The financing world: A decade of reflectionsAnthony M. GramzaFinancing industry history
From what I hear, commercial mortgage funds are readily
available at interest rates of six percent or less, and with
attractive terms and conditions. Furthermore, we hear that many
lenders are chasing the deals! Competition for the business is
heavy, there are not enough transactions to fill the pipelines and
everyone is seeking loan applications. These are the words on the
street today and, believe it or not, as Ripley would say, heard by
brokers and clients during the middle months of 1997.
The conduit market has exploded, money is chasing money and
rates, margins and terms continue to be quoted at levels unheard of
just a few years ago. Am I hearing 1997 or 2007? The answer is
"both." What we were saying in our articles in 1997 is the same as
we write today. It's unbelievable, but true. Who would have
believed that money levels would continue their attractiveness over
the past decade? I confess that I, as your author, would never have
believed that all of the commercial mortgage funds, low interest
rates, competitive margins and all of the reasonable terms would
remain the same for so long. But they have, and it's been a
blessing for those investors who took advantage of the times and
the brokers and agents that assisted their clients in obtaining
needed commercial mortgage funds.
During 1998, we continued to see interest rates in the six
percent or less range and funny games being played in the market.
Decreasing spreads prompted many conduit lenders to back out of the
marketplace or change their underwriting criteria, demand more
equity and tighten up their underwriting guidelines. The
marketplace saw treasuries dive to the low fours. Many lenders did
not want to lend at these low yields. Some lenders actually reneged
on their commitments. The rates remained low. Many of the Wall
Street conduits could not sell their commercial mortgage-backed
securities (CMBS). Some of their commitments were underwater. They
then had to determine what to do with this paper—hold it or
bite the bullet. Many decided to hold and many sold, took their
losses and moved on, hopefully learning an expensive lesson! Or did
As we proceeded into 1999, the word on the street was
"procrastination." Many of our clients did not feel the need to
submit all of the so-called necessary documents. "Why are you
asking for an updated financial statement? Why do I need an
accountant? Why can't I get a commitment?" Some lenders felt that
there would be a turndown in the marketplace and decreased their
staff. This, in turn, caused delays in the initial review of broker
submissions and delays in reporting back to clients—not the
right conditions to make happy campers. Even the third-party
providers employed by our lenders caused some delays, partially due
to an anticipated slowdown and partially because of added
requirements in factual reporting.
For the next few years following, the marketplace seemed to be
on a steady pace, with no big excitement and everyone happy on both
sides of the desk. In early June 2003, commercial rates were down
further—into the five percent range! Yes, you read
correctly—five percent and holding, with many older mixed-use
properties approved at the 5.5 percent level. Eighty percent
loan-to-values were the norm, amortization schedules were up to 40
years, and many of the transactions were at par. Our firm alone
received quotes on flag hotels at 85 percent LTV, fixed rate at
seven percent and amortization schedules between 20 and 25 years.
You could also negotiate par lending. And get
this—residential lending was in the 4.75 percent range. How
sweet it was! The five-year Treasuries were at 2.4 percent, and the
10-year Treasuries were at 3.38 percent. With the six-month LIBOR
at 0.99 percent, our international lenders were quoting 150 basis
points over the six-month LIBOR, or a 2.5 percent interest rate!
And yet, many of our clients/borrowers could not smell the sweet
success of the overly attractive lending market. What were they
waiting for—rates to drop further? Did they feel that their
"cream puffs" deserved a rate better than what was quoted by real
lenders? And, many of our intended clients were dreamers, looking
for the pie-in-the-sky commitments.
Spring 2004 continued with procrastination. We kept on asking,
"What are you waiting for?" In early spring, the rates were great.
Multi-family projects were quoted at 5.5 to 6 percent,
office/industrial/mixed use was quoted at 6.5 to 7 percent, and
hospitality was quoted at prime plus 2.5 percent or fixed at eight
percent. And yet, there was hesitancy. Toward the end of 2004, our
lending sources were telling us that it was (and would be) a so-so
year and there was a sure indication that all of the funds
committed originally would not make it to the funding table. As
time marched on, so did the increase in lenders into the commercial
market arena. In addition to our regular/regulated lenders, the
mortgage brokerage and mortgage banking firms increased, to take
part of the pot that was stirring in the marketplace.
And what about our Wall Street conduit lenders? With the
continuous flow of dollars into the lending market, it became
evidently difficult to find enough end users in the domestic
marketplace. Therefore, why not consider (and they finally did) the
international arena? The European and Asian markets decided that
what they had heard and seen in the successes of the U.S. CMBS
program excited them, and the dollar signs could be seen all over
the corporate world. With this in mind, Wall Street became partners
with various international firms. Those international firms, in
turn, began organizing and funding both the residential and the
commercial loan requests of their populaces. They received their
guidance from our experienced bankers of Wall Street. And how are
they doing? They're doing quite well, thank you.
For the year 2006 and the beginning of 2007, we found the
competition as heavy and maybe even more so for commercial loan
products. With the slowdown of the residential loan requests and
the created problems of the sub-prime market, more brokers are
seeing the advantages of commercial loan brokering and are
aggressively pursuing opportunities in this part of our industry.
Single-tenant or owner-occupied properties are at an 85 percent LTV
or 90 percent loan-to-cost, with rates at 175 to 200 basis points
over the 10-year Treasury, fixed for up to 15 years over 30-year
amortization schedules. Attractive as they may be, clients still
need to remember that their deals are not all cream puffs. They may
carry some blemishes, which will cause rate increases or
amortization decreases. However, many clients will not readily
admit such imperfections!
Lastly, over the past 10 years, we continued to remind clients
and our co-brokers to consider the following:
• The broker or agent must carry educational
• Brokers are not lenders and cannot issue letters of intent
or make commitments.
• Ask your broker or agent for references. If he will not
honor your request, move on.
• Be realistic in your timeframe.
• Remember, the broker works on the behalf of a client.
• Cooperate to the fullest on documentation.
• If you retain the services of a broker, pay him a retainer
to cover his expenses.
• Credentials count. You get what you pay for.
• If you are not comfortable with the modus operandi of the
broker, then move on.
• In this industry, nothing is free.
The majority of us, both clients and brokers, have experienced a
decade of abundant funds. We still experience very reasonable
interest rates and attractive terms and conditions. We still have a
field of aggressive lenders seeking the business and willing to
make some compromises to land the transaction for either their own
portfolios or to help in funding CMBS pools. I hope that it has
been a great decade for you and you will be able to fulfill your
hopes and dreams for the next decade.
With this in mind, I leave you with these wishes: Where there is
pain, we wish you peace and mercy. Where there is self doubt, we
wish you a renewed confidence in your ability to work through them.
Where there is tiredness or exhaustion, we wish you understanding,
patience and renewed strength. Where there is fear, we wish you
love and courage.
Peace to you, my friend.
Anthony M. Gramza is president of Rochester, N.Y.-based AMG
Commercial Mortgage Group Inc. He may be reached at (585) 264 9540
or e-mail [email protected]