Capmark, the full-service lender formerly known as GMAC Commercial Holding Corp., earned high marks from Legacy Partners for offering the apartment developer a break on the guarantees it was required to make for its latest Texas project.

Guarantees are a top concern of multifamily developers when they look for a construction loan, according to experts like Emanuel Westfried, vice president of construction finance for Meridian Capital, a New York City-based mortgage broker.

Legacy’s workers started building Legacy at Town Lake, a 31-story high-rise in Austin, Texas, in March, using a $36 million construction loan from Capmark. The only guarantee that Foster City, Calif.-based Legacy had to make was that the apartments would be completed, which the developer plans to do by summer 2008.

Apartment borrowers usually have to make several promises to lenders before taking out a construction loan, ranging from a guarantee that the apartments will be completed to a guarantee that the developer will pay back the entire amount of the construction loan.

These guarantees only come into play if a project runs into serious trouble. But responsible developers carefully consider their guarantees every time they take on another deal.

“We’ve all seen how bad it can really be,” said Spencer Stuart, a senior vice president and partner with Legacy, which is working on nine projects in different parts of the country. Before the developer takes on a tenth deal, it might want to reduce the number of guarantees it has made.

“At some point, you have more guarantees out than you prudently should,” Stuart said. “If we can eliminate one, it’s a big benefit.”

Capmark’s loan also includes an extra-long four-year term. “We were looking for at least a four-year term,” Stuart said. “It’s a high-rise, so it takes longer to build.”

Stuart would not reveal the total development cost of Legacy at Town Lake, but the company typically uses its own equity and that of its partners—in this case BlackRock, Inc.—to cover 30 percent of a project’s costs. If that same ratio applied here, it would mean Capmark’s $36 million loan covered 70 percent of the cost of a $51 million project.

Capmark charged Legacy a “competitive” interest rate, floating at well under 200 basis points over the London InterBank Offered Rate (LIBOR). Legacy also purchased a cap on this rate for less than $100,000. Typical interest spreads for rental apartment construction loans hover in the mid-100s.

The apartments at Town Lake will range from 659 to 2,876 square feet and should rent for an average $2.04 per square foot. Legacy will also build 1,000 square feet of retail space at the property at the urging of local officials, though the parkland around Town Lake is not a great location for retail. Capmark’s loan is not underwritten with the expectation of any money from the retail space. “We’ll make it something meaningful to the setting,” Stuart said. “Maybe a bike shop.”

Borrowers worry over permanent loans

Construction lenders are becoming a little more conservative in their assumptions about what kind of permanent financing a rental property might receive.

“We’re concerned about it,” said Pat Wilson, senior project manager for Trammell Crow Residential (TCR), an apartment developer based in Atlanta. TCR is looking to finance several apartment projects after years of focusing on condominiums.

April and May saw some serious fluctuations in the market for permanent financing, in particular for conduit loans. A wave of foreclosures in loans for single-family homes and condominiums has made investors nervous about housing in general, according to Gary Tenzer, co-founder of George Smith Partners, Inc., a real estate investment banking firm.

Fitch Ratings, an agency that rates Commercial Mortgage-backed Securities (CMBS), is now demanding that CMBS issuers sell more of their loan pools as high-yield B-piece CMBS and fewer as lower-yielding A-piece bonds. This should push conduit interest rates up overall. Some pension funds and insurance companies are doing extra credit to help solve the problem by providing construction loans that roll right into fixed-rate permanent financing, according to Westfried. He is working to close several transactions like this.

Finding ways to lend to condominium projects

Finance pros report that most multifamily construction loans are still financing condominium properties, but lenders are becoming much more cautious as the market for condominiums softens even in markets that were once safe, like New York City.

“We’re seeing a lot of people have problems with these projects,” said Westfried of Meridian Capital.

Citizens Bank and BlackRock won points for innovation with condo developer JMP Holdings, based in Clifton, N.J., for taking the lead in the creative $57 million financing of the Plaza at Tenafly, a new condominium development in Tenafly, N.J., across the Hudson River from Manhattan.

This unique deal, which closed in April, includes a credit enhancement by BlackRock, Inc., which has effectively guaranteed the project’s total development cost, $68 million, on the off-chance that the condominiums do not sell.

It took a year and a half to structure the innovative transaction. Credit enhancements are commonplace in the apartment business, but not for condominium deals. “I’ve never worked on a condo deal like this,” said Tom Didio, senior managing director for Holliday Fenoglio Fowler, L.P., the mortgage broker who arranged the transaction.

BlackRock has put no equity into the project and will receive half of the profits the project generates from condo sales.

BlackRock’s guarantee helped the Plaza win a favorable interest rate. “The pricing was very good, “ Didio said. The Plaza received a $57 million loan package with $32 million from Citizens Bank and another $25 million from Sovereign Bank. The whole $57 million has a floating interest rate of 165 basis points over LIBOR. That’s an amazing rate for a condominium loan, which today tends to hover at more than 200 basis points above LIBOR.

The guarantee from BlackRock also meant that JMP only had to guarantee 10 percent of the $57 million loan amount. The loan also covers 83 percent of the project’s cost, strong proceeds for a condominium deal today. The loan has a 30-month term with a six-month extension.

The market for condominiums is still strong in Tenafly, where single-family homes rarely sell for less than $1.5 million. The developers expect the 150 condos at the Plaza to sell for a total of $100 million, or an average of $667,000 per unit.

Fast-acting condo financing

Terra Capital Partners, based in New York, took just 30 days to commit to a mezzanine loan for Russland Development’s Michigan Avenue Towers II condo project in Chicago’s South Loop, just two blocks from Grant Park.

It helped Terra that the Tower had pre-sold 85 percent of its condos and received 10 percent downpayments from buyers. Pre-sales in the 50 percent to 60 percent range are more common for condominium projects. The lender still had to review all of the sales contracts for the Towers to make sure that buyers could not easily walk away from the property. “We blew through our due diligence,” said Dan Cooperman, managing director for Terra.

Terra’s $8.6 million mezzanine loan has a 24-month term and an interest rate, or yield for the lender, in the high teens. The loan closed after the project’s $66.5 million primary loan, and making the two loans mesh together created another layer of complexity. The Towers will cost $81 million to develop, so that the total loan package covered 93 percent of the project’s cost.