Financing Commercial Real Estate in Alaska
Seller’s market takes hold
Wells Fargo Alaska commercial real estate lending specialists Patti Bozzo and Andy Petro (center) are flanked by Volunteers of America Alaska President Elaine Dahlgren and Anchorage real estate developers John McGrew (left) and Glenn Gellert (right) inside a new Trailside Heights condo in Anchorage.
© Amber Johnson Photography
Anchorage developer Glenn Gellert of Trapline LLC does more than just develop housing; he helps create affordable homes. Gellert, along with co-developer John McGrew and Volunteers of America, recently opened the first phase of Trailside Heights in South Anchorage.
The first stage of the affordable housing development features sixty-six two- and three-bedroom townhome style units. Amenities include washer and dryer hookups, single-car garages, recreation areas, a business center, computer lab, clubhouse, meeting room, community room, exercise facility, and on-site management.
Trailside Heights wouldn’t have been possible without a grant from the Rasmuson Foundation and loans from Wells Fargo bank and Alaska Housing Finance Corporation (AHFC). Wells Fargo supplied Gellert with a much-needed $16 million construction loan. “Wells Fargo was very accommodating because the appraisal came in at a particular amount that translated into a loan amount that was less than what we needed,” Gellert says. “But Wells Fargo adjusted its underwriting standards.”
AHFC provided two permanent loans for the project: a first loan at a market rate of 6.5 percent with a thirty-year amortization and a “soft” second loan at a reduced interest rate of 1.5 percent with a flexible payment plan. The monthly payment is based on a percentage of the available cash flow after all expenses have been paid. “Getting flexible permanent loans is important to making these deals work,” Gellert says. “Alaska Housing is good at providing what developers need.”
Gellert is also working with AHFC and Wells Fargo on the financing for the second phase of the Trailside project. It will include twenty additional units and is slated for completion in 2014.
Financing Options and Sources
Gellert is among the Alaskan borrowers who are taking advantage of commercial real estate loans. Commercial real estate generally constitutes any type of property used for business or investment purposes. It includes everything from affordable housing, like Gellert’s Trailside project, to office buildings, retail space, restaurants, and car washes. In Alaska, commercial properties also involve multi-family housing, warehouses, hotels, medical facilities, marinas, and even cruise ship docks.
Commercial real estate falls into three main categories: owner-occupied, non-owner-occupied/investor (office, warehouse, and multi-tenant), and multi-family housing. Prospective borrowers can seek financing for these types of properties from a variety of banks, credit unions, and other financial institutions. For example, Wells Fargo Manager Commercial Real Estate Group Alaska Region Andrew Petro deals with an array of projects. The bank’s Anchorage real estate department primarily handles large loans for investor-type real estate, while its business banking locations outside Anchorage tend to deal with more owner-occupied projects. Wells Fargo’s financing includes development construction loans, “mini perms” (for projects that are constructed, but not yet fully occupied), and term loans for purchases or refinances.
Wells Fargo’s Anchorage location finances about fifty projects statewide annually and about $100 million in loan production. Over the last twelve months, the bank has financed 108 new commercial real estate loans in Alaska totaling $159 million. “We value having a local commercial real estate department in the state,” Petro says. “We understand our environment.”
KeyBank also deals with a variety of commercial real estate financing situations. The most common scenario involves a business or nonprofit wanting to build or buy a location, according to Brian Nerland, president of KeyBank’s Alaska District. Sometimes the situation includes a non-owner occupied project or a refinance. “We can leverage our resources in our company to meet all types of commercial real estate financing,” Nerland says. “We can do everything from owner-occupied to assisting companies that want to access the capital markets with their real estate financing.”
Like KeyBank, First National Bank Alaska also typically processes owner-occupied, commercial real estate loans. First National provides bank-held real estate loans with terms up to twenty years, according to Vice President Commercial Lending Ed LaFleur. The length of the loan depends on the borrower’s business plan, holding period for the subject property, and a number of other factors. “We currently have approximately $600 million in non-residential/commercial real estate loans,” LaFleur says.
In addition to offering traditional financing options, First National, KeyBank, and Wells Fargo provide access to special loan programs. These programs—which are especially beneficial to borrowers who can’t qualify for conventional loans—normally have longer terms, lower interest rates, and more creative financing options.
Important Qualifying Factors
The qualifying requirements for a commercial real estate loan are much like those for standard business financing. Loan to value, repayment sources, and location are key issues. Depending on the type of business involved, the lender will require borrowers to provide financial statements, tax returns, and other documentation.
