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Lenders Keen on Financing Apartments

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SPECIAL TO THE TIMES

Investors who hope to buy, build and renovate apartment complexes will find a ready supply of financing this year from banks and traditional lenders as well as from special funds created by investment partners who want to capitalize on the demand for apartments in Southern California.

That’s the consensus from lenders, companies that invest in apartments as joint venture partners, and others familiar with the world of apartment financing.

Those who provide capital for apartment purchases say Southern California’s severe housing shortage, combined with the lack of new apartment construction, has many lenders and investors convinced that apartments will be a safe place to earn steady, if not spectacular, returns for some time--as well as a calm alternative to the frothy world of stock market investing.

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If the economy remains strong and buyers don’t overpay, apartments will likely continue to provide annual returns of 7% to 12% by conservative estimates, plus appreciation as values continue to climb, according to a number of lenders and investors.

The result, they say, will be an increasing pool of capital available for apartment financing, especially for buildings priced below $5 million, which represent the majority of transactions in Los Angeles and Orange counties.

“There are probably more choices this year than ever before” for apartment financing, said Adam Weissburg, an attorney with Cox, Castle & Nicholson who specializes in real estate finance.

Officials at two lenders that specialize in apartments, Southern Pacific Bank in Los Angeles and First Federal Bank in Santa Monica, said they view apartments as relatively low-risk loans in comparison to other categories of real estate.

Southern Pacific lent $350 million to apartment buyers in 1999 and expects to lend $400 million this year, according to Joe Ursino, a vice president at the bank.

All but a few of Southern Pacific’s loans are for properties priced below $3 million, Ursino noted. He said apartments represent 70% of the loan portfolio at Southern Pacific, which made 790 loans on apartments last year, or an average of just over $443,000 per loan.

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First Federal originated $150 million of its own loans and bought $150 million worth of loans from other lenders last year, said Babette Heimbuch, the bank’s president and CEO, who added that First Federal hopes to boost last year’s $300 million total to $360 million this year.

Heimbuch said that the bank’s average apartment loan is about $500,000, and that apartments represent about 35% of the bank’s $1.2-billion real estate loan portfolio. About 60% of the portfolio is in single-family home loans and the remaining 5% in various commercial property loans, she said.

“Apartments have a cash flow coming in that can pay the lender, so they’re a fairly good risk. Even in the worst case, if you have to foreclose, you still collect rents and you can readily find a buyer,” Heimbuch said.

First Federal generally lends about 75% of the purchase price of an apartment building, with the buyer providing a 25% down payment, according to Heimbuch. That split is a fairly typical financing arrangement, and one that some companies are trying to capitalize on by offering to serve as a joint venture investor with apartment buyers in return for a share of the profits a year or two in the future when the building is sold again.

“In return for our equity investment, we share in the [rental income] and in the profit when the building is sold,” said Michael Lowinger, president and CEO of Los Angeles-based Hanover Financial Co.

In Santa Monica, for example, Hanover provided most of the down payment in a joint venture with JSM Construction Inc. to acquire an existing office building for $3 million, raze it, and build a 48-unit apartment complex.

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Hanover typically serves only as an investor and doesn’t manage properties, Lowinger said, providing up to 90% of the cash that buyers need for down payments. “Often, one of our partners would only have the capability of doing one project independently,” Lowinger said. “With us as a partner, they can do two or three investments at a time.”.

Hanover favors properties where the values can be increased through renovations or improved management, Lowinger said, and its partners typically are individuals or entities that have experience in managing or renovating properties.

Many of those providing financing for the under-$5-million market find it attractive because they believe apartment values have the potential to continue rising, said Robert Brunswick, president and CEO of Newport Beach-based Buchanan Street Partners, which invests on its own account and also acts as an investment advisor to others.

“Even though real estate has recovered so much that some people might think it is overpriced again, in most sectors it has only come back to where it was 10 to 12 years ago,” Brunswick said.

Apartment buyers fall into two general categories, short-term investors who hope to sell in a year or two and long-term holders who look forward to cash flow for years to come, according to attorney Weissburg.

Weissburg said lenders and investors often tend to focus on niches within those two categories.

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Anaheim Hills-based Fremont Investment & Loan, which lent about $75 million on apartments last year in Southern California, generally prefers deals of $4 million or more and tends to be more competitive in lending on renovation projects, said Tom Whitesell, a senior vice president with Fremont in Santa Monica.

Southern Pacific Bank’s specialty is older buildings that need some work, according to Ursino, who said there is less competition from other lenders in this niche.

“Our specialty means that we don’t usually find ourselves lending in places like West L.A.,” Ursino said. He said Southern Pacific tends to lend more on “B and C buildings rather than A buildings,” and to do business with buyers and developers who “have demonstrated over the years that they can create value in buildings that need to be spruced up.”

Investors view apartments as a good bet, according to Heimbuch, because values tend to rise and fall steadily over years, rather than jumping or plunging quickly. She said a large percentage of apartment complexes in Southern California probably didn’t lose more than 25% of their value, even during the recession.

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