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Life Companies Expanding Small-Balance Offerings

November 9, 2011

We recently reported that life insurers have been playing a more active role in financing small-cap apartment properties of late - competing effectively in that space against Fannie Mae’s and Freddie Mac’s attractive rates and terms. But life companies - which have historically been associated with large core-type mortgages at conservative leverage levels - likewise appear to be gaining small-balance market share in other income-property categories.

One key attraction: active community and regional banks are still generally insisting that small-balance borrowers pledge considerable personal assets as back-up collateral in addition to the real estate security. Yes, some life companies also seek recourse from borrowers seeking higher-leverage transactions of $3 million and under - but for the most part not nearly as much as their commercial banking counterparts.

And despite their generally conservative loan-to-value limits, life companies active in the small-balance arena are also demonstrating exceptional flexibility when it comes to term lengths and amortization schedules. Transactions closed within the last couple months (see below) feature both terms and amortization schedules ranging from 10 to 25 years.

Life company activity in the space also appears to be broadening with respect to acceptable collateral type. While the generally struggling retail real estate sector remains the most active category for life companies pursuing small-balance transactions, office and industrial owners and buyers are also frequently tapping these lenders these days.

Although many of the active life company lenders do request at least some degree of recourse with transactions of $3 million or less, the interest rates they’re quoting today are about as low as they’ve ever been, observes Ron Reese, senior vice president with NorthMarq Capital in Dallas. Reese is in position to get a strong read on prevailing life company strategies, as NorthMarq has correspondent relationships with a long roster of these lenders.

With Treasury yields hovering around historic lows, most life companies are endeavoring to price transactions in terms of coupon rates rather than negotiating on the basis of spreads over the relevant benchmarks, Reese relates. For multi-tenant income properties, most are generally targeting coupons in the low- to mid-5s at their highest leverage limits, he adds.

Life companies active in the small-balance space also tend to expect something of a pricing premium below the $3 million principal point - and, again, may well request at least partial recourse in that size range, Reese adds.

For instance at press time Reese and associates were working on an approximately $3 million deal - factoring to a 75 percent LTV - with a life company to finance a multi-tenant retail center in the Dallas-Ft. Worth area. The lender requested that the borrower guarantee repayment to the tune of 35 percent.

The latest quotes came in at right around 5 percent for a five-year term and 25-year amortization. With a 10-year term and 25-year amortization schedule, the quote was more like 5.375 percent.

In contrast, with a recent $7.5 million loan Reese arranged for a somewhat larger but comparable property (and likewise tenanted by mostly local operations), the 10-year rate was 4.85 percent. And the deal was entirely non-recourse.

"So you can see the premium for the smaller transaction size."

Reese is aware of life companies even going below the $1 million mark with retail and industrial mortgages (in addition to multifamily), but hasn’t been directly involved in any transactions in that size range recently. Indeed one of the life company correspondents of small-balance specialist BMC Capital is willing to fund commercial mortgages as small as $500,000, says president/CEO Keith Van Arsdale.

Reese also notes that some life companies are willing to fund in secondary markets - but rarely in MSAs with populations of less than 100,000.

Other just-closed transactions arranged by NorthMarq’s originators around the country illustrate the flexibility life companies are demonstrating with respect to terms and amortization schedules - not to mention the variety of property types.

Members of the Miami team helped owners of the 32,236-square-foot Alexander Buildings office complex in Naples secure $3.3 million from Aetna Health & Life over a 15-year self-liquidating term. And Baltimore-based operatives arranged $1.6 million in 15-year financing (amortized over 25) from Symetra Life for the 72,204 square foot industrial property at 5200 Raynor Ave. in Linthicum, Md.

As a couple of other recently closed transactions arranged by correspondent NorthMarq illustrate, high-activity small-balance specialist StanCorp Mortgage Investors can be flexible with collateral categories as well as term/amortization lengths. Subject properties are the 89,000-square-foot San Jacinto office building in Beaumont, Tex. (10-year term, 10-year amortization); and a 38,998-square-foot mixed-use property along 47th Street in Brooklyn, NY (25-year self-liquidating term).

Over the past four quarters, StanCorp has funded nearly $1 billion in commercial mortgages - up nearly 20 percent over the previous year. Its portfolio’s 6,000-plus outstanding loans average hardly $800,000, with the average LTV estimated at 65 percent and its delinquency rate flat over the As a couple of other recently closed transactions arranged by correspondent NorthMarq illustrate, high-activity small-balance specialist StanCorp Mortgage Investors can be flexible with collateral categories as well as term/amortization lengths. Subject properties are the 89,000-square-foot San Jacinto office building in Beaumont, Tex. (10-year term, 10-year amortization); and a 38,998-square-foot mixed-use property along 47th Street in Brooklyn, NY (25-year self-liquidating term).past year at 0.43 percent.

Clearly StanCorp isn’t the only life company affiliate growing its commercial mortgage originations - albeit the big insurers are known more for mega-transactions than small-balance loans. American Council of Life Insurers data indicates life companies collectively placed more dollars into commercial mortgages during the second quarter - $15.7 billion - than they have during any quarter since ACLI began tracking the capital flow way back in 1990.

Even considering that Wall Street conduit lenders began pulling back during that quarter, and that many banks remain hamstrung by distressed balance-sheet mortgages, the figure represents noteworthy growth - literally doubling the first-quarter activity.

Several other life companies active in the small-balance space are actually small- and mid-sized insurers themselves, Reese notes. These include lending operations affiliated with the likes of Symetra Life, American Equity Life, Minnesota Life, American United Life, Ohio National Life and American National.

And even several of the household-name giants are now willing to fund transactions as small as $3 million or so - typically at leverage of no more than 70 percent, Reese adds. Among this group are Thrivent Financial, Aetna Health and Life, Sun Life of Canada, Aviva Life and others.

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