ZERO.

The Federal Open Market Committee, having concluded a marathon two-day meeting yesterday, “decided to establish a target range for the federal funds rate” for interbank lending from 1.0% to a range of zero to ¼ percent” and further added that it “will employ all available tools to promote growth and maintain price stability” including keeping rates at “exceptionally low levels…for some time.” (Read the Fed’s statement) The Fed’s target range of 0 to 0.25% marks the lowest targeted rate set by the FOMC since it began publishing the federal funds target in 1990.

U.S. 10- & 30-Year Treasury Yields Fall to Record Lows.

U.S. short-term Treasuries rallied this morning, pushing yields on 10- and 30-year notes and bonds to all-time lows.  Investors have continued to pour capital into Treasuries as concerns mount that the credit crisis will persist or even deepen in the near term. 

According to Strategic Alliance Mortgage, the yield on the 10-year note fell 16.8 basis points, or 0.168%, to 2.113% at 10:15 a.m.  “That’s the lowest level since the Treasury began providing daily data on the securities in 1962,” as reported by Bloomberg.com. The 30-year bond yield fell 14 basis points to 2.619%, “the lowest since sales of the security began in 1977.”

Big-Bank Troubles, Small Bank Opportunity.

“While now is hardly the time for optimistic forecasts, next year could present community banks with unprecedented opportunities to add customers, loans, and talent as larger rivals repair balance sheets and integrate mergers,” according to AmericanBanker.com.

Colliers Meredith & Grew Year-End Commercial Bank Lender Survey.

The Capital Markets Group at Colliers Meredith & Grew recently hosted a roundtable “lender luncheon” to discuss the markets.  In attendance were key representatives from seven of New England’s leading banks.

• Nearly across the board, these banks reported seeing sizable withdrawals of deposits (starting in October).  The most recent flight to safety (U.S. Treasuries and cash equivalents) was cited as the driving force behind withdrawals; a trend covered at length in last week’s Interest Rate Tracking. With smaller banks and trusts having to pay “pretty good rates” to bring these deposits back, expect rates on commercial real estate loans to reflect the widening of spreads that has occurred as their cost of capital notches incremental gains.
  
  
• Fortunately, all the banks in attendance have money to lend and are well capitalized.  These banks are actively lending (as of December 7th) and reported marginal to double-digit year-over-year growth in their loan portfolios.  They all reported increased deal flow and new opportunities for diversification, most notably, discounted note financings and acquisitions.  Forced to play second fiddle to big-banks with mammoth balance sheets and in-house securitization desks for years, small to mid-sized banks are no longer competing with Wall Street and are taking advantage of the opening in the market to go toe-to-toe with the life companies for market share.
  
  
• Those banks with excess capital and an appetite for growth by acquisition view this market as an historic opportunity to play offense by snatching up local/regional players at significant or even distressed-level discounts.
  
  
• Condos and for sale single-family housing projects are still kryptonite to small bank’s capital, the Superman of today’s credit markets.  For the most part, multifamily apartments were cited as the darling of the four food groups (office, industrial, retail and multifamily).
  
  
• Certainty of execution will play into the hands of commercial banks in this market.  Most lenders are “being fussy” and cherry picking only the best deals.  This level of upfront scrutiny should assure borrowers that their deal will be funded as represented.
  
  
• While most lenders in attendance would go up to $15 - $20 million by bringing in a partner, the most cited “sweet spot” was $3 - $8 million.  These banks are looking to ratchet down total loan sizes in order “to do more, smaller deals and spread the risk around.”  But take note, one hand giveth – the other taketh away.  Just as Wall Street’s demise promises increased deal flow and new opportunities for growth, the dearth of options in the take-out market have forced a majority of small to mid-sized banks to do “a lot of hand holding” and restructuring with existing borrowers.  One of the trusts in attendance reported 80% - 90% of its CRE lending was tied up in refinancings this year vs. acquisition in the past few years.  With fewer options available to borrowers, those seeking to exit short-term construction loans and mini-perms have turned to the banks for extensions or restructuring of their existing notes, whereas in the past a majority of these notes would have been taken off the books by Wall Street as they were permed out.
  
  
• As the recession deepens, underwriting has become more conservative.  Take note, as is and always will be the case with commercial real estate lending, the following summary is intended as a general snapshot of underwriting standards in today’s market but “it depends on the deal.” 
  
  
• Small to mid-sized banks will go up to 75% Loan-to-Cost at full or partial recourse (around 50%) for construction loans but significant pre-leasing or build-to-suit (retail/office) is a MUST;
  
  
• They will consider 75% Loan-to-Value for cash-flowing deals;
  
  
• Most are in the process of considering floors given the recent drop in Treasury yields to historic lows;
  
  
• Underwriting 5 – 7 year max terms, higher/market vacancies, “true” management fees and questioning pro formas that show unfettered growth in the near term;
  
  
• Looking at least 12 months forward for rollover risk;
  
  
• More often than not, lenders are looking at sponsors “global” cash flow and exposures for problem areas across their business/investment lines;
  
  
• Amortization schedules of 20-25 years is typical, with 30 years considered on a VERY selective basis.