Conduit Lending Broaden Investment Opportunities

Conduit lenders, who make loans that are then pooled and sold to Wall Street investors as bonds are softening underwriting requirements to lure borrowers. This type of interest- only financing was conventionally offered to strong properties in promising markets. That has changed and suddenly seems to be right for practically any borrower in any type of market. This opens the door to secondary and tertiary markets. There are many old buildings prime for re-purposing in tired neighborhoods on the fringes of the central business districts. With cap rates so low in many markets, investors are increasingly seeking out more speculative opportunities with upside potential. The more speculative the project, the more important it is, to work with financing instruments that provide flexibility, high leverage and competitive interest rates. After all, investors seek returns and accumulation of wealth.

Some key negotiating lender terms to consider include; paying interest only for a set period of the term and then converting to principle and interest payment over a negotiated amortization period, waiving insurance fees and tax escrows, capping legal fees, lower assumption fee if the property is sold and lowering the typical 1.2x debt coverage ratio. With all the competition among conduit lenders, looser loan terms are advantageous to the borrower. This will also open your eyes to a broader range of investment opportunities that would not have normally been considered.

Insuance of commercial mortgage-backed securites (CMBS), backed by U.S. assets; 
2001: $67.1B, 2002: $52.1B,  2003:$78.8B, 2004 $93.8B, 2005:$169.2B
Source: Commercial Mortgage Alert