Credit companies: a capital idea for real estate.

The problem: While the conventional lending community is necessarily focused on recycling existing loans and restructuring troubled property-related debt, income-producing real estate is starving for a fresh infusion of capital. To illustrate the immediate and critical need for "new" cash, consider

Given the shake-up in the industry, it is not surprising that banks and thrifts are diligently trying to maintain a delicate balance among fighting foreclosure battles for troubled properties, upholding conservative capital reserve ratios, and attracting competitively priced lending opportunities that carry minimal risk. Similarly, with 75 percent of their funding activities geared toward refinancing existing portfolios, life insurance companies and pension funds currently exhibit little appetite for new loan production. The time may be at hand to re-examine the use of credit companies.

Traditionally labeled "lenders of last resort" (due to high pricing and arduous terms), credit companies may offer some of the best answers for finding new capital. Although credit companies represent only a handful of players, they are responsible for generating as much as 20 percent of the total volume of new funds in the marketplace.

While today only six major credit companies remain active, including only the largest corporations in America and a handful of Japanese finance companies, these firms have an abundant supply of money -- but they are highly selective. Nevertheless, these financial institutions extend their lending capacity to a wide range of underwriting alternatives:

* Permanent Loans. Credit companies will structure fixed-rate permanent mortgages, junior debt, and participating debt/equity deals, but in comparison to traditional lenders, these arrangements are usually for shorter terms (typically three to seven years). Typical pricing for permanent loans is based on a spread of up to 3 percent over prime, structured as a fixed-rate deal with the floating rate difference accruing to the end of the loan balance. "Fixed" rates range from 8 to 10 percent, and accruals can be structured as much as an additional 10 percent of the total loan amount. Credit companies do offer flexible prepayment terms to encourage borrowers to seek refinancing as a project's cash flow begins to stabilize.

* Construction Loans. Although credit companies and banks match funds to short-term capital that is suitable for funding construction and variable-rate loans, credit companies are not governed by federal, state, and local banking regulations. Credit companies are more flexible yet have the financial understanding of banks because of their asset-based lending experience.

While credit companies are traditionally known for funding highly aggressive risk-oriented projects, the real estate credit crunch has created an excellent opportunity to fund conservatively underwritten real estate transactions. Credit companies are also funding standby transactions with the expectation of taking a short-term ownership position in the property until the project has an opportunity to stabilize cash flow in a tough market condition. Of course, under all such conditions, credit company pricing reflects risk and reward return.

Constituting only a handful of players in the marketplace, credit companies nonetheless represent a strong force that is creative and active. Since these institutions have a multi-faceted understanding of the various elements of lending, including corporate, commercial, and real estate asset-based lending, they provide fresh amounts of capital and offer more liquidity in the toughest real estate lending market in memory. And because of their direct link to the capital markets through their ability to raise capital by selling and guaranteeing commercial paper, credit companies can be expected to capture a larger market share from traditional lending sources during this next decade.

John Oharenko is senior vice president for the Investment Group of Royal LePage, an international real estate firm based in Chicago. He specializes in structuring debt and equity transactions for institutional-grade realty projects.