Capital needs change as real estate
development projects and strategic
property acquisitions transition into stabilized operations. Many permanent and
long-term financing vehicles are available
to meet these needs. Conduit lending is a
common option, but there are variants
within conduit lending and a growing number of features and options.
Conduit lending helps connect Main Street
businesses with Wall Street financiers and
funding options.
For guidance on navigating the process,
Smart Business spoke with Larry Silberman, group regional president of commercial real estate for MB Financial Bank, to
learn the options that owners and investors
have for long-term fixed-rate financing and
how to match their needs to options.
How does an investor get access to long-term
fixed-rate financing?
Most community banks don’t offer permanent debt options for long-term fixed-rate financing, so businesses usually go
outside their main commercial bank. The
primary options are through an insurance
company or a conduit, at times accessed
through correspondent mortgage brokers.
Conduits typically package these loans into
a portfolio securitized by selling bonds.
Commercial banks can add a lot of value
as an intermediary, even if they don’t offer
the desired funding vehicle. They already
have a close relationship with their customers, an understanding of the properties
and investments, knowledge of customers’
financial performance, and relationships
with multiple mortgage brokers and insurance companies. The bank has the flexibility to match its customer with the most
appropriate funding source, and the customer benefits from the convenience of
working through his or her regular banker.
There’s usually no cost premium to working
through the bank as an intermediary. In fact,
terms are often favorable to the customer.
How does funding through an insurance company differ from funding through a conduit?
Conduit loans tend to be more structured, and therefore less flexible for the
borrower. Flexibility includes prepayment
terms, provisions for the partial release of
collateral, guidelines on rebuilding the
property in case of fire or other damage,
plus various interest and financing terms.
Because conduit loans are pooled and
securitized, there is less flexibility for individual borrowers. The tradeoff is that they
often have a better price. Conduit loans are
also available to more borrowers, because
insurance companies tend to be more conservative in their underwriting and more
selective in their potential borrowers.
Are there any new long-term financing
options?
The basic options remain the same, but
there are several new variations. For example, now there are interest-only options for
permanent long-term financing. Life insurance companies are starting to provide
complete funding for projects right from
the start of construction. Historically,
insurance companies have gotten involved
after construction was complete and the
property was generating stable cash flow.
Some lenders are also offering flexibility
on non-recourse provisions, which allow
the borrower to buy down the rate.
Negative arbitrage situations are also
becoming more common. Say you need $5
million to fund construction of a project
that will take 10 months to complete.
Typically, you would draw $500,000 a
month for 10 months and pay interest only
on the outstanding amount. The new alternative is to be advanced the entire $5 million. The borrower takes the amount it
doesn’t need immediately and invests in a
short-term interest-bearing vehicle, such as
commercial paper. ‘Negative arbitrage’
refers to the difference in the interest rates
between the loan and the investment.
What advice do you have for businesses
seeking long-term financing?
Be prepared with information, and be
patient. Prospective lenders will want to
see at least three years of financial data.
This includes normal operating expenses,
documentation of capital improvements,
tax records, utilities and other fixed
expenses, rent rolls and the leases for
major tenants.
How does a company choose what type of
loan is most appropriate?
It really depends on how much flexibility
is desired, and the nature of the business or
project being financed. If the financing is
for a single, stable, long-term asset, such as
a big-box retailer or outlot pad for a bank,
then there is less need for flexibility, and
the borrower can get better terms.
If the financing is to develop a property
that will have multiple tenants, with less
predictable cash flow, more flexibility will
be needed over the long term. It can be
hard for a business to know what flexibility it needs, so this is an area where there is
value in using the commercial bank as an
intermediary. The intermediary doesn’t
have a vested financial interest or profit
incentive in the option that’s chosen. This
independence can help bring clarity to a
potentially confusing decision.
LARRY SILBERMAN is group regional president for commercial real estate at MB Financial Bank. Reach him at
[email protected].