Now that the retailing sector and shopping centers are bouncing back from plummeting sales, calamitous tenant consolidations and store closures over the past couple-three years, many life insurance companies are looking to do more business with solid borrowers, observes Ron Reese, Dallas-based senior vice president with NorthMarq Capital.
And as recent activity clearly demonstrates (see list below), insurer financings frequently include small-cap retail centers.
Life companies are offering longer fixed-rate loan terms than banks, and unlike banks they typically don't require personal recourse at modest leverage levels even with loans under $5 million, Reese and others stress. "Banks tend to want full recourse on everything they do," Reese adds.
"There just aren't a lot of lenders doing deals under $5 million on a non-recourse basis," adds Paul Schroeder, managing director with Cohen Financial's San Francisco office. While Wall Street conduits were a solid option pre-recession, Wells Fargo Real Estate Capital Markets is about the only conduit looking to compete in the small-balance space today - and it's still gearing up, he adds.
Schroeder just arranged a fully amortizing 20-year, $5.5 million mortgage from Sun Life Financial refinancing the 98,270 square foot Maxwell Village Shopping Center in upscale Sonoma, Cal., which is anchored by a Lucky supermarket and Rite Aid pharmacy
Facing an upcoming maturity of the existing mortgage, Schroeder's veteran developer client was seeking long-term fixed-rate financing - and clearly preferred a non-recourse transaction. "And that's not something you'll get from banks," who typically insist on personal repayment recourse and are reluctant to lend for more than five years or so, Schroeder continues.
As Reese stresses, certain life companies are now eager to establish relationships with strong borrowers - and will consider small-balance transactions if they support that goal. For instance, he just closed a $4.55 million, 10-year mortgage from Aviva Life & Annuity covering the 22,190-square-foot portion of the Eagle Landing shopping center in Sparks, Nev., net leased long term to two tenants: Walgreens and AutoZone.
The financing helped the client - an affiliate of powerhouse Fritz Duda Co. - acquire the entire 47,170-square-foot REO from its former lender for $10 million, including $7 million for the parcel secured by the Aviva loan, property records show.
While it's a relatively small transaction for Aviva, officials there were quite interested in establishing a relationship with such a proven and preferred borrower, Reese continues. Indeed it would make sense for Aviva to also consider providing permanent financing for the multi-tenant balance of the property once the Duda group stabilizes it, he adds.
Reese and Schroeder note that life companies clearly prefer to keep leverage below 70 percent - but might offer some wiggle room if the borrower is willing to accept at least partial recourse.
If the borrower team is able to convince a life company to go with a higher LTV for a property facing some roll-over risk - clearly an atypical situation - then the lender would likely ask the borrower to guarantee repayment of 25 percent or more of the principal amount, Reese specifies. "But if you take the LTV down to 65, recourse is less important."
Schroeder's Sonoma client didn't need to push the LTV envelope, and was willing to go below 60 percent - which of course entailed a narrower interest rate spread than would have been the case at higher leverage.
Indeed generally speaking, the lower the leverage and the less the exposure to near-term roll-over risk, the tighter the interest rate spreads life companies will quote, Reese relates. With engagements he's currently pursuing, quotes for small-cap shopping center loans are coming in anywhere from about 190 to 250 basis points over the comparable-term Treasury yield.
Properties attracting the sub-200 spread quotes are typically those demonstrating stable occupancy for several years running - with borrowers seeking no more than 55 to 65 percent leverage.
NorthMarq Capital's originators around the country in fact have already arranged several small-balance retail property mortgages so far this year: