The pace at which events unfold in the financial markets can be dizzying at times. Indeed, in Shopping Center World's ranking of top retail lenders for 1998, Nomura Capital held the No. 2 position, behind Lehman Brothers, with nearly $3 billion in loans. Today Nomura's successor company, Capital America, is on the ropes. If it has not gone out of business by the time this article is published, indications are that it soon will.

The story of Capital America is essentially the story of real estate lending in the past 12 months: After starting '98 with a bang, the market tanked in early fall.

Or rather, a significant segment of the market tanked. Conduit lenders, which had enticed borrowers with low spreads, high loan-to-value ratios and minimal oversight, started falling by the wayside, victims of their own imprudence. Investors, concerned about the ability of many borrowers to come through on their payments over time, abruptly turned against the CMBS market, leaving conduits unable to raise capital for further lending.

According to some observers, the Asian economic crisis contributed to the debacle by flooding the market with capital as investors pulled money out of Asia and invested it in the U.S. CMBS market.

The turnaround was abrupt. Michael Surber, president and CEO of Carmel, Ind.-based USA Funding Inc., says his firm was working on a $150 million deal when the crisis hit. "The lender was offering an 85% LTV one week. One week later it was 75%," he recounts. As a result, the deal stalled for three months.

Ironically, there was still a lot of money available for borrowers to tap into, but because they had become so accustomed to getting cheap access to it, at least for the time being they were unwilling to suffer the higher costs and stiffer demands required to obtain it. In addition, given the rapidity with which the conduit market unraveled, they were understandably wary of the overall market as well. Would it, too, shortly come apart at the seams?

By late December it seemed fairly clear it would not, and borrowers began slowly returning, resigned to the fact that the great deals of the first half of last year were no longer available. The holiday season and end-of-year accounting period for companies on a traditional fiscal year schedule gave property developers and owners a good excuse for holding back a little longer, but by all accounts January was shaping up to see a lot of new activity.

Unfortunately for borrowers, loans are not as attractive as they were a year ago. As Joseph Cunningham, president of Sacramento, Calif.-based Liberty Mortgage Acceptance Corp. points out, because lenders have increased spreads, rates are higher even though 10-year Treasury and LIBOR rates are down.

Even the conduit market has been showing signs of recovery, though with a significant difference. Today's conduit lenders are more likely to be divisions of banks, insurance companies and other well-established firms, rather than the new generation of financial companies that had sprung up in recent years.

"We're hungry to do deals. We're actively marketing," declares Geoff Arrobio, a vice president in the Los Angeles office of Irvine, Calif.-based Johnson Capital Group Inc.

Johnson Capital Group exclusively represents both Prudential Insurance Co. and Prudential Capital Co. in Utah, Arizona, southern Nevada, southern California and Hawaii, and Arrobio says the statement applies to both entities. He reports his firm handled about $250 million in retail loans for the two companies in the past 18 months.

Prudential presents a good example of a traditional lending source that has established its own conduit. Arrobio says about 60% of his office's retail loans come from Prudential's insurance side and 40% from the capital side.

Typical of conduits, Prudential Capital has looser requirements than Prudential Insurance. The latter requires supermarket anchors (preferably supermarket and drug anchors), a high percentage of credit tenants and borrower credit. The maximum LTV is 75% and minimum debt coverage is 1.2. Rates are in the low 7% range, with 10- to 15-year terms on 25-year amortizations. Thirty-year amortizations are possible for newer centers.

Prudential Capital, on the other hand, will do unanchored strips and offer LTVs up to 80% for anchored centers, with debt coverage of 1.25. The maximum LTV for unanchored centers is 75%. There are costs for the greater liberality, however. Rates are several basis points higher and take-out loans are not available. A minimum 12-month history is mandatory.

Other lenders report similar criteria, terms and rates, though there are variations. For example, ORIX, a New York-based direct lender, rarely offers terms longer than five years, according to Matthew Judge, an assistant vice president for the firm. But unlike Prudential, ORIX will do construction loans and will do them even if the borrower does not have a permanent lender in hand.

And Chester P. Soliz, senior vice president of commercial lending for New York-based Wall Street Mortgage Brokers, says he has been finding conduits giving the better rates. "We've been placing at very close to 7% with them," he reports.

According to Arrobio, many, perhaps most, of the major established U.S. financial and Wall Street names have formed or plan to form conduit divisions. They recognize the opportunity it presents for them to diversify their holdings and believe their reputation for responsible investment will make their CMBS packages attractive to investors.

"These are not cowboy lenders like some of the conduits have been. We've all been here for many years and plan to be around for many more," he says.

Matt Lituchy, a senior vice president for Cleveland-based KeyBank and director of the bank's northern California office, confirms Arrobio's observation. He reports that Key, which has traditionally done only construction lending, did about $600 million in permanent loans through the CMBS market last year.

According to Greg J. Spevok, director of originations for New York-based Bear, Stearns, the amount of money available through conduits has changed very little, despite the closure of many conduit lenders. As he puts it, "There is not less money, only fewer sources."

Spevok, who says Bear, Stearns is aggressively seeking good deals, calls the remaining conduits extremely strong. "They have been through a cycle that was as bad as anyone had ever seen in terms of bond market stability and proven themselves well able to handle rough seas," he says.

Though last summer's crisis created a troubling situation, conduit lending will always be up and down, says Soliz. "It's cyclical. They come in and out of the market. Securitizations take a fair amount of time to complete, so they go to the market for funds after substantial intervals," he points out.

A significant change among conduits is the demand for reserves. Traditional lenders had already instituted clauses requiring assurances that money would be available for repair and retenanting costs, but prior to September only a few conduits asked for set-asides.

Jeff Jones, executive vice president of Kansas City, Mo.-based Midland Loan Services, says virtually all lenders now require either reserves or proof of sufficient available financial assets to cover unexpected costs.

"It's to the borrower's advantage," he explains. "If an anchor leaves, he will be able to pay leasing commissions and tenant improvement costs to land a replacement. And if he sells, the reserves are a salable asset."

Both Cunningham and Lituchy say a frequently overlooked factor in the dearth of lending in the last quarter of '98 was the fact that lenders had such a strong seven months from January through July.

"Many lenders had already met their goals for the year, so they sat back during the crisis," Lituchy notes.

Most observers anticipate a strong '99, with most responsible lenders gearing back up for high-volume business. As a signal of the change, Surber reports, the stalled $150 million deal got back on track in December, with closure set for early January.

Many lenders say they plan to lend more in '99 than they did in '98. Cunningham reports that Liberty did about $300 million in loans last year but expects to do $500 million this year. Retail accounted for about half of last year's total, and he projects the '99 ratio will remain about the same.

Johnson Capital Group has averaged $350 million to $400 million in loans per year, about two-thirds of it retail. The level will be at least as high this year and probably higher, Arrobio says.

Lituchy says KeyBank has set a goal of $1.6 billion in retail lending for the year, compared with $100 million from September '97 to December '98.

According to Arrobio, spreads dropped 25 to 50 basis points in December. He doubts they will drop much more before spring. If prime rates remain low as expected, loans should remain very attractive.

Some recent deals give a fair indication of what borrowers can expect in the near future. Johnson Capital Group arranged a $6.5 million loan for a 39,000 sq. ft. Bristol Farms-anchored center in Pasadena, with interest in the mid-7 % range, a 10-year term and 30-year amortization. Arrobio says the borrower got an 80% LTV because the center offered strong sales and demographics and a good location.

Johnson says Midland refinanced an unanchored center in the Midwest at $64 per sq. ft., with a 70% LTV, 10-year term, 30-year amortization and a spread of 290 basis points over Treasuries. American General Investment Corp. provided Win Properties Inc. $38 million to acquire a mixed-property in Rye Brook, N.Y., with 150,000 sq. ft. of retail. The loan has a 7.14% fixed rate and 15-year term.

Although some analysts caution that another brief downturn could occur, most believe the long-term outlook is good.

"The CMBS meltdown and global financial crisis were unrelated to the fundamentals of real estate," says Lituchy. "And while the past period was painful, it was also encouraging. Unlike the late '80s when lenders continued to lend despite signs of trouble, this time the market did what it was supposed to do. It imposed instant discipline and cooled things down. That is a very good sign for the future."