In Booming Real Estate Market, Trusts Going Head-to-Head with Banks

The red-hot real estate lending market is attracting a new competitor- commercial mortgage real estate investment trusts.

Commercial mortgage REITs fund themselves by buying commercial mortgage- backed securities, or CMBS. They then acquire mortgages on commercial buildings.

Many commercial REITs originate loans ranging from $5 million to $10 million on existing properties.

REITs have "clearly been a factor in terms of competition on the low end of bidding," said Breck Hanson, head of real estate lending at LaSalle National Bank, Chicago. "Yet we had our biggest production year ever."

The vibrant real estate market has provided enough business to accommodate the new competition. But some say commercial REITs have some competitive advantages over bank lenders.

Mortgage REITs get a tax break on their expenses, and are free from the regulatory restraints and costly bricks-and-mortar networks that banks have. Therefore, many REITs can lend money on more competitive terms than banks.

In addition, some REITs have teamed up with mortgage bankers or other conduit lenders that continually provide them with projects on which to lend.

"Commercial mortgage REITs are going to be the real estate lenders of choice in the future," said Thomas Dreyer, head of the real estate research group at Friedman Billings Ramsay & Co., Arlington, Va.

Though there are only about six public commercial mortgage REITs, many more have registered to go public, Mr. Dreyer said. The current crop of public REITs is just "the tip of the iceberg," he said.

Commercial mortgage REITs feed off of the thriving CMBS market, which saw $40 billion in new issues last year and is set for even more this year.

"This has been a very important industry, one that has not totally matured, but matured quite well," said William Willoughby, president of Criimi Mae, a Rockville, Md.-based commercial mortgage REIT that is the largest buyer of subprime CMBS.

Criimi Mae started a "lock-in" program last June, which allows borrowers to prepay loans anytime for a set penalty. It lets borrowers avoid the typical "lock-out" terms and yield maintenance programs that conduit lenders typically require.

On a 10-year loan, Criimi Mae's prepayment penalty is 3% for the first three years, 2% for the second three years, 1% for years seven through nine, and nothing for the last year.

The program has been so popular that Criimi Mae has generated commitments at a clip of $100 million per month, Mr. Willoughby said.

But observers say they are concerned about the maintenance of underwriting standards in the face of more lending competition.

"While commercial real estate lending as a category is in good shape, it's clearly gotten more competitive in the last three years," said Gary Gordon, and analyst with PaineWebber Inc. "The underlying assets are generally pretty healthy, but lending standards are getting worse."

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