The crucial factor for most commercial real estate financing transaction is the property. According to LaFleur, commercial real estate loans usually require more effort to value the real estate. Property appraisals can be very complex, with several valuation approaches used by the appraiser and lender. In addition, there are usually several other reports needed for environmental, structural, health, and safety reasons. “These reports can be time-consuming and costly,” LaFleur says. “Commercial real estate loans take longer to consummate from the beginning of the process to the end of the process.”
If the borrower plans to lease space to individual commercial businesses, the income from rents will be a major consideration. The borrower will also be expected to have specialized, relevant knowledge. For example, one should be familiar with local zoning requirements to ensure tenants’ operations are allowed at that specific location. The borrower should also know how to employ commercial vendors for maintenance, repairs, insurance, and other needs—or retain a leasing company to handle these tasks.
If financing is being sought for an owner-occupied property, other considerations come into play. “The owner will need business experience to make sure there is positive cash flow to service the subject debt,” LaFleur says. If it’s a hotel, restaurant, or special-use property, experience is a must.”
There may also be some concern about leverage, if the borrower doesn’t have a good secondary source of repayment or minimum working capital for repairs or vacancies, LaFleur says. He adds: “The borrower needs to have a good equity position in the properties. If he’s leveraged to the maximum, he might not have anywhere to go if he loses a major tenant or has a couple of buildings go empty.”
LaFleur advises borrowers to start the loan process early. It can take several weeks or months to complete appraisals, environmental and structural reports, as-built surveys, and loan underwriting approval. He also recommends getting and staying organized. “You need to make a calendar of events based on the information and timing forecast you get from everybody involved,” he says. “You do not want to miss your contingency and closing deadlines. You could possibly lose your earnest money and\or miss out on your purchase.”
Earnest money can run $50,000 to $1 million, depending on the loan amount.
Special Financing Programs
Alaska’s financial institutions also offer special financing programs for borrowers who can’t qualify for a traditional commercial real estate loan. A key source of financing is the Alaska Industrial Development and Export Authority (AIDEA). The public corporation’s loan participation program funds a variety of commercial real estate projects, including offices, warehouses, retail, tourism, hotels, health care facilities and even car washes. “The program offers the benefit of a long term, a reasonable interest rate and predictable payments,” says Chris Anderson, who is in charge of AIDEA’s commercial finance department.
The program offers loan lengths up to twenty-five years, as well as variable-rate loans termed at ninety days, one year, three years, and five years. AIDEA also funds business equipment such as furniture, fixtures, and other furnishings and refinances existing commercial real estate loans. The program’s variable and fixed interest rates, during the first week of April, ranged from 5.03 percent to 6.07 percent.
Many AIDEA loan participation program borrowers are small mom-and-pop businesses and owner-users. They typically have their own building and want to provide a place of employment for their business. Some also want to lease out a small amount of their space for income. Other program participants are sophisticated investors who focus on buying and selling commercial real estate.
Regardless of their type, the financing process is the same for all borrowers: The loan undergoes origination and underwriting with the lender. Once approved, the loan gets submitted to AIDEA, which independently underwrites and approves it through its internal processes. Then AIDEA closes and funds the loan. “By policy, we can fund up to 90 percent for terming out new construction or the purchase of an existing property,” Anderson says.
Anderson says the program’s average loan amount is around $1.5 million, with a $20 million limit per transaction. Depending on market conditions, AIDEA closes ten to forty loan participation program transactions annually. As of the end of February, it had 279 loans on the books, representing a total portfolio of $444 million.
Anderson stresses that AIDEA’s commercial finance department has previous bankers and experienced commercial real estate underwriters who are well equipped to assist borrowers. “We have good relationships with all of the lenders throughout the state,” Anderson says. “We understand how they underwrite and approve. This helps facilitate the lending process for borrowers.”
In addition to AIDEA and AHFC, Alaska lenders also offer special financing through the Small Business Administration the Administration’s Certified Development Company 504 loan program, which mainly provides longer-term financing for owner-occupied commercial real estate. The U.S. Department of Agriculture and Bureau of Indian Affairs also offer loan participation and guarantee programs.
Money Available to Lend
Alaska has a favorable economic environment to support commercial real estate projects. The real estate market is very stable, and interest rates are extremely low. “Based on those factors, it’s a great time to invest in commercial real estate,” says Petro of Wells Fargo.
In addition, financial institutions have a great deal of liquidity and are looking for good real estate investments. “There’s never been a better time to lend,” Petro says.
KeyBank’s Nerland agrees, describing the lending climate as very good. “It’s a great time to be acquiring, refinancing and, in some cases, building,” he says.
Former Alaskan Tracy Barbour writes from Tennessee.