July 9, 2002

Commercial Mortgages & Real Estate Loan News:
Q&A for Legal Insight

As is consistent with the style and intent of From the Street, we wanted to bring yet another perspective to our audience with prominent issues that affect your decisions in the commercial real estate investment marketplace. This week we are fortunate to have Chris Fisher from the Kansas City office of Bryan Cave LLP respond to several questions as they pertain to legal issues in today's capital markets. Bryan Cave LLP is an international law firm handling a broad range of real estate legal services, and the following is a snapshot of what Chris Fisher has observed in our market place.

Peter Slaugh (PS): Explain some of the areas your firm specializes in relative to commercial real estate services.

Chris Fisher (CF): Bryan Cave LLP's commercial real estate group is one of the largest practice groups within the 800+ lawyer worldwide firm. In conjunction with our commercial finance group, we represent buyers, sellers and various types of lenders in complex commercial real estate transactions all over the world. With Bryan Cave lawyers domestically in New York, Chicago, Kansas City, St. Louis, Washington D.C., Phoenix and Los Angeles, our conduit lending, construction finance and real estate development practices are among the strongest around. Our real estate development practice has helped us to develop and maintain a strong leasing practice representing both landlords and tenants on a national basis.

PS: Given the economic and national security events of the US over the last 12 months - what impact have these events had on your core business?

CF: The commercial finance area has stayed strong over the past year, with a significant upturn in loan refinancings, modifications and forbearances, but a general drop in new financings. On the real estate side, while new development has generally slowed some, we have seen a mild increase in retail development and major leasing transactions. Our construction group has remained steadily busy for the past several months.

PS: Are there certain issues that lenders are keenly focused on that affect our commercial investor audience?

CF: Since 9/11, real estate lenders have become particularly focused on terrorism insurance requirements, and insurance companies are generally excluding it from their policies. Although we have not seen a particular increase in policy limit requirements or a decrease in deductible requirements, lenders are generally no longer willing to permit terrorism exclusions. We have, however, recently seen some flexibility in certain "low-risk" projects in "low-risk" regions. For example, there may be some flexibility on the coverage for a self-storage project in the Midwest. On the other side of the equation, in some projects and in some regions, business/rental interruption insurance requirements have been extended to be, in some cases, up to 24 months.

PS: My understanding is that you handle accounts for life companies, conduits and regional banks - can you point out any nuances between the various lending sources that might help investors understand the broader characteristics of each?

CF: Choosing between life, conduit and regional (and even local) banks has been and remains a balance of rates, flexibility, costs and service. More recently, as underwriting has tightened, the simple issue of availability of financing has become as much of an issue as any of the other factors. At different times over the past two years, each of the financing vehicles has, at one time or another, been significantly out of the market. On a whole, we are seeing some signs that conduit deal flow is beginning to increase and that pipelines are becoming more crowded than they have been for the past 12 months. We have also seen local and regional banks becoming more rate competitive than they once were.

PS: Are you seeing any properties being turned back to the lenders?

CF: We have not seen dramatic numbers of properties being returned to lenders. Unlike past downturns, lenders have been more receptive to modification and forbearance arrangements, opting not to take properties back as quickly as they might have fifteen years ago. This is, among other things, likely a product of better initial underwriting, together with the lessons learned by lenders in the 80's when so many properties were foreclosed.

PS: What regions/marketplaces seem to be particularly active and inactive, and could you comment on what might be driving either?

CF: Domestically, we have seen a great many real estate deals in the deep South and Southeast regions. Particularly, we have seen a number of retail deals of every variety in those areas. As always, we are extremely busy on the real estate finance side in our West coast offices, and on the development side out of our Phoenix office. Capital markets work out of our New York office also seems to be more and more active.

PS: How has the real estate legal market changed given the events of the past 12 months?

CF: Investors and lenders seem to have a renewed focus on quality and efficiency. Not so long ago, the only criteria seemed to be price. More than anything else, this change is probably a result of a complex business in a complex world made more complex by recent events. The real estate industry is looking for law firms with a broad range of expertise on a national and international level, but without profit centers or internal firm politics that create barriers for clients between offices. That model, what Bryan Cave LLP calls the One Firm Concept, has been very successful. Industry professionals want to know that they can talk with their lawyers on a firm wide basis and receive the same high quality advice and guidance whether they are talking with their development lawyer in Phoenix, their construction lawyer in Kansas City, or their securitization lawyer in New York.

At Steelhead Capital, our goal remains to add value to your organization by providing professional mortgage banking services and we hope this week's subject matter provides yet another perspective to assist you in achieving your commercial investment objectives.

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