed securities market last year, according to Kenneth Leventhal & Co.'s Income Property Securitization Report. This year's volume will be boosted by the work of Citicorp, First Union and NationsBank.

Since forming last July, First Union has closed on more than $200 million in loans and contributed more than $100 million to a recently completed $240 million Fannie Mae ACE swap. The swap, which creates AAA-rated securities, was co-managed by New York-based CS First Boston.

"I don't think any firm is going to do more than $400 million to $600 million in volume because the average loan size has dropped from $5 million to $3 million," says Greco, adding that First Union is on target to close on $500 million this year. "It takes a lot of deals each month."

"The key to the business is origination," adds Greco. "We're swamped with business, while investment banking firms have to search for it. No investment bank has 7 million customers or a network of 1,400 underwriters like we do."

With many banks also securitizing loans in-house or using relationships with investment banking firms to structure CMBS, they are looking to exploit their ability to provide a host of financing services to borrowers.

"Banks can walk into the offices of the top 50 real estate owners and offer them more of a full-service (financial) approach (compared to investment banking firms)," says Hallowell.

As spreads come down and, perhaps, underwriting gets more aggressive, the question is whether banks will make the same mistakes they made in the 1980s. Hallowell says it's too early to tell.

Veribanc Inc., a Boston-based bank rating service firm, says real estate lending is growing without a proportionate increase in delinquencies. "There's been a dramatic improvement working from the real estate crunch and the risk in making loans on real estate is declining," says Dr. Warren Heller, research director of Veribanc. "Bankers have a way of voting with their feet."

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