Hawaii Commercial Real Estate Loans Vary Greatly

In recent weeks, we have had mortgage brokers and lenders pricing and refinancing

loans that we are working on in the Hawaii commercial real estate marketplace. It has become very clear that these lenders are placing a lot of weight on longer term leases. The properties that have average leases of at least five years are garnering excellent loan rates and quotes. The situation for a lender seems to be 10 years or more on leases, and Tenants with rated credit.

As the lease expirations get shorter, lenders are pricing a lot of risk and expense into the turnover of Tenants.

We have seen a very dramatic difference in pricing for the loan and rates from mainland and Hawaii lenders. This spread shrank dramatically during the boom years 2005-2007. In fact, shorter term leases were desirable, as buyers and lenders looked at those as opportunities to increase rates in a fast growing market.

Todays reality is that shorter term leases are being penalized. It may be advisable to prepare the property for sale and extend leases prior to any marketing of an investment property in Hawaii.

This year weve seen a surge in owner/user financing for commercial real estate in Hawaii. The Small Business Administration (SBA) is providing additional financing or second mortgages for owner/users here to once again obtain high rates of leverage that have not be seen over the past two years. We have seen half a dozen deals recently completed with leverage up to 90% and with half of the money at rates as low as 2.89% for 10-years, fully amortized.

With this kind of financing back in the market, we are seeing an uptick in smaller investment property sales in Hawaii. In particular, were seeing a surge in transactions for owner/users.

Recently, we have seen the beginning signs of a more rational market in the commercial real estate industry. In the past four weeks, we have seen loan-to-value ratios and debt coverage ratios return to a more fair and balanced level. While these loans are available for better income-producing properties, at this point in the cycle, it signals to us a return to a more level playing field and a point in the cycle which we may see increased transactions activity.

Specifically, we are seeing loans done on improved property with strong income in place with loans at value ratios of 75% and debt coverage ratios back down to 1.25% on the mainland US. With reports of these deals now starting to close and coming in for the past few weeks, we are looking for signs of similar availability with our local banks.

At this point in time, we are aware through our relationships of loans what will be offered for Hawaii properties. Last week, I even received a quote of up to 80% loan-to-value ratio. This will make a major difference in the numbers of potential buyers in the market place.

With lenders obtaining 25% equity investment before their debt investment, this seems like a safe bet for these lenders. Todays overall values are under written to tighter guidlines and will protect lenders adequately.

by: Mark Bratton

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