As published in Scotsman Guide's Commercial Edition, January 2006.
In the past few years, low interest rates, low-yield money and heavy residential demand fueled an unprecedented boom in the real estate finance industry. In 2005, lenders became more aggressive and creative than before, as they broke molds and created new rules for real estate lending.
At the current pace, this year should be no different. To the dismay of the bubble doomsayers, we think there will be no dramatic changes or downturns in the foreseeable future, though we will experience some interesting transitions in certain markets. In 2006, two highlights stand out: the emergence of mezzanine-equity lending -- a hybrid of mezzanine lending and equity lending -- and the gradual resurgence of the multifamily and office sectors.
Lenders have been increasing their loan-to-cost percentages to aggressive new highs, particularly in the condominium-development and condo-conversion sectors. Senior lenders reached levels of as much as 80 percent to 85 percent of cost on the capital stack. Mezzanine lenders have begun lending at more than the traditional 90 percent of cost. As mezzanine lenders increased their leverage up the capital stack -- as much as 98 percent in many cases -- they and their standard-equity partners received a portion of project profits.
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