commercial properties in New York as larger lenders with household names are sitting on the sidelines. Last week the thrift closed a $11.5 million permanent financing for the Avalon Hotel, a new boutique hotel in Manhattan's Murray Hill district. And it is about to close a construction loan for the Savoy Park Avenue on 26th Street. Local Federal has been financing commercial real estate all over the United States since the early 1990s, when it bought mortgages at deep discounts from Resolution Trust Co., said Bill Reid, senior vice president and loan officer. "An Oklahoma bank is beating out New York banks, who fail to see some of the good deals," said Richard Pergolis, principal of Pergolis Swartz Associates Inc., a commercial mortgage broker that has worked with Local Federal on several deals. Local Federal has more than $650 million of commercial real estate loans on its books and is looking to expand its portfolio to more than $1 billion, Mr. Reid said. The thrift has $2.1 billion of assets. The thrift has purchased or originated more than $1 billion of loans since the early 1990s - and experienced zero losses. It has had to foreclose on only four properties, all of which were sold at a profit. The savings and loans that got into trouble during the 1980s lent at high-loan-to-value ratios and were involved predominately in construction lending, said Robert Vanden, executive vice president and vice chairman of Local Federal. By contrast, Local Federal insists on high debt-coverage ratios, is involved mostly in permanent financing, and has done "only a handful" of construction loans, Mr. Vanden said. The bank's team of eight loan officers have backgrounds in either real estate appraisals or workouts dating back to the REIT debacle of the 1970s and the S&L debacle of the 1980s, Mr. Vanden said. In the past, Local Federal had a hard time competing with Wall Street's conduit lenders, who originate loans they intend to securitize. To protect itself from interest rate risk, the thrift structures its 10- year loans so the rate resets after the first five years; it also uses "floors" that prevent the rate from falling below 7.5%. "Our rates were never low as the conduits' rates," Mr. Reid said. "We were never winning deals off our interest rates." However, one thing the thrift could do that conduits could not was to cut the borrowers some slack on prepayment penalties. Conduits impose yield maintenance penalties based on complicated formulas that force the borrower to pay the difference between what the lender would have earned on the loan being refinanced and the lower market rates. Local Federal, by contrast, imposes a simple "54321" penalty: five points if the borrower refinances in the first year, four points in the second year, and so on. Sometimes it even levies just a one-point penalty throughout the life of the loan. "We will be very flexible on prepayment and that's what distinguishes us from a conduit," Mr. Vanden said. "Our key marketing point is very low prepayment penalty and flexibility to negotiate. We're not just checking the box." With the global liquidity crisis putting the kibosh on lending by conduits, Local Federal has seen its application and production volumes double since late August. The Avalon Hotel had only been open for four months when Local Federal agreed to refinance the $3.08 million acquisition loan and a $4.15 million construction loan that had been made by Korea First Bank. Many lenders insist on at least 12 months of operating history before financing a hotel. But Local Federal took comfort in the high level of borrower's equity. The appraised value of the property was $32 million-nearly three times the amount of the loan. Similarly, with the Savoy Park Avenue, developer Henry Kallan is contributing $800,000 of cash plus the land, which is appraised at $4.5 million.

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