DATE: Sunday, May 11, 1997                  TAG: 9705100553

SECTION: BUSINESS                PAGE: D1   EDITION: FINAL 

TYPE: Commerical Real Estate 1997 

SOURCE: BY TOM SHEAN, STAFF WRITER 

DATELINE: CHESAPEAKE                        LENGTH:  111 lines

FINANCING: REGION IS SHARING TURNAROUND

A forest of steel girders has emerged from the woods along Volvo Parkway east of Battlefield Boulevard.

By November, part of the 475,000-square-foot project taking shape will become the corporate headquarters for Dollar Tree Stores. The rest will be a distribution center for the chain of Everything's A Dollar stores, which has been based in Norfolk.

What isn't visible amid the construction equipment and stacks of building materials is another key ingredient - more than $30 million from three life insurance companies.

After a severe drought in financing for commercial real estate projects in the early 1990s, banks, insurance companies and investment firms have opened up their spigots. ``It's a torrent. We have more money than I can remember seeing, even during the 1980s,'' said John Levy, head of the real estate investment and research firm John B. Levy & Co. in Richmond.

``If you can't get financing now, there may be something wrong with the deal.''

Some of that torrent is finding its way into Hampton Roads, where a recovery in commercial real estate had been hampered by a glut of office space and lackluster economic growth.

When Dollar Tree looked for ways to finance a new headquarters and distribution center, it wanted to avoid using land as collateral for the loan, said Eric Coble, the retailer's senior vice president for finance. With help from mortgage banker First Union Mortgage Corp., Dollar Tree got the necessary funds through a private placement of loans with insurance companies.

Banks, too, have demonstrated a greater willingness to finance commercial projects. Central Fidelity National Bank recently provided $5 million for one of the few speculative office buildings under construction in Hampton Roads.

The 65,000-square-foot Southport building, on South Boulevard near Mount Trashmore in Virginia Beach, is due to open in early June.

``Our indicators are that demand is starting to outpace the supply,'' said Denny Cobb, manager of the real estate finance division in Hampton Roads for Richmond-based Central Fidelity. ``We're optimistic that these conditions will continue.''

This pursuit of projects to finance is an about-face from the situation five years ago. Struggling with swollen portfolios of foreclosed buildings, many banks halted their real estate lending and dumped troubled properties at fire-sale prices. Life insurance companies weren't far behind.

The glut of office buildings and other commercial projects of the early 1990s sprang from years of frenzied real estate lending. Throughout the 1980s, developers often found banks willing to provide 100 percent of a project's value and very favorable terms.

Not today. Before financing a commercial project, banks want the developer to have cash equity in his project, said Central Fidelity's Cobb. They also want a personal guarantee from the developer and a portion of the building leased before construction begins.

The developer of the speculative office building near Mount Trashmore in Virginia Beach had no tenants lined up when Central Fidelity provided financing. However, the developer had the financial strength and other resources to qualify for the loan, Cobb said.

Despite the pressure on lenders to put their funds to work, bankers, and developers say they have not seen a deterioration in lending standards.

``I'd say lenders still have the upper hand,'' said David J. Beatty, president of CENIT Commercial Mortgage Corp., a unit of the Norfolk banking company CENIT Bancorp Inc.

However, the sources of financing for office buildings, hotels, warehouses and other commercial projects are changing. Some mortgage bankers worry that the latest wave of mergers among insurers will reduce the availability of permanent financing for smaller projects.

Some smaller life insurers had provided $500,000 to $2.5 million for commercial projects before they were acquired, Beatty said. When they became part of much larger companies, the minimum for financing climbed to $5 million or more.

``The bigger companies want to be efficient, so they go after the bigger deals,'' he said.

Meanwhile, investment banking firms are playing a larger role in the financing of commercial real estate. A handful of Wall Street firms, including Merrill, Lynch & Co., CS First Boston and Lehman Brothers, routinely buy pools of commercial mortgages that are packaged into securities for sale to insurance companies, mutual funds and other institutional investors.

This ``securitization'' into mortgage-backed securities is already done with most of the home loans made by banks and mortgage companies. Instead of buying whole loans for its investment portfolio, an insurance company may decide to buy these commercial mortgage-backed securities. If the insurer changes its investment strategy and seeks something with a higher yield or longer maturity, it can sell some of its mortgage-backed security and buy others.

Compared to the hundreds of billions of dollars invested annually in commercial real estate, the securitization of commercial mortgage-backed is still modest. The volume, however, has been growing - from $6 billion in 1990 to $30 billion last year.

Victor Pickett, vice president of First Union Mortgage and its regional manager in Norfolk, said some unexpected consequences will materialize from these securities. When a building owner's mortgage ends up embedded in a security, the property owner will find it impossible to separate his loan from hundreds of others.

Under normal conditions, that isn't a problem. But if the borrower has difficulty making payments on the loan, there won't be anyone at the insurance company or pension fund to discuss restructuring the loan and preventing a foreclosure, Pickett said. The need for restructuring will continue because commercial real estate remains a highly cyclical business, Pickett added.

``It's the side of mortgage-backed securities that nobody thinks about,'' he said. ILLUSTRATION: Color photo

[Dollar Tree...]

Color photo by Motoya Nakamura/The Virginian-Pilot

[ Photo of downtown Norfolk showing highrise buildings including

NationsBank, Crestar, Dominion Tower, Marriott Hotel] KEYWORDS: COMMERICAL REAL ESTATE 1997

